Immediate Income: Why Individual Stocks Matter

Summary

• Immediate income investing is viewed as high risk/high reward.
• Multiple types of securities can be used to find high yields but none are safe as individual stocks.
• Individual stocks should be used as ballasts to a immediate income portfolio.

Investment Thesis

Immediate income investing provides an avenue for predictable reliable income, however investing in individual stocks should not be overlooked. Individual stocks provide a ballast against the ever-changing word of high yield closed end funds, CEFs, exchange traded funds, ETFs, and exchange traded notes, ETNs.

The Background

In a previous article, I laid out the groundwork of why immediate income investing is a valuable alternative to the more mainstream investment styles readily used. Furthermore, I illustrated that within a near-term, 10-year time frame that immediate income investing beats out dividend growth investing.

I define immediate income investing as: Investing with a taxable account seeking immediate high return via dividends.

Stocks or CEFs/ETFs/ETNs

Closed end funds, CEFs, Exchange traded funds, ETFs, and Exchange traded notes, ETNs, all offer superior yields against most stocks. They do this via leverage mainly - adding to already complex securities.

Exchange Traded Notes

Exchange traded notes especially offer constantly varying dividends - hard to build your monthly income needs around. Two ETNs that are perfect examples of this are: UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) and UBS ETRACS Monthly Pay 2xLeveraged Closed - End Fund ETN (CEFL).

MORL Dividend

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Although these ETNs offer high yields, their irregular dividends make them exceedingly difficult to regulate your income from investments to your needs. UBS Group (UBS) offers the ETRACS series of ETNs that are highly popular, and often highly leveraged.

The risk with ETNs run with them being redeemed. This is where the provider shuts down the ETN based on losses, negative momentum or lack of investor interest. UBS recently closed 8 such ETNs last month.

While ETNs make a nice high yield choice, their varying dividends and redemption risk add additional diligence requirements, making them the least valuable option for immediate income investing. They should not be ignored but shouldn't be depended upon as the main income driver in a portfolio.

Exchange Traded Funds

There are less high yielding options with ETFs than CEFs or ETNs. ETFs are highly popular for passive investing. ETFs exist for investing following strictly the S&P 500 or other indexes. However some high yield options exist, one such option is InfraCap MLP ETF (AMZA), another is Global X MLP ETF (MLPA).

MLPA Net Asset Value

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A risk with high yielding ETFs is net asset value or NAV decay. AMZA and MLPX both trade and operate within the struggling master limited partnership, MLP, world. Across the board MLPs are down however this negative market sentiment has boosted yields while fundamentals have been unchanged. These ETFs have seen their NAV decrease while trying to maintain their high dividends - creating high yields. Whether they can maintain this in the face of pressure is unsure, but ETFs will not reach $0 unless they pay out every last penny, or their holdings, all of them, crash. Unlike CEFs, ETFs share price is set to their NAV value daily, meaning only during the day can you grab shares at a discount/premium. AMZA and MLPA offer high yields and the surety that they won't disappear overnight, but fall short of the simplicity of CEFs and individual stocks.

Closed End Funds and other Registered Investment Companies

Closed end funds and registered investment companies, RICs, are another route to find high sustainable yields. However, caution here must also be exhibited. CEFs offer a set number of shares from an initial NAV. CEFs can increase or decrease their NAV as their investment strategy takes place, however most focus on giving high immediate income to their shareholders.

Cohen & Steers Select Preferred and Income Fund, Inc. (PSF) is an excellent example of a solidly executed CEF that offers a 7.5% yield along with an annual special dividend which boosts this amount. PSF has a set dividend payment, it monthly pays out $0.172 regardless of how much the fund brings in. Any overage is paid out in the annual special dividend. This set pattern allows investors to enjoy an expected monthly payout while enjoying an added boost at the close of the year. The catch to this method is if the CEF does not earn its dividend - its NAV suffers. So far PSF has grown its NAV while paying out its yield.

Meanwhile, MFS Intermediate High Income Fund (CIF) offers a monthly yield also, it pays out a 9.5% dividend on its NAV monthly. This amount changes monthly based on the performance of the fund and has caused its NAV to decrease steadily.

CIF Net Asset Value

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Over a ten year time span, PSF has quietly grown its NAV while CIF has decreased. This degradation has affected CIF's ability to pay the desired dividends to its holders.

Oxford Lane Capital (OXLC) is a well-loved monthly payer. Unlike other CEFs where you are investing in the fund itself, with OXLC you are investing in the RIC running an collateralized loan obligation, CLO, fund. This is a minor nuance that most brokerages don't spend the time to distinguish. OXLC offers a higher yield than most CEFs and currently is seeing its NAV grow slowly.

CEFs abound and many solid immediate income choices exist - too many to overview here. But these securities are also complicated since they invest in multiple other securities, making it harder to track the risks being taken.

