March is all about basketball, so we're borrowing "madness" mania as a metaphor for our dividend investment portfolio. After all, the approaching end of the first quarter of the 2013 investment "game" is a good time to look at the "starters," "subs and "recruits" on our dividend investment "team."
Like a good coach with a game plan, we prepared for 2013 with a solid business plan. Among our objectives was to find new players to help our team.
For background, we should point out that at the end of 2012, we had pared our portfolio to just 7 stocks, too few in our opinion. We had a good 2012, but we also traded stocks feverishly until we found a lineup we liked. Better to have a few stars than a bench full of warmers who don't produce - or are so volatile and undependable that the rest of team is distracted.
We cut the roster to what we believed to be five stars and two strong backup players. The non-performers were cut, and we went on the recruitment trail.
So, who are our five starters? Here's a look:
PennantPark Investment Corp. (PNNT). PennantPark is an externally managed investment company that, like one of our other starters, Triangle Capital Corp. (TCAP), has elected to be treated as a business development company. It invests principally in middle-market companies in the form of senior secured loans, mezzanine debt, and equity investments in the $10 million to $50 million range. We began to accumulate shares in 2011, when we believed the U.S. economy was headed for recovery (oh, what a lonely position that was!). Since its inception in 2007, PNNT has paid 23 consecutive dividends without a decrease. During that time, its dividend has doubled, to the current $0.28 per share ($1.12 annualized) from its initial dividend of $0.14 per share ($0.56 annualized) back in June 2007. It's really nice to have a good shooter on our team; this one has been getting hotter and hotter.
Yield on our cost for this sharp shooter is 10.6%. Current yield is 9.3%.
PennantPark Floating Rate Capital Corp. (PFLT) is PNNT's little brother. When we saw the three-pointers PNNT was dumping in with consistency, we wanted a look at this up-and-comer. PFLT also is a BDC, and each is part of the same company. It pays a monthly dividend, currently at $0.875 per share, or $1.05 annualized. As its name suggests, PFLT invests principally in floating rate loans of $1 million to $10 million in size. Its loans go primarily to companies whose debt is rated below investment grade.
PFLT, for us, has been a good player. We've owned it since 2011, attracted by an article by Will Ashworth in Investopedia. You can read it here, and, frankly, I'd recommend that, because Mr. Ashworth explains the differences between the two companies and focuses competently on the kinds of investment each makes.
PFLT is a young player. Since its inception in 2011, it has paid 22 monthly dividends without a decrease. Its initial dividend was $0.05; its current monthly dividend is $0.0875. At its current price of about $14.40 per share, it yields 7.3%. Our yield on cost is 8.2%.
Another starter is Calumet Specialty Products Partners (CLMT). With three BDC's on our starting team, it makes sense to have a player from a different background. That's why we like CLMT. This a company that does something: It takes raw products, adds value and resells them at a profit. Lately, lower commodity prices have enhanced its performance, and for that reason some investors are worried that this hotshot may wear out. For more on that subject, see Seeking Alpha contributor Bret Jensen. Unlike a basketball coach, an investor can sell part of a player, and we were thinking we should sell some of our CLMT holdings when it hit its 52-week high earlier this month. We used the profits to help pay for a recruit, American Realty Capital Partners (ARCP), which we discuss below.
CLMT is a specialty refiner. Among its products are customized lubricating oils, white mineral oils, solvents, waxes, asphalt, and gelled hydrocarbons. Its fuel products segment processes crude oil into various fuel and fuel-related products, such as gasoline, diesel, jet fuel, and heavy fuel oils. The company has been around since 1916, and is expansion-oriented. It recently announced plans to build a diesel fuel refinery in North Dakota, in the heart of the Bakken activity.
After cutting its monthly dividend in May 2008, it has paid 20 consecutive quarterly dividends without a decrease. Its current dividend is $0.65, a nice increase from the October 2012 dividend of $0.62. Its yield on recent price of $38.12 is 6.7%. Our yield on cost is 7.2%.
CLMT hit its 52-week high of $40.25 on March 4.
Triangle Capital Corporation is the third BDC among our starters. It focuses on leveraged buyouts, management buyouts, employee stock ownership programs, change-of-control transactions, acquisition financing, growth financing, and re-capitalizations in lower middle market, mature, and later-stage companies.
TCAP has played dependably for our team. It has paid 26 consecutive dividends without a decrease. Its latest dividend, payable at the end of this month, is $0.54, an increase of just under 2% from its December dividend. At a recent price of $28.09, its yield is 7.5%. Our yield on cost is about 8.5%.
Its companies represent a variety of sectors, including manufacturing, media, distribution and transportation.
KKR Financial Holdings (KFN) is the fifth starter. KFN is an externally-managed specialty finance company with expertise in a range of asset classes. It's managed by KKR Financial Advisors LLC, which is a wholly-owned subsidiary of Kohlberg Kravis Roberts and Co. After cutting in August 2008, it has paid 14 dividends without a decrease. For the past two years, it has paid "bonus" dividends; this year's five-cent extra is payable March 28.
Its current annualized dividend is $.084, a yield of 7.4% on a recent price of $11.15. Our yield on cost is 8.2%.
And our recruits? We've added six in the first quarter of 2013:
Compass Diversified Holdings (CODI): This company specializes in acquiring controlling stakes in small- to middle-market companies. It enables shareholders to participate in the its companies' operating cash flows through the receipt of regular distributions. Its yield, based on a recent price of $15.65 is 9.5%.
Prospect Capital Corp. (PSEC): This is another BDC, but we liked it and bought it. It invests in first-lien and second-lien debt and mezzanine debt, and in some cases that includes an equity component. As an yield-oriented investor, it has a good track record with dividends; it cut its dividend in 2010, but since has paid 37 consecutive monthly dividends without a decrease. To be sure, however, its increases have been quite small.
Senior Housing Properties Trust (SNH): This is a real estate investment trust (REIT) that focuses on properties catering to the U.S. aging population, such as hospitals, assisted-care facilities and nursing homes. The strategy makes sense, given the "baby-boom" demographic. Its current yield is just over 6%, but so far it's played a little better for us, with a yield on cost of 6.4%.
PennyMac Mortgage Investment Trust (PMT): This is a specialty finance company focused on mortgage and mortgage-related assets. Analysts love it at the moment; it has a "strong buy" rating. Its current yield is 9.0%. It has gained in value since we bought it; our yield on cost is 9.7%.
American Realty Capital Properties: This company has been in the news lately, with stock guru Jim Cramer mentioning it occasionally. We like its monthly dividend, which we've elected to plow back into shares. Analysts currently love it, too. Its yield on a recent price of $14.66 is 6.4%. We bought it lower than that, and it is yielding 6.8% on our cost.
BlackRock Kelso Capital Corp. (BKCC): This is another private equity firm specializing in middle market companies. It has a very attractive yield at 10% low debt and an acceptable free cash flow. Its current yield is 10%, on par with our yield on cost.
These six "recruits," and our five "starters" are the heart of our team. The two "subs" which helped us beat our 2012 goals are SandRidge Permian Trust (PER) and Pitney Bowes (PBI). Both have been on rough seas, but both have paid extraordinary dividends.
We bought PBI when it was in a trough, so it actually has good stats for us.
PER, on the other hand, has yet to return to us in dividends its paper losses in share price. It's currently trading below $15 a share. It was recently downgraded by RBC, which gives it a target price of $17 per share. At that price, we'd be ahead. That said, we'd work a trade with PER when the conditions are just right.
We love them all, but we're not deeply attached. All it takes is a misstep or two, a drop in dividend performance, some bad PR or a continuing performance decline and we'll just have to "cut" them. PER is on the edge, but the rest have played well during the first quarter.
Additional disclosure: Please note that the information presented here is not the work of licensed financial adviser or experienced investment professional. Information provided should never be construed as investment advice. It is for educational and informational purposes only, and constitutes the elements of a personal learning project by a private investor.