Recent conversations with the Seeking Alpha community have helped reshape this retirement income portfolio. Suggestions from responders included more diversification plus consideration of closed-end funds and business development companies. With the market nearing all-time highs, it seemed prudent to further diversify the portfolio.
Prospect Capital Corporation
Prospect Capital provides private debt and equity capital to middle-market companies in the U.S. and Canada. Its initial public offering was in 2004. It invests primarily in first-lien and second-lien senior loans and mezzanine debt, which in some cases include an equity component. As of December 31, 2012, PSEC reported investments in 106 companies. (Recent investments are listed in the 2013 Q2 report.)
PSEC's first quarterly dividend of $.10 was paid in December, 2004. Small increases occurred each quarter through April, 2010. In July, 2010, PSEC lowered its payout and began paying a monthly dividend of $.10. Since then, the dividend has been increased in tiny increments. The monthly dividend payable on March 21, 2013 will be $.11005.
For the December 31, 2012, quarter (PSEC's 2013 Q2), net investment income was $.51 per share, compared with $.33 per share in the year-ago quarter. For the six months ending December 31, 2012 (the first six months of fiscal 2013), net investment income was $.97, compared with $.59 for the six months ending December, 2011. Net asset value as of December 31, 2012, was $10.81.
PSEC's recent quarterly earnings news release said, "Our debt to equity ratio stood at 47.8% (29.2% after subtraction of cash and cash equivalents) at December 31, 2012."
Morningstar reports a price earnings ratio of 8.8, with a five-year average P/E ratio of 13.9. The 52-week high was $12.25 and the 52-week low was $9.80. With an annual dividend of $1.32, at the February 22 closing price of $11.23, PSEC's yield was 11.8%.
Realty Income Corporation
Realty Income is a 44-year-old real estate investment trust, with over 3,500 commercial properties in 49 states, diversified across 44 industries and 150 companies. A majority of the properties are retail, with the greatest revenues coming from convenience stores, chain restaurants, movie theaters and health and fitness industries. The leases generally are "triple net," where the tenant pays for the taxes, maintenance and insurance on the property.
The January 2013 merger with American Realty Capital Trust resulted in a 19.2% increase in Realty Income's monthly dividend, from $.15175 to $.1809167. This raised the annual dividend from $1.82 per share to $2.17.
Realty Income's 52-week price range has been $36.34 to $45.00. The closing price on February 21, 2013 was $44.30. Ordinarily, I would not purchase a stock this close to its 52-week high, but the merger with American Realty Capital Trust and the subsequent 19% dividend increase puts the 52-week price range in a new light.
The company reported 2012 adjusted funds from operations (AFFO) of $2.06 per share, up from $2.01 in 2011. The property occupancy rate was 97.2% in 2012 and 96.7% in 2011. Realty Income has increased its dividend each year since 1995. At a February 22 closing price of $44.47, Realty Income's yield was 4.9%.
Since the last report, the portfolio's cash percentage has grown from 5.6% to 9.3% (closer to the 10% target). The target allocation for the two business development companies and four of the closed end funds is 5% each. The target allocation for the 14 stocks and the utility sector closed-end fund is 4% each. Here is the portfolio as of February 22, 2013:
Genuine Parts Company (GPC) 4.2% (increased from 3.9%)
Johnson & Johnson (JNJ) 4.0% (reduced from 5.2%)
National Retail Properties (NNN) 4.0% (reduced from 4.9%)
Realty Income Corporation 4.1% (new to portfolio)
W.P. Carey Inc (WPC) 4.0% (reduced from 5.0%)
PennantPark Investment Corporation (PNNT) 5.1%
Southern Company (SO) 4.0% (reduced from 4.9%)
NuSTAR Energy LP (NS) 3.9% (reduced from 4.9%)
Natural Resource Partners LP (NRP) 4.0% (reduced from 5.7%)
Starwood Property Trust (STWD) 4.0% (reduced from 5.3%)
Eaton Corp PLC (ETN) 3.9% (reduced from 5.1%)
LinnCo LLC (LNCO) 4.0% (reduced from 5.1%)
Prospect Capital Corporation 4.9% (new to portfolio)
LTC Properties Inc (LTC) 4.0% (reduced from 4.9%)
PPL Corp (PPL) 4.0% (reduced from 5.0%)
Annaly Capital Management Inc (NLY) 3.8% (reduced from 4.9%)
BlackRock Utility & Infrastructure Trust (BUI) 4.8%
NFJ Dividend & Premium Strategy Fund (NFJ) 4.8%
Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV) 5.0%
Nuveen Equity Premium Advantage Fund (JLA) 4.8%
ING Global Advantage & Premium Opportunity Fund (IGA) 5.1%
The portfolio's yield as of February 22, 2013 was 6.7%.