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I suspect that most dividend investors are conservative by nature. I am. I don't believe I have any special talent or gift for trading, a crystal ball, or any access to insider information. Consequently, I have little expectation of prospering by consistently buying low and selling high. In... More
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  • PSEC, A View From A Dividend Investor

    To be frank, I'm primarily a hi-yield preferred dividend investor, which accounts for approximately 80% of my portfolio. However, there are occasions when I feel the price of the preferreds I am watching have become exceedingly high, consequently, dropping the yield, I am in search of, for the risk I am willing to take. When this occurs, as it did around the middle of 2013, I began searching for other hi-yield dividend alternatives and stumbled onto the BDC market. At the time, I recall reasoning that with a gradually improving economy, the BDC sector might be a relatively risk-free way to leverage my portfolio with the cheap money I was borrowing, on margin, for the tidy return I expected from my growing portfolio of assorted BDC's: MCC, TICC, FSC, BKCC, SLRC, PNNT, and ultimately PSEC, the focus of this article. Price-wise, thus far, this strategy has not panned out exactly as well as I had hoped it would; however, I remain optimistic because of the healthy dividends I am receiving, which has lessened the blow of the fall in price across my investments in the BDC sector.

    Initially, to pump up my yearly dividend tally, I purchased 2000 shares of each of the above mentioned stocks. However, researching and listening to PSEC's F2Q14 conference call, I decided to marginally increase my position. I, confess, I liked the 12+% dividend yield, but more so, I liked the size of the PSEC in relation to most other of the BDC's, and their business model. I believed then, as I do now, that their size and access to funds ( 1 Billion dollar credit facility), low leverage (at the time 48%), and their origination platform as highlighted below:

    "With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor related lending, direct non-sponsor lending, Prospect sponsored operating buyouts, Prospect sponsored financial buyouts, structured credit, real estate yield investing and club and syndicated lending. This diversity allows us to source a broad range and high volume of opportunities.

    Then select [ph] in a disciplined bottoms-up manner the opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low single digit percentage of such opportunities.

    Prospect originations in recent months have been well diversified across our seven origination strategies. Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. Prospect's approach is one that generates attractive risk-adjusted yields and our debt investments were generating an annualized yield of 12.9% as of December 31."

    I liked that their size allows them to bid on deals in a rarefied, plus 100 million dollar, market unavailable to many of their smaller BDC competitors, which leads to their diverse portfolio, at that time numbering 130 (now 146) companies in a variety of sectors.

    And I especially liked the fact that their basic credit line was at a modest fixed rate, while most of their loans were at a floating rate, which would increase as did interest rates, which, I believe, must increase as the market and economy improves.

    Then with the news that the BDC's would, for primarily GAAP accounting reasons, be removed from several indexes, culminating in June, I watched the broad sell-off and across-the-board price decline of the BDC sector, which I believed had been mostly priced in. Initially, I decided to wait until sometime in June to buy more of PSEC, which I probably should have done, but with their recent precipitous fall because of the SEC decision, I began to gobble up shares as their price declined; again, a tad too early. My only regret is that I could have purchased the 20K I eventually ended up with at a better price.

    Going forward, I am comfortable with my position and I have no intention to sell at this time. My reasoning and the reason for this post. Although I can't be certain where the price of PSEC will be in six months or six years, I am reasonably certain that during the time I hold my position I am assured, for at least until January 2015, I will be earning a dividend yield of at least 12+% on my money. Furthermore, even if the price of PSEC at that time is $1 less than my average price per share, I will still be up approximately $6,500. Worst case scenario, even if NAV falls, the future dividends are cut, and the price continues to fall, my eventual losses will be ameliorated by those wonderful monthly dividend payments. And, if I am correct, and my belief in this company is rewarded, I will likewise be rewarded handsomely. Bottom line, I firmly believe the upside, of this investment, by far exceeds the potential downside.

    As I mentioned at the outset of this article, I am primarily a preferred dividend investor, which means that I am a conservative long-term investor, basically risk-averse. Although I can't and won't claim that I can even approach the awesome knowledge-base brought to the SA forum by many of the other posters, I'd gladly match my portfolio gains against any over the past five years.

    "To thine own self be true," should be a cherished and highly prized by all prospective investors. I live by this aphorism and it has served me well. Not long after I had returned to the market in 2008, after my devastating fall in the fiasco of 2000, I realized that I was not equipped to delve deeply enough into diverse company financial statements, derivatives, CLO's, and conference calls that usually spun the numbers to present their companies in the best way possible. With this realization and acceptance of my shortcomings, I realized that any success I might hope for as an investor would have to be a result of keeping it simple, basic, and with the objective of investing with an ultimate win-win philosophy. I believe I have accomplished that beyond my wildest dreams, which I have chronicled in my Dividend Investor's Guide.

    Disclosure: I am long PSEC, SLRC, PNNT, FSC, TICC, BKCC.

    May 23 12:10 PM | Link | 2 Comments
  • Water: Abundant Yet Scarce

    We are a nation of pipelines, piping millions of gallons of mostly hazardous oil and liquefied natural gas throughout our country. Here's a thought, why not our most valuable resource, Water? Although I claim no engineering expertise, I envision a vast system pipelines (cement and otherwise) traversing our nation moving vast quantities of this precious fluid from areas of plenty to areas of need. Imagine opening intake valves situated along swollen rivers, modestly reducing the height of potentially devastating flood-waters and transporting it to water-starved regions of our country. After the initial expense, which by-the-way, would employ thousands of construction workers throughout many states, I envision billions of gallons of water being transported virtually cost-free utilizing a system of solar and wind technologies powering those pumps necessary for moving the water. I envision, when conditions warrant it, moving water into storage in a series of natural (caverns, lakes) and man-made (dams & lakes) ready for release when needed by water-starved communities. Certainly now with the effects of Global Warming adversely affecting so many of our western communities, with the promise of worse to come, we should undertake this worthy and necessary national project. We are a nation of grand ideas and great projects undertaken and accomplished throughout our history. We opened the Great Lakes to navigation, the Intracoastal Waterway, a national highway system, and a railroad that traversed our continent, why not something simple and mundane like anther system of pipelines, this one dedicated to the flow of water.

    May 22 2:15 PM | Link | Comment!
  • View From A Private Investor

    For much of my adult life I voted as an Independent; which, in my case, meant that politics didn't much interest me, consequently, I didn't pay it much attention. However, in 2008, with the nation's real estate market in the proverbial toilet, I returned to the market, which I had left after the drubbing I suffered as a result of the fiasco. By the end of 2008, it appeared as if lightning had struck again, and I was down another considerable sum of money, which sharply focused my interest in not just the market and the plummeting world economy, but also politics and the increasing role it was playing in my dwindling fortune. The more I learned, the more I became discouraged. To my chagrin, I watched as our political leaders, primarily the Republican Party, at the very outset of President Obama's first term of office, decided it was better for their party politically that he fail regardless of the negative consequences for the nation. In spite of their repeated attempts to undermine his efforts to revive our floundering economy, he succeeded, and slowly the recession we were in the grip of began to subside. Fortunately, during this time, instead of fleeing the market, I hunkered down and studied it as I had never studied anything before, and discovered a rational, dividend oriented way to invest, which led me to, what I term, my Warren Buffet moment. However, this is not the crux of this article, it only serves to inform you that my new investment strategy became wildly successful; so successful that I published The Dividend Investor's Guide, which, at-long-last, brings me to the point of this article: The following observation is excerpted from my guide, published in 2011:

    The Dividend Investor's Guide


    Although I'm not necessarily proud of it, prior to the nomination of George W. Bush and his consequent election, I was registered Independent. More precisely, I didn't pay attention to the political process and wasn't particularly thrilled about either party, believing they were, more or less, just different sides of the same coin devoted to taking our money and wasting a great deal of it. Much the same, I believe, as what many of today's Tea Party members believe. Therefore, beyond an occasional gripe, I realized I knew very little about the nuts and bolts of how the political system really functioned, and therefore, I had little to say, nor did I care to say very much about it. However, my political naivety ended with President Bush's election, who I believed was really not intellectually capable of functioning adequately in this lofty role. I predicted he would be a terrible president and harm the country. Unfortunately, he far exceeded my dire expectations, the consequence of which we are suffering through today, and sadly our children in the future. However, during his presidency, being the basically apolitical animal I am, I really didn't pay close attention and did little more than vote against him in the subsequent election, which I was certain he'd lose considering the terrible job he had done during his first term in office. Beyond being shocked and mortified that he was re-elected, once again after the reality of the election wore off it was back to the business of being little more than the ordinary tax paying disinterested citizen. It was in August of 2008 that I began to pay closer attention. The time might be familiar to you because that was the month I once again began investing in the market and I began to realize that my investing success or failure was, in some small part, dependent upon politics. And in a normal market and world that would be the case, but within a few short months everything changed. I was proven wrong, politics would play a far larger part in the domestic and global economy than I could have ever imagined. I'd say my interest certainly peaked the following month, the day Treasury Secretary Paulsen addressed congress requesting 700 billion dollars to help bail out our rapidly failing economic system. I distinctly recall that first congressional vote rebuffing his request and how the market reacted with stomach-wrenching DOW drop of 770 points. Yes, I began paying serious attention, especially since my portfolio was down well over $400,000 and rapidly shrinking as I watched in horror. By the end of that October, my losses swelled to approximately $600,000.

