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'Income Factory' Re-Invests At 12% Rate; 6-Month Total Return A More Subdued 4%



  • Our Savvy Senior "Income Factory" had a total return of 4.1% through July 10th, a turnaround from the negative 1st quarter total return of -2.8%.
  • But we received cash distributions of over 6% (12% annual rate) that could be reinvested and compounded.
  • Challenge now: Do we "play it safer" and go for lower yields at better prices, or stick with our "stars" that still have high payouts but have gotten pricey?
  • Also, will our patience eventually be rewarded in the MLP patch?
  • And finally, a word about how we "keep score" and track our Income Factory performance.

It's hard to find much of anything too exciting to say about the second quarter that we just completed. Like a football team with a strong "ground game," we continued to grind out the yardage with a cash distribution yield slightly over 12% that we can re-invest and compound, growing the income factory output and building cash generation capacity for the future. Meanwhile total return moved into the plus column, with a 4.1% total return for the year through July 10, versus a -2.8% return through the end of the first quarter.

Let's review what that means. In the first quarter we had cash distributions of 3%, but an overall total return of -2.8%. While we collected cash at an annual rate of 12% (i.e. 4 times 3% to annualize the rate), a market value drop (i.e. paper loss of portfolio value) of -5.8% netted out to a total return loss of -2.8%. (i.e. 3% minus 5.8% = -2.8%.) The income factory still had 3% cash to re-invest and buy more cash generating "machines" to increase its future cash output, but the market value of the factory itself was down by 5.8%. Of course, with the reinvested 3% cash income, the owner of the factory had a higher current cash income than ever. So from an economic perspective (i.e. what it produces) our factory was more valuable to us than ever.

In the second quarter, we continued to collect cash income at a 3% per quarter (12% per annum) rate, but the market appreciated enough during the quarter (actually a quarter plus ten days, since I've "closed the books" for this article on July 10 to incorporate any trades made in the last week) that the total return has switched around to a positive 4.1% from the negative -2.8% in the first quarter. That means for the year ended July 10 we collected cash distributions

This article was written by

Steven Bavaria profile picture
Steven Bavaria publishes a boutique marketplace service - Inside the Income Factory - here on Seeking Alpha, which helps members implement the strategy outlined in his book "The Income Factory: An Investor’s Guide to Consistent Lifetime Returns" (McGraw Hill, 2020).

Bavaria introduced the Income Factory® philosophy in his Seeking Alpha articles over the past 12 years, drawing on his fifty years experience in credit, investing, journalism and international banking. His earlier book "Too Greedy for Adam Smith: CEO Pay and the Demise of Capitalism" exposes the excesses in the CEO pay arena. Both books are available on Amazon. 

Bavaria began his career at the Bank of Boston, handling international credit workouts that included managing a fleet of ships, chasing a Vatican-owned bank in Switzerland, and leading the turnaround of troubled branches in Australia and Panama.
Then he did a stint as a journalist, writing about the financial markets for Investment Dealers Digest (IDD). There he wrote some of the first articles about novel securities, like CLOs, that have now become mainstream, and covered the early evolution of corporate loans to a public, tradable asset class. 
Later he worked at Standard & Poor's, where he introduced credit ratings to the leveraged loan market, helping to open the loan asset class to pensions, mutual funds and specialized investment vehicles like CLOs.

Bavaria graduated from Georgetown University and New England School of Law. He lives in Ponte Vedra, Florida.


Analyst’s Disclosure: I am/we are long ACP, AMZA, BGH, BIT, CHI, DSE, EMO, FGB, FMO, GLO, HIE, KIO, NCV, NCZ, NHF, NRO, PHK, RA, RIV, UTG. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (216)

Steven Bavaria profile picture
I read a number of helpful articles here on SA and concluded that there was no assurance that the rights would be worth more to keep and exercise than they would be worth on the secondary market, so I decided life was too short to spend any more time trying to figure it out, and sold them.
anarchist profile picture
Steve comments on the RIV rights offerings? Should one participate, oversubscribe?
Steven Bavaria profile picture

So many of our asset classes - like loans and high yield bonds - have low durations and will re-price upwards relatively fast as rates move.

