Over the last decade, Master Limited Partnerships (MLPs) have grown from a market cap of $30 billion to over $350 billion. After a rough final quarter of 2012, MLPs have been on fire, with the Alerian index gaining a whopping 19% so far this year.

In a previous Seeking Alpha article, I explained the MLP structure and evaluated the risk-to-reward attributes of MLP Exchange Traded Notes (ETNs) and Exchange Traded Funds (ETFs). In this article, I will extend the analysis to Closed End Funds (CEFs).

Several MLP CEFs have been created recently and do not have a long track record. Therefore, I will limit this analysis to the 13 CEFs that were launched before 2011. These CEFs are summarized in Table 1.

(Click to enlarge)

Table 1: CEFs with at least 2.5 years of historical data

One of the main benefits of MLP CEFs is the simplification of tax

Income investors who do not want, or who may not use, energy infrastructure securities that generate K-1 tax reports, can turn to energy infrastructure funds that generate 1099-DIV tax reports (or an ETN that generates a 1099-INT). Let's look at price appreciation expectations and yield for an example of each of four approaches to investing in energy infrastructure portfolios:

• AMLP: passive index ETF, generating a 1099-DIV
• EMLP: active, unleveraged ETF, generating a 1099-DIV
• KED: active, leveraged CEF, generating a 1099-DIV
• AMJ: passive index ETN, generating a 1099-INT

6-MONTH RELATIVE PRICE PERFORMANCE VERSUS S&P 500:

YIELD AND PRICE APPRECIATION EXPECTATIONS:

The figures after each symbol below are presented in this order: Yield/Price Appreciation/Yield+Appreciation. These are not necessarily our predictions, but they are the composite "street" predictions.

The yields are from Morningstar, except for EMLP. The predicted yield for EMLP is based on the yields of the individual portfolio holdings weighted for

Kayne Anderson Energy Development Company (KED) has seen its earnings estimate for fiscal 2012 surge 42% over the last 30 days based on its strong fundamentals. Further, shares of this non-diversified closed-end management investment company have gained nearly 39% in a year's time. The company became a Zacks #1 Rank (Strong Buy) on August 30 and is currently trading near its 52-week high of $25.99.

Fiscal 2Q Results and Guidance

On July 24, Kayne Anderson reported second quarter fiscal 2012 net investment income of $0.04 million compared with $1.9 million in the prior-year quarter. Results deteriorated on the back of the decline in total investment income and higher expenses. However, net distributable income increased 10% year over year to 45 cents per share.

Total investment income came in at $2.5 million, down 53% from $5.3 million in the year-ago quarter. Total expenses were $2.4 million, up slightly from $2.3

The combination of ready access to inexpensive capital and the pressing need for additional takeaway capacity to support robust drilling activity in shale plays promised to fuel distribution growth in coming years. Meanwhile, mergers and acquisitions also surged, as upstream MLPs sought to purchase underpriced acreage and midstream MLPs vied for pipeline assets.

Then commodity prices began to tumble. Natural gas prices, which were already weakened by the glut of production from prolific shale gas plays, sank even further after the no-show winter of 2011-12 sapped demand and increased the volume of gas in storage to record highs. With producers beating a hasty retreat from gas-focused basins, critics questioned the demand for

Q2 2012 Results Earnings Call

July 24, 2012 5:00 PM ET

Executives

Monique Vo – Vice President, Investor Relations

Kevin McCarthy – President and CEO

Terry Hart – Chief Financial Officer

Analysts

Selman Akyol – Stifel Nicolaus

Presentation

Operator

Good afternoon. My name is Hop, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2012 Earnings Call for Kayne Anderson Energy Development Company. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Monique Vo. You may begin your conference.

Monique Vo

Thank you, Hop. Good afternoon, everyone. And welcome to the earnings call for the Kayne Anderson Energy Development Company for the quarter ended May 31, 2011.

Before we begin, I'd like to remind

I have developed a database of high-yield, closed-end funds with the goals of discovering the best return potential of the group and to get an idea what makes the - at times - strange world of closed-end funds tick.

Analysis Baseline Data

For this discussion, I am using the following data. All of what will be discussed here relates back to these limitations. If what I discuss here goes against what you believe about closed-end funds, go find some data which supports your point of view.

• My database includes 102 closed end funds. The selection criteria were total assets of $250 million or greater, current distribution yield greater than 6% and no muni-bond funds.
• The fund types include leveraged and high-yield bond funds plus the funds working with the host of different strategies to squeeze high yields out of stocks.
• This article looks at total returns for the last two

Are analysts always right? Should savvy investors take their recommendations as dogma, or should they search for top stocks among their hold and sell recommendations?

Analysts do have an edge over the rest of us in making short-term earnings estimates…and not much else. They are closer to firm management than the rest of us, but their recommendations should not be followed religiously when constructing a long-term income portfolio.

The following stocks are analyst "hold" recommendations which pay dividend yields that exceed 5%. They were also screened for dividend sustainability by restricting the search to stocks with payout ratios at or below 50%. Their details follow:

Atlantic Power Corporation (AT) recently traded near $13.70 per share. At this price level, the stock has a 8.2% dividend yield. AT shareholders have sustained a -1.7% change in share price over the past year. At present, shares of this mid cap stock trade

We sold our entire Terra Nitrogen LP (TNH) position, as of April 30th, 2012 after 112% stock rise over the last eight months. We recommended Terra Nitrogen LP for our clients after irrational 30 point single day drop and posted our recommendation on Seeking Alpha on September 22, 2011.