    Investors were fleeing the market in droves. I didn't follow their lead simply because I firmly believed, and still do today, that there are really only two places to invest serious money, money that most probably you and I will never come close to attaining in our lifetimes Money held by the true Masters of our Universe, those individuals who hold a great deal of sway over congress and, not only our political process, but similarly the world's. And where do they have most of their tremendous wealth invested? Those two places I referred to, Real Estate and the Market, all markets. And for that moment in time the real estate market was virtually dead. I hopefully concluded that they might not give a good God-damn about your money and mine, but they would certainly act when their wealth was in danger, as was clearly evidenced when congress, in three short days, passed a bill suspending naked shorting of the financials, and quickly re-voted to pass that $700 billion TARP bailout after the market collapse. Consequently, I stayed and toughed it out, while biting my nails to the bone.

    With Obama's election, I breathed a sigh of relief, knowing he was certainly more intelligent than Bush and hoping he could help dig our economy out of the hole it was in, and the ever-deepening hole I was in. With bated breath, I counted the days to his inauguration when he would finally take the reins of government, which Bush appeared to have relinquished, even before his term had ended. Obama hit the ground running, starting off requesting a new stimulus package, one that was sorely needed to jump-start our virtually frozen economy. And then it happened, something I noticed from nearly the outset, which I have subsequently written about:

    On January 16, 2009, days before President Obama took office, Rush Limbaugh addressed his radio audience, wishing for Obama to fail. Later he softened his words by saying it was Obama's policies that he wanted to fail. And thus was born the Republican strategy to insure Obama would become a one-term president, which was later given voice to by the Republican leader of the Senate, Mitch McConnell, shortly after the Republican victory in the 2010 midterm election when his party retook control of the lower house of congress. Implausible as this might sound, it is my contention that from the very beginning of the Obama presidency, the Republican Party did everything in their power to prevent Obama from rescuing the failing American economy, and more specifically their effort to keep the unemployment rate above 8%. They realized that if Obama succeeded in rescuing the economy, the Republican Party would, not only be terribly weakened for at least a generation, but that it might actually cease to exist as a viable party. In order to accomplish their nefarious goal they first fought against and, consequently, reduced the requested amount of Obama's initial stimulus request from 1.2 trillion dollars to 787 billion dollars. Then with Senator Richard Shelby at point, they strenuously fought against Obama's bailout of the American auto industry, which had they succeeded would have cost Americans directly involved in that industry at least a million jobs, with an additional untold number of jobs lost in sectors of our economy both directly and indirectly supported by our auto industry. Most egregious and cynically harmful, the Republicans, emulating Chicken Licken, fought against Obama's attempts to rescue the economy by continually and remorselessly frightening the already shaken American public, exclaiming that his policies, especially the stimulus and tarp programs were abject failures. In fact, to this day, Romney, the leading Republican presidential contender, proclaims that the stimulus was an abject failure producing no job growth, disregarding the fact that the month Obama took office we were losing over 750,000 jobs per month, which turned into a net positive the following year. Had we been in a shooting war with the nation's fate at risk as we were in 1942, the year following the disastrous Pearl Harbor attack, it would most certainly had been considered treasonous for an individual or party to continually and publicly disparage our war efforts. Yet, at the outset of Obama's presidency, when we were most certainly in the economic battle for the very life of our nation's economy, and a heartbeat away from a second great depression, the Republicans, did just that. And because our economy is basically, and unfortunately, 70% consumer driven, Americans, further frightened by the Republican ongoing diatribe, drastically reined in their spending and investing, which further depressed our failing economy, and it is my contention, has delayed and stalled the recovery. This is further evidenced by the actions of the lower house since the Republicans regained control. Not only have no bills been presented or passed promoting job growth, but because of spending cuts initiated in the lower house, we are experiencing a marked reduction of public sector jobs, which has served to negatively affect the unemployment rate in spite of the gains from job growth in the private sector. Historically, no president has been reelected when the unemployment rate has been above 8%, the magic number, above which the Republicans plan to recapture the White House without destroying their brand in the process. Fortunately for them, a major segment of the American public, for a variety of reasons, is not paying attention, at least as of yet, and another segment is so set in their ideology that they simply refuse to accept what should be clearly obvious. Bottom line, at the time of this writing, the global economy, primarily because of Europe's sovereign debt crisis, and ours, primarily due to our political gridlock, is on the verge of sliding back into recession. And the Jury's out about whether or not we'll fall back into recession, and if so, how deep it might be. All we can be certain of is that we cannot control the outcome. Our job as investors is to protect our respective portfolios from a further decline in value.

    May 21 12:03 PM | Link | Comment!
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