Besides that, the increasing interest rates are a sign that the economy is improving, which will be good for credit quality generally, another important positive for a credit-focused portfolio.
Thanks Steven - I guess one has to know their tolerance for volatility as well as risk. I sold half of these types of holdings over past two weeks. But I am comfortable sticking with the rest and riding it out. I will buy back as/if NAV continues to drop...on GSBD, GBDC, etc...
Hello Steve - Given the rapid recent increased upward trend in interest rates, are you still comfortable with a high allocation to these interest sensitive investments? They appear to be quite volatile. I have been trying to mirror your portfolio for past 8 months,and have been pleased with it (thank you), but I am starting to get a bit concerned. Like many here, this is my primary source of retirement income. Should I be diversifying to other asset classes as well? I know you feel this is already "diversified", but it all seems to be subject to rate risk, to more or less degree. thank you. - Steve K
NV_GARY profile picture
I guess they wanted 2.87% exposure to one commodity.
Pinot44 profile picture

Big fan.

Why do they have a 3% position in Sprott Physical Gold and Silver Trust? Asking for a confused friend.
Thank you for this article. Very helpful information.
Very impressive returns. You are obviously very knowledgeable and thorough.
Have you ever thought of a starting a paid for newsletter or something similar with your portfolio and recommendations available to subscribers only (sort of like Contrarian Investor but, hopefully, with far better recommendations and results)?
With the returns you quote, if provable, investors would flock to you and you would make far more money than you ever could by just investing your own money.
Thanks for another great article Steven! As an early retiree (no SS or Medicare or IRA withdrawals yet) I'm pretty focused on finding good Income Factory investments for my taxable account that has to generate all my living expenses plus growth. I've got IRA accounts as well, which are much easier to plan for, especially Roth IRA.

So investments like CEN which have been all or mostly ROC or EXG and similar tax-advantaged or municipal funds (PML, NVG) are worth pointing out. Same thing with qualified dividends from common or preferred stock and baby bonds; under current tax law QDI, like long-term capital gains are not taxed below about $77k taxable income for a couple. Because of that I've shifted to more investments generating qualified dividends in my taxable account.
May I suggest that you flag or identify your holdings that would be good for taxable accounts?
Any comments on DMO?
The fund has an attractive yield, shrinking premium, good managers and protection against interest rate increases.
If discount shrinks a bit more then it becomes interesting.
The fund is to liquidate on 1 st March 2022 and the premium is a drug.
look like they cut the div 2 months ago.
Jim_Purzickis profile picture
They did cut the dividend recently. It has a history of cuts, I believe.
Jim_Purzickis profile picture
Tremendous July.

Jim's Happy Hour High Yield Portfolio: 4.93%
SP 500 index: 3.58%

Since my inception date (4.1.18, prior to that I was 100% stock): 10.24%
SP 500 index: 6.52%

Note: Returns are net my monthly expenses, that's why it's called the Happy Hour portfolio.
Steven Bavaria profile picture
I mention a "starter list" in here


I also mention the funds you could "soup it up" with if you wanted a higher yield short list.
stevenamills profile picture
Steve -

I know this makes me a member of the "no good deed....." club, but do you plan a periodic wrap up on Granny's Portfolio? While I tend to stay more aggressive, the Old Ladies Portfolio has it's place. e.g. I recently bought a car and they had a nice financing incentive, so I set up one of my accounts with the conservative portfolio (couldn't resist SOME juicing) and have Scottrade make the monthly payments. Worked out well, to date.
ChequeMate profile picture

Question - in terms of categories, you do have in the article utilities UTG and UTF but they are not high dividends. Did you ever consider ones like DPG?
Steven Bavaria profile picture
Steve -
It's on the agenda, but I'm having a busy summer, as we downsize a bit, selling our home in NY and moving back to Connecticut. But I do plan to review the Widows and Orphans at some point, although not so formally as the Savvy Senior Income Factory.
ChequeMate profile picture
As you know Steve, I love reading you!

If you had to refine your portfolio down to 4, 5, or 6 CEFs like a 'best of the best' what would you narrow this down to?

I am curious.

