Income Factory Continues To Churn Out Cash At 11.5%; Total Return 21.6% For 6 Months

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Includes: ACP, AIF, AMZA, AVK, AWP, BDCL, BGB, BGH, CEN, CHW, DSE, EAD, ECC, EMO, ERC, ETJ, FGB, FMO, FOF, GHY, GLO, GPM, HIE, HYB, IGD, IVH, JMLP, JRS, KIO, KYN, NCZ, NHF, NRO, OCCI, OXLC, RA, REML, RIV
by: Steven Bavaria
Summary

I am pleased with the performance of our Income Factory™ as it churns out a cash distribution yield of 11.5% for re-investment and compounding.

While also earning total return for the first 6 months of 21.6%.

That's up another 3% from the strong out-of-the-box pace of the first quarter.

Our Income Factory™ continues to do what it is supposed to, churn out cash at an "equity return" rate (plus/minus 10%) or higher, that we can re-invest to create our own long-term growth, regardless of how the market chooses to value our "factory" (i.e. our portfolio) from time to time.

Meanwhile it has done very well on the total return front, racking up paper profits on top of the strong cash flow, more than offsetting the paper losses suffered in 2018.

Of course, true Income Factory aficionados don't get too excited about market appreciation, since it actually raises the price and lowers the yield on the "raw material" we continually purchase as part of the re-investment and compounding process. But we are all human and do get a warm fuzzy feeling when we see our investments go up in price, especially if we've just gone through a previous six months like the latter half of 2018, when Mr. Market was re-pricing much of our portfolio in a negative direction.

Of course, the irony of that was how last year's severe market drop actually put money in our pockets (current and future) by raising our re-investