Ongoing monetary easing around the world is artificially keeping interest rates low. This is hurting income investors seeking yield. The 10-year iShares Barclays 7-10 Year Treasury (IEF) yields just 2%, while the iShares Barclays 20+ Year Treasury Bond (TLT) is yielding 2.81%. Investors have alternatives over the return on cash. The choices are bonds, MLP's ("Master Limited Partnerships"), and high dividend-paying stocks.
in the ETF space, a positive performer for 2012 is the PIMCO Total Return ETF (BOND), Bill Gross manages a smaller ETF with assets of $2.6B. In comparison, its big brother is the Total Return Fund, which holds assets of $270B. Since it was launched on March 1 2012, the Total Return ETF is already up 8.4%, far better than the larger Total Return Fund itself, which is up 4.5% in the same period.
Master Limited Partnerships
In the MLP space, Breitburn Energy (BBEP) is a compelling investment. I sold these units because the company reached its target price, but plan to buy units again if prices decline. Breitburn offers a yield of close to 10%, paying $1.84 per share at an annualized rate. During its presentation at Barclays CEO Energy-Power Conference, Breitburn explained that it was able to grow its distribution over time through a strong but conservative hedging strategy. The company targets a long-term coverage ratio of between 1.1 to 1.2 times.
The company pointed out that its hedging strategy was important in limiting losses back in 2008, when gas prices fell from $14.00 to $10.00 in six months. Oil fell from $140 to $100 per barrel, yet Breitburn was able to maintain an EBITDA decline of just 15%.
Investors should appreciate that Breitburn recognizes the difficulty of predicting future commodity prices. This is why hedging is a central part of its business model, and explains why for the rest of 2012, close to 80% of its natural gas and oil production is hedged.
Breitburn's share price dropped recently, closing at $18.65, after the company issued 10 million units at $18.51 per unit. Underwriters have a 30-day option to buy an additional 1.5 million units.
Another MLP to look at is Oaktree Capital Group (OAK). As a fan of Howard Marks, Oaktree Capital's IPO was of significant interest to me. Oaktree shares pay a distribution of $0.79 per share, up from $0.55 per share in the previous quarter. This represents an annualized rate of 8.15%. Investors should note that Oaktree issues a K-1, which will have tax implications different than regular dividend-paying stocks.
High Dividend-Yielding Company
SeaDrill Limited (SDRL) is a company that pays a yield of 8.22%. During the last quarter, SeaDrill paid a quarterly dividend of $0.84, up from $0.82 in the last quarter. Even though the yield is high, the company is an off-shore driller, a sector that has inherent risks for investors. Still, Seadrill management said during its conference call that it secured contracts and commitments totaling nearly $7.6 billion. Its order backlog is at a record high of $20.3 billion.
Management's commitment in paying a high dividend is supported by its strong operational performance, high order backlog, and a positive outlook for the drilling industry.
SeaDrill is up 81.1% from its 52-week low and close to a 52-week high, so it would be preferable to start a position in the company at lower prices. Another reason to wait is that after the close, SeaDrill announced it was issuing $1 billion in unsecured notes. The additional debt may alarm investors, but servicing the debt should be supported by the high order backlog, favorable daily rates and longer contract durations for its existing fleet.