Thanks - CM
Think. Focus. Health. Wealth profile picture
Jim - is your income factory's income up 4% July mtd or price appreciation? my income factory disapproves of price appreciation :)
Jim_Purzickis profile picture
Both, total return, no doubt the holdings have gotten more expensive. I did rebalance my BDC holdings this week as I am generally pretty active. I'm capturing most of the return of the SP 500 for the month of July. I did not expect such a strong upside capture.
Think. Focus. Health. Wealth profile picture
looks like edi is returning from the dead price wise (stabilizing) , gonna nibble a little more why yield is still good...as bdc's begin reporting aug 1 (for about 3 weeks) should be some opportunities perhaps
Jim_Purzickis profile picture
Still long EDI and EDF, and just reinvested the dividends. I bought a few BDCs before earnings because I expect that earnings for the top-tier group will be pretty good. AGNC also reported yesterday after the close and the stock is up modestly today. Small wins are fine with me. I've had a great month of July.
Jim_Purzickis profile picture
My 'income factory' is certainly churning this month - up 4.18% July MTD. Some recent trades (CBL, WPG) are adding to performance.Turn off the machines. LOL
vannman ty steve for all ur hard work and sharing it with us. warren buffet was my guide then I added u
darehabber profile picture
Much thanks, Steve. I'm an expert in Real Estate Investing & operation, but I've much to learn about the "CEF World" & am wise enough to remain humble around the learning process. Thank you for taking the time to share your perspective on ROC.....I bet it's a valuable dialog as I'm positive the question is on the minds of many tracking the forum. Never would have guessed that income generated from a call writing strategy would be considered ROC!.....making all the more "clandestine"; difficult for a "keep it simple advocate" to navigate!

Related question: Will the ROC be decucted from the stated dividend payout on the document for tax purposes??

it is reported as "non-dividend distributions" on your combined 1099.

These do not get entered into your tax return.
NV_GARY profile picture
And that ROC reduces your cost basis- puts cap gains off into the future IF sold down the road. The reduction will probably be calculated by your brokerage- so cost will decrease.
Steven Bavaria profile picture
Howard -
ROC is a tricky topic as you probably know from numerous comments and articles. Some is destructive and some not. How income is labeled is not always helpful, since the "normal" income of many funds - MLPs, REITs, CLOs, equity funds that also use options and other hedges - is counted in whole or in part as "return of capital."

In ZF's case, since they employ an options strategy, the gains and losses of that strategy are labeled as ROC. In 2017, for example, ZF had large gains from its options strategy (see its 2017 annual report, pages 5 and 31, accessible from CEFConnect and linked here: www.virtus.com/...

I think they have been "subsidizing" their generous payout this year from the gains of the options last year, so that clearly would be ROC. On the other hand, it was real money earned last year, so using it to pay distributions seems appropriate, even though as options income I understand it gets labeled as ROC.

I tend to ignore the label and track how much of the cash distribution I really get to "keep" as earnings on a particular fund after deducting any depreciation in market price over time. To the extent that a fund is paying me, say, 11%, but slowly giving away 2% per annum in market depreciation, I regard that 2% as the "real" ROC, regardless of how it's labeled. To me that fund is earning me the net amount, or in this example 9%.

ZF has actually been a bit of a disappointment for me in the couple years I've held it, in that I've given up to market depreciation over half of its attractive 12-13% distribution rate over the period I've owned it. But in some ways that's the "beauty" of diversified high yield investing. Even a relatively poor choice, as ZF has turned out to be so far, has still returned me about 4% per annum, after deducting the paper loss from the actual cash received. And of course, the cash received has been reinvested in what have been, for the most part, better investments.

In a diversified, high yield portfolio, you will always have some clunkers that pay you 11 or 12 percent in cash and then take some or even most of it back via market depreciation. But you will hopefully have others that don't, and a rare few that actually increase their distribution from time to time. That's why my strategy is to shoot for a distribution yield of 11% or even a bit higher, hoping that I'll actually get to "keep" 10% or so, after market erosion, as a "real" cash return. That 10% will double my income stream, even after the erosion or destructive ROC or whatever we decide to call it, about every 7 years. That's "growth," in my book.

Back to ZF. For me the jury is still out on ZF and I have held a good chunk of it despite its mediocre recent performance because of its attractive long term record (8%, 11% and 10.5% average annual total returns for the past 10, 5 and 3 years respectively). ZF admits in interim reports that its option strategy has been terrible this year, which has exacerbated its poor performance. I'm betting on its getting it back on track, as it was in previous years.
darehabber profile picture

Please have a look (cut & paste?) at the link below to Virtus recent announcement


It would seem to me that this kind of return of capital imbedded in rates of return is no way to build compounded wealth!

Yet this return of capital notion seems to be hidden and "clandestine" from a lot of CEF data....only alluded to on CEFCONNECT.

Any way to make an informed decision on a CEF with regards to the return of capital? Where can it be found?

Thanks in advance!

blancobob profile picture
Left banker
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