Stocks

Individual stock picking can be extremely hard. This is why Warren Buffett offered his famous challenge of managers vs. passive ETFs. Spoiler: The ETF won. But for immediate income investing, individual stocks offer unique opportunities for high yields with straightforward risk/reward profiles.

These straight forward risk/reward profiles allow these stocks to become the rebar added to the foundation of your portfolio, providing stability and strength to what you are building upon. Below are a few excellent examples of individual stocks that clearly offer high yields, strong fundamentals and little capital depreciation risks.

Uniti Group (UNIT) I have consistently encouraged investors to consider and open positions with. UNIT offers 11% yield and as a real estate investment trust, REIT, is required to pay out 90% of its taxable income. UNIT has seen strong upward movement after its sudden collapse last year due to external pressures. UNIT covers its dividend and would provide a solid straightforward ballast against complexity of other securities.

KNOT Offshore Partners LP (KNOP) is another high yielding individual stock, it offers a yield of 9.35% and has paid consistently with a strongly covered dividend. This stalwart will provide solid capital preservation and a nice income stream.

CenturyLink, Inc. (CTL) offers a yield of 10.74% which is also solidly covered. This company is fresh focused on selling its services to enterprises and businesses which provide the highest revenue and income. CTL is one of the only telecom stocks that offer this high of a yield - that is without a doubt covered.

CTL

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All three of these individual stocks outperformed the S&P 500 this year to date while offering a superior yields worthy of an immediate income investor's portfolio. Meanwhile the market price of the traditionally loved immediate income securities has not performed as admirably.

PSF

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Traditionally, investors espousing this style of investing are less concerned about paper losses/gains however having individual stocks as a capital ballast to reduce capital depreciation and paying out high yields is beneficial.

Investor Takeaway

Individual stocks add simplicity to an immediate income portfolio, allowing investors to clearly see the financial situation of the security they are holding. Individual stocks should not be looked over and I strongly encourage my fellow immediate income investors to add this much needed rebar to their portfolios.

Analyst’s Disclosure: I am/we are long UNIT, CTL, MORL, CEFL, KNOP, AMZA, OXLC. 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.

Comments

[m8]

KNOP dropped 40c today. Div due in two weeks. 9.35%. Buy it.

[bsand]

Is KNOP Roth IRA "safe"?

[Treading Softly]

KNOP issues a 1099div - No K1 or IRA tax issues there

[MrDondo]

Sympathies on the DLNG if you bought it before May. My parents' had a huge position that they acquired last summer. I did my DD on it in January and decided to steer clear - seemed a trainwreck was coming.

[Norman Bates at Disneyland]

Only 6 vessels and basically 1 customer (who is not exactly popular, ATM) seems a good reason to avoid DLNG, IMO. One accident, breakdown in harsh conditions, unexpectedly-long dry-docking, whatever and revenue can be materially affected. With only 6 vessels, times are good until they are not.

[Guest 11/10/04]

Am holding proportionally too much of my total portfolio in AMZA and CTL and
DLNG, but the high divs have couter-balanced the waiting payoff in the mining
stocks-silver especially. Thanks for the informative article. Going to "follow you".

[Jim_Purzickis]

While I own mostly CEFs, I do own BDCs and high yield stocks. CNSL looks like a decent bet with a covered dividend. Owned UNIT and CTL in the past, sold UNIT too soon. NCMI same story.

[MLian]

Thanks for the article! Immediate income and I'd add keet it ongoing and increasing (DRIP) income. Cheer

[Treading Softly]

My pleasure, thanks for commenting! Immediately DRIP-ing that income, nice!

[MyJourney]

I must be in the right place, TS and SA Comments here. I own many of the high div companies mentioned here: UNIT, NRZ, EVA, PEGI, KNOP, USAC. Thanks to all who commented; you've given me some unfamiliar and previously discarded names for research.

[Treading Softly]

Thanks for commenting! I've quickly noticed that this community (Immediate income investors) are active but largely forgotten. I'm glad I can be a resource for additional securities to research!

[MrDondo]

I was looking forward to your individual recommendations, but it turns out I already own them all! UNIT, KNOP, and CTL are large positions in my portfolio along with ETP, EVA and some high yield preferreds (MTBCP and TGP-B). Will be following you now (and checking out your previous articles) as we think alike.

[Treading Softly]

Thanks for commenting! I actually have a large position in EVA also - capturing it when its yield was close to the 9-10% range. I seek immediate income and part of that is well timed transactions - I purchased shares of PEGI (Which I have yet to write about) when its share price dropped on reactionary selling and captured that high yield when normally it isn't available.

[MassSpec Guy]

TS, congratulations on your very nice paper. What about BDCL? Supposedly BDCs will benefit from increasing interest rates.

[Treading Softly]

Thanks for your kind words! I own shares of BDCL also, however I still lean towards predictable dividends/distributions and it leans heavily towards the varying output like CEFL and MORL. My main issue with BDC in general is their dividends are often too high to be sustainable, and the sustainable dividend payers are lower yield. Meaning BDCL has its work cut out for itself with that sector as a whole.

[Colin Delaney]

Great article TS!

I'm surprised NRZ wasn't discussed in the stock section of the article. Its one of my top mREIT's and has a large following here (which isn't a reason to write about it, of course).

I'm not to familiar with UNIT, but I'm definitely adding it to my list of RIET's to consider, especially if it makes your individual stock section as an RIET. REIT's hold about 60% of my IRA right now, and the DRIP makes it hard to grow other sectors when I'm already maxed out for this years contributions!

[Colin Delaney]

Then again, I'm sure there are hundreds of individual stocks (with high yields) that people could say that same thing about.

[Treading Softly]

Thanks for commenting! I haven't personally reviewed all deeper financials of NRZ to add it to the list. I won't mention a stock in a positive or negative way unless I have analyzed it myself - just a personal accountability rule. NRZ is on my list to do a deep dive on though - stay tuned ;)

[Colin Delaney]

Totally understandable, and a very good policy to have when writing articles such as this!

[vinyl1]

I agree that the complexity and leveraged of ETFs, ETNs, and CEFs will probably lead to disaster sooner or later. Many CEFs were thoroughly walloped in 2008-9, but it wouldn't even take that much to send them through the floor.

However, the answer is not to go out and buy complex and leveraged individual stocks, which are just as much a financial engineering play as the synthetic entities. You need to look for real companies with good business models, strong balance sheets, and some growth.

In this environment, you won't get a large dividend payout using such companies, but you'll be safer in the long run, and your income will grow rather than shrink.

If you gave me $1 million dollars right now and told me to construct a dividend portfolio, I would tell you that it's not safe to go over about 5%. I could give you 5% with some risk, but anything higher is likely to lead to grief.

[Treading Softly]

Thanks for commenting! I understand your concern, however I might add that the market as a whole often incorrectly values stocks causing mismatched yields for dividends. KNOP isn't a complex stock to look into its financials but yields close to 10% for example. CTL is valued based on its peers, and not its own fundamentals. Exactly why I picked them for my examples.

[Smarty_Pants]

Another plus is that KNOP issues a 1099 at tax time rather than the K-1 usually associated with MLPs.

Other MLPs also worthy of consideration:

GLOP (1099) yielding 9% with management goal of increasing payout 5+% annually

and

USAC (K-1) yielding 12.3% - coverage around 1x but strong management and a history of maintaining the payout during cyclical troughs

[Treading Softly]

Thanks for commenting! Those definitely are stocks worth checking out!

[Srmonroe00]

Sorry I see AMZA.

[Treading Softly]

Its all good! AMZA is definitely a stock endears strong opinions.

[quitethefool]

I wouldn't under rate AMZA. It has a yield of approximately 18%. Even if it never rises in share price another penny you will have all your capital back through the dividends alone in approximately 5-1/2 years. And in all likelihood the share price is eventually going to go up too as MLP's come back into favor.

[Jim_Purzickis]

Once the noise on MLPs subsides, AMZA could have material upside. I believe Jay when he says the current dividend is sustainable but time will tell. AMZA just needs sideways action - permanently- and you're going to do well with it. It will never reach the 20s again as an investor you just want steady and she goes from here.

[Srmonroe00]

I held Unit for a year, sailing along and wham, gutted like a pig. Would you buy this security again? Do you think it was a one time Deal? would love to hear your opinion on this. Great article. Only one you missed I like is Amza, REML. Thanks so much. Sam.

[Treading Softly]

UNIT got smashed due to WINs struggles, as long as WIN continues to chug along and pay rent - UNIT will have time to continue to diversify. I don't foresee any fundamental weakness - stock price might get hammered depending on the outcome.
Either way UNIT offers a high yield due to the market worries about WIN. I've written multiple times about UNIT and feel strongly that it is worth investigating as a buy. I do get feeling burned by its share price movement over the last year, but its rallying strongly back to its pre-drop levels

[Don317]

The author cited CTL as an “excellent example” of an individual stock offering high yields, strong fundamentals and little capital depreciation risks.

In 2013 CTL suddenly and unexpectedly cut its dividend by 25%. The stock price immediately fell by nearly the same percentage and has never really recovered.

Characterizing CTL as “rebar added to the foundation of your portfolio” is a questionable assertion.

[Treading Softly]

thanks for commenting! CTL also recently completed its acquisition of level3 which overhauled its fundamentals and re-oriented it to being a enterprise vs consumer focused company. CTL produced large amounts of FCF which more then covers its dividend. Share price remains suppressed due to that whole sector struggling. I agree in 2013, CTL not a good choice, today? Sign me up.