Desperately Seeking Yield Through Equities Redux: Part 11 - Wrap Up

by: Philip Mause

This series has been devoted to the analysis of various types of equities attractive to yield oriented investors. The first article dealt with BDCs, the second with agency mortgage REITS, the third with non-agency mortgage REITs, the fourth with telecom stocks, the fifth with equity REITs, the sixth with utility stocks, the seventh with tobacco stocks, the eighth with MLPs, the ninth with a dividend anticipation strategy and the tenth with the issue of context. This article will deal with several individual stocks and classes of stocks that have come to my attention; it will also provide a summary of strategies for approaching the sector discussed in the series.

First of all, as I have written the series, i have become aware of certain stocks and sub-sectors that deserve more attention. Data concerning the stocks is derived from Yahoo Financial. Data concerning the closed end funds is derived from the Closed End Fund Center website.

IDT, Inc. (NYSE:IDT) - IDT is a telecom company but is different from the telecom companies analyzed in part four. The stocks analyzed in part four all had landline telecom businesses and most of them also had wireless businesses. IDT's business is different. It provides "pre-paid' telecom services - both local and long distance - often to customers who do not have access to other telecom services; its business is described in more detail in this article. As of last year IDT was paying a 15 cent quarterly dividend. In anticipation of the year end tax change applicable to dividends, IDT paid a 60 cent dividend last Fall but indicated that it would not pay additional dividends this fiscal year (which ends on July 31). Essentially, IDT paid an entire year's worth of dividends in one quarter in order to provide investors with the advantages of the old dividend tax structure.

I do not believe that IDT has made a formal or binding commitment but it is very likely that the 15 cents per quarter dividends will resume in the first quarter of the next fiscal year which starts on August 1. If this occurs, then based on its current price of $13.27, IDT would yield 4.5%. IDT seems to produce ample cash flow to support the 15 cent per quarter dividend although its business is unusual and it is possible that technological or regulatory events could have an adverse effect. Its very low price to earnings ratio makes it attractive as a component in a yield oriented equity portfolio.

Vector Group (NYSE:VGR) - VGR (formerly, the Brooke Group) is a tobacco company featuring several brands (including Liggett and Select) and apparently focused on the discount end of the market. It also invests in real estate. It has been very interesting to yield oriented investors because, at its current price of $16.19, it has a dividend yield of 9.8%. As is often the case with stocks which have very high dividend yields, VGR's current pricing (which produces the high yield) is likely due in part to a perception that the dividend may be reduced. In the past year, it appears that VGR's cash flow from operations was not sufficient to support the dividend and there has been some recent borrowing. VGR carries a fairly heavy debt load although it also has considerable balance sheet cash so that the debt does not seem unmanageable. The tobacco industry is certainly not a growth industry and it is unclear whether VGR will be able to increase cash flow enough to make the dividend sustainable. I would watch this stock closely and, if a dividend cut is announced, be ready to buy if the price is reduced sufficiently.

In writing about MLPs, I discussed some of the tax issues associated with the K-1s which they generate for shareholders. One way to avoid this is by investing through closed end funds which, in turn, own MLPs. In the last few years, there seem to be more and more of these. Most of them are trading slightly above net asset value and have roughly 20-30% leverage (debt as a percentage of total assets) comfortably below the 50% closed end fund maximum. I am going to list the ones I am aware of. I should note that I am not providing tax advice here but a simple inquiry is likely to satisfy an investor that he or she can avoid the K-1 hassle this way.

1. Clearbridge Energy MLP (NYSE:CEM) 2. Clearbridge Energy MLP Opportunity (NYSE:EMO) 3. Cushing MLP Total Return (NYSE:SRV) 4. Fiduciary Claymore MLP Opportunity (NYSE:FMO) 5. First Trust MLP (NYSE:FEI) 6. Kayne Anderson MLP (NYSE:KYN) - this appears to be the largest and one of the oldest (inception in 2004) - it trades at a fairly hefty premium to NAV and has relatively high leverage 7. Nuveen MLP Total Return (NYSE:JMF)

8. Tortoise MLP (NYSE:NTG) 9. Tortoise Pipeline and Energy (NYSE:TTP) - this trades at a slight discount to NAV and includes significant non-MLP energy holdings

In summing up, I tend to favor diversity especially because each of the sectors discussed in the series has its own idiosyncratic risks and diversity tends to cushion an investor against a disastrous development that hits any one of these sectors. MLPs are definitely an attractive sector - especially now that the energy sector seems to be one the economy's major growth engines. The closed end funds described above provide an investor with diversity within the sector and eliminate some tax hassles. As long as things are going smoothly, the leverage may offset administrative costs. On the other hand, in a nasty downturn the leverage compounds an investor's losses. Still, I think MLP closed end funds are attractive here although I might wait for one or more of them to open up a discount to NAV before buying; unfortunately, given their increasing popularity, it may be a while before discounts open up.

The sectors which hold debt instruments as assets - BDCs, agency and non-agency mortgage REITs - may not have a great deal of upside as many of them have traded up to an NAV which is calculated by valuing debt instruments on the basis of unpaid principal balance (UPB). I have pointed out some discounts that are still available in these sectors but in one important case - American Capital (NASDAQ:ACAS) - no dividend is currently being paid. Agency mortgage REITs definitely belong in a yield oriented portfolio because of their high yields and also because they appear to have weathered the Crash better than any other sector.

I am nervous about tobacco stocks because of the potentially declining market and the possibility of adverse regulation or litigation but they seem to do relatively well in an economic downturn. Utility stocks are beginning to trade like bonds and probably should be compared with bonds in terms of yield (bearing in mind that utility stock dividends tend to grow slowly over time). The telecom sector has some interesting stocks although a relatively large player, CenturyLink, recently had a dividend cut. Equity REITs provide some protection from inflation and should be included in a yield oriented portfolio although I believe inflation is not really the big danger now.

Even though the stock market has moved up a great deal since the original series of articles, I still generally prefer solid companies that pay dividends and have reasonably decent prospects for growth over most of these sectors but I also believe that an investor should hold diverse holdings. In this regard, Wal-Mart (NYSE:WMT) and Cisco (NASDAQ:CSCO) have each recently increased their dividends substantially. In the long term, I would emphasize "regular" stocks rather than these sectors but for retirees with an immediate need for yield, these sector provide more interesting opportunities than bonds or cash right now and every yield oriented investor should consider them carefully. I would definitely advise any investor who is entirely in cash and/or bonds to migrate in the direction of a diverse mix of the sectors discussed in this series instead. You can definitely generate higher yields than in the bond market and there is also some potential for price appreciation.

Just remember - as I said in an earlier article - please be careful out there.

Disclosure: I am long ACAS, CSCO, WMT, TTP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.