Seeking Alpha
Recommended for you:
Profile| Send Message|
( followers)  

Investing in bonds for income is very dangerous today because rate spikes can dramatically reduce the value of your investments, and inflation can dramatically destroy the purchasing power of your interest payments. Consider the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT).TLT has an average effective duration of 15.25, which means that a 1% increase in interest rates would reduce the value of TLT by 15%. This is rough! This is not safety.

Income investors in 2011 faces the dilemma of a debt bubble. Interest rates are at record lows, and short-term treasuries are expected to earn negative real returns. Investors seeking yield have bid up the prices of junk bonds and bid down their yields. This can be witnessed in the returns of the high yield debt (junk bond) exchange-traded funds (ETFs), which trade at dividend yields near 8%.

Domestic equity companies with dividends competitive with junk bond interest rates (8% or higher) were found among many sectors and types of securities. Two populations with many top dividends were equity closed-end mutual funds (CEFs) and private equity companies.

CEFs have been a means for investors to buy stocks at a discount. Below is a list of top dividend CEFs:

Extreme Dividends from Equity CEFs

Ticker

Dividend Yield

Return on Equity

Performance (Year to Date)

Beta

P/E

P/B

GAB

10.45%

19.66%

-1.11%

1.33

4.03

0.92

EOI

10.21%

6.55%

-9.09%

0.81

11.87

0.79

EOS

10.34%

20.18%

-6.71%

0.9

8.77

0.83

JPZ

10.48%

11.39%

-4.81%

0.66

7.71

0.87

JLA

10.75%

10.16%

-3.83%

0.66

8.54

0.87

JSN

10.81%

10.50%

-4.82%

0.67

8.33

0.87

MFD

10.10%

35.11%

2.67%

1.15

2.64

0.81

BQR

10.11%

15.52%

-10.92%

1

5.6

0.84

DGF

10.12%

28.88%

1.34%

1.05

3.28

0.87

HQH

10.01%

8.79%

8.72%

0.8

9.99

0.85

HQL

10.00%

10.67%

7.36%

0.83

8.12

0.83

GGN

9.89%

22.35%

-6.29%

0.99

5.05

0.93

ETJ

11.21%

5.37%

-7.39%

0.08

15

0.82

CII

11.22%

13.02%

-8.49%

0.89

6.51

0.84

INB

11.13%

9.81%

-5.54%

1.18

8.75

0.84

GPM

11.14%

12.61%

-2.82%

0.73

7.18

0.89

ETB

10.68%

20.32%

-9.68%

0.76

4.18

0.81

ETV

11.51%

20.35%

-6.93%

0.7

8.49

0.82

ETY

12.24%

8.98%

-9.04%

0.78

8.23

0.75

JTA

9.21%

13.75%

-7.41%

1.31

6.05

0.81

MCN

9.20%

9.05%

-7.67%

1.07

8.9

0.8

MSP

9.07%

9.18%

-6.67%

0.93

8.96

0.82

JPG

9.07%

11.78%

-7.00%

0.71

7.4

0.86

SCD

8.91%

13.72%

3.29%

1.01

7.02

0.92

UTF

8.84%

15.97%

3.49%

1.08

7.47

0.88

JRS

9.41%

28.68%

0.82%

1.79

3.82

1

JDD

9.43%

17.54%

1.73%

1.19

5.17

0.87

SRV

9.67%

33.93%

-5.39%

0.73

4.05

1.16

DDF

9.61%

29.04%

-2.18%

1.24

3.12

0.82

DPO

9.59%

15.15%

7.26%

0.86

6.61

0.97

CGO

8.19%

18.89%

5.09%

1

5.02

0.9

RQI

8.10%

31.89%

6.72%

2.19

3.47

0.93

ERH

8.22%

17.51%

-0.54%

5.26

0.88

RNP

8.24%

26.58%

5.89%

1.9

3.84

0.93

JTD

8.62%

16.26%

-3.52%

0.94

5.46

0.85

BCF

8.49%

25.04%

-9.09%

1.28

3.58

0.73

GLV

8.52%

15.07%

-5.38%

5.29

0.77

CLM

16.30%

9.49%

17.92%

1.09

13.84

1.25

CRF

16.51%

8.67%

13.17%

1.01

15.54

1.22

CFP

18.50%

18.91%

-0.45%

0.5

5.81

1.13


How do CEFs work? CEFs are mutual fund companies that buy and sell investments from a fixed pool of capital. Shares in CEFs are sold by current owners, often at prices that are lower than the sum of their holdings. When you buy a CEF, your investment pays expenses to the fund manager. The hope of CEF investors is that the return on their assets will exceed the fund manager’s expenses.

Value investors should check different markets and financial instruments to find the best available deals. Closed-End funds (CEFs) trading at a discount to net asset value (NYSE:NAV) are a source of potentially attractive investment idea. Further research is required to determine if the fund’s underlying holdings are a value portfolio.

Alternatively, individual investors may find high dividends among a few private equity firms. Here is a list of ETFS which have a dividend yield greater than eight percent:

Extreme Dividends from Private Equity Firms

Ticker

Dividend Yield

Payout Ratio

Return on Equity

Performance (Year to Date)

Beta

P/E

P/B

Strategy

HRZN

10.2%

38.0%

17.6%

13.5%

N/A

19.78

0.9

Venture Cap

TCAP

10.3%

65.8%

21.1%

-5.5%

0.46

6.65

1.24

Buyouts

TICC

10.6%

56.5%

18.5%

-11.4%

1.13

5.25

0.96

Tech Sector

PNNT

10.7%

90.3%

11.3%

-13.8%

1.72

7.88

0.91

Private Equity

BKCC

11.7%

114.4%

11.1%

-15.0%

1.45

8.36

0.9

Private Equity

PSEC

14.0%

77.9%

13.6%

-14.1%

0.75

6.53

0.84

Private Equity

MCGC

14.4%

N/A

-6.5%

-28.8%

2.33

N/A

0.68

Private Equity

Private equity companies (also called business development companies or BDCs) are firms that invest in companies in ways that are not available to individual investors through public exchanges. Instead of buying shares in publically traded companies like Apple through a discount broker like Scottrade, they purchase equity or lend money to companies that do not issue shares or bonds to the investing public. They can also invest in companies that will never go public, but will always be privately held. Private equity deals are typically made by investment bankers in expensive suits, have expensive educational pedigrees, and charge expensive fees.

Unfortunately, private equity firms are very complex and not transparent. Their holdings can be valued based on models or appraisals, which are done in-house by employees who hope to keep their jobs or by a third-party with a vested interest in renewing their contracts with the private equity firm. Either way, there is considerable motivation in providing a high valuation. Investors considering private equity must scrutinize the firm they are investing in and its holdings.

For both private equity firms and CEFs investors must do more homework. Investors must research the fees charged by managers and the holdings of the firm, as well as the firm’s investment strategy. The primary difference is that the value of the holdings is much easier to asses in the domestic equity CEFs, whose publicly-traded companies have prices listed on exchanges.

Source: 8% Or Higher Dividends: Domestic Equity CEFs Vs. Private Equity