TNH is a $4.9 billion market capitalization Master Limited Partnership (MLP) that yields 6.97%--based on its last quarterly distribution of $4.53/unit and a price of $260/share. Earnings appear to be growing at a decelerating pace. In the June 2011, earnings were reported at $3.95/share versus $2.22 in q2 2010--a 77.9% increase. In the December quarter 2011, earnings were reported at $3.87/share versus $2.61/share in Q4 2010-a 48% increase.

TNH earnings benefited from two extended commodity trends which aided earnings and appear to be tiring. The first commodity trend is corn prices which have been strong for nearly seven years rising from

"My favorite line is that economists were created to make weather forecasters look good. A good dose of humility is always required."

David Jones

Prospect Capital Corporation (PSEC) is a business development company that makes secured debt and equity investments in middle-market private companies and public micro-cap businesses. It is faring much better than many of its peers. Net income, sales and EBITDA have been trending upwards for the past few years. We like Prospect Capital Corporation for the following reasons:

• A good yield of 11.1% and a strong five year dividend average of 12%.
• Net income has increased from $35 million in 2009 to $118 million in 2011.
• EBITDA has is up almost 200% from its 2009 levels of $40 million. In 2011 EBITDA came in at $118 million.
• It has a sturdy five year sales growth of 41%.
• It has a very strong quarterly earnings and revenue growth

In the U.S. stock market, 10 stocks were found to have dividend payback periods under 15 years. Unfortunately, buyers of these stocks would have to wait at least 11 years for the dividends of any of these stocks to pay back their initial investment. The fastest paybacks are not fast enough to ignore capital appreciation when judging stock investments.

Payback Period Calculations

The number of years it takes for an investment to pay you back is called the payback period. Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend yield was projected by taking the minimum of the following:

• Earnings growth over the past five years

• Analyst estimates for earnings growth for the next five years

• Return on equity times the earnings reinvestment rate

The minimum of these measures was then used to estimate dividend growth for the next three years.

There is a common misconception among investors that small companies do not pay dividends. This common notion assumes large caps are mature companies flush with cash and that companies with smaller market capitalizations are cash-strapped startups. This is simply not true: research in a previous article found surprisingly few large caps have payback periods inside of two decades. Research featured in this article discovered more micro cap stocks with payback periods under 20 years.

Micro Cap Stock Payback Period Calculations

The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out in the

In a difficult economy, it makes sense to scout for investment opportunities with robust business models and sustainable dividends. Despite the uncertainty, many companies have a good ongoing business operation and they are still confident about the economic future. That's the reason they have raised dividends. Last week, 36 companies raised distributions of which 14 have had double-digit dividend growth. The biggest hike was realized by Potash/Saskat (POT), which doubled quarterly dividends from 7 cents per share to 14 cents. However, I screened the recent dividend growth stocks by real bargains, measured by a P/E ratio of less than 15. These are the detailed results:

1. Norfolk Southern (NSC) has a market capitalization of $24.43 billion. The company employs 28,559 people, generates revenue of $11,172.00 million and has a net income of $1,916.00 million. Earnings before interest, taxes, depreciation and amortization ((EBITDA)) amount to $4,075.00 million. EBITDA margin

Closed end funds (CEFs) are some of the most unique and misunderstood investment vehicles in the markets. Built within these funds are characteristics that make them difficult to understand, yet advantageous enough to be classified as an outstanding assets within an income portfolio. For 2011 investors had to suffer through a tumultuous year with many ups and downs in the market. The volatility of these markets also took their toll on the CEF world. Income investors held tight as the markets swooned and rebounded time and time again. In the end there were a number of great CEFs that not only held their ground, but also made money in the process for those willing to hold them through 2011. Listed below are some the best funds for 2011 that income investors should closely examine to see if they might be right for one’s portfolio as we move into 2012.

Reaves

It's December 2nd and I am writing this as I make my list and check it twice, for the 2012 high yield portfolio. Many will enter, few will win. There are tough credentials to get into this circle of trust, so without further ado here they are, broken down by sectors:

Business Development Companies:

Kayne Anderson Energy Dev.--(KED) is a principal investment firm specializing in energy investments. The firm prefers to invest in midstream energy companies. It seeks to invest between $10 million and $75 million. The firm typically invests in non-traded companies through equity and debt instruments. The current dividend is a stellar 7.8%, and their payout ratio is 32%. In the past years it has blown away the indexes. As of the end of August, the company's NAV was $227 million or $22 per share, they have LT investments of $300mm, and what I like

The payback period answers the following question: "How long would it take for a dividend-paying stock to pay back the stock's original price?" The time it takes for an investment's cash outflows to sum to the original outlay is called the payback period, and it is considered a simplistic and crude measure of risk.

Payback periods were calculated for large-cap, mid-cap, and small-cap stocks in prior articles and are calculated here for micro-cap stocks with dividend yields exceeding 4%. Payback period estimates depend on earnings growth and dividend payout ratios. Changes to dividend yield were projected by taking the minimum of the following:

• Earnings growth over the past five years
• Analyst estimates for earnings growth for the next five years
• Return on equity times the earnings reinvestment rate

The minimum of these measures was then used to estimate dividend growth for the next three years. Abnormal growth will not last

On October 18th, 2011 former BDC Kayne Anderson Energy Development (KED) reported earnings for the quarter ended August 2011. (KED gave up its BDC status for technical reasons related to portfolio diversification and investment eligibility, but the Company continues to pay a regular dividend and is operated as before, so the BDC Reporter continues to track its progress).

“Real” Results On The Upswing

Because much of KED’s income consists of return of capital, you can’t take the nominal income and earnings numbers too seriously. The results have to be recast, which KED is happy to do for you in the press release. Adding to the complexity, KED has substantial amounts of Payment In Kind (“PIK”) income, and some of that is booked through the P&L and some directly by adjustment to the balance sheet. Here’s a quote from the press release to give you an idea of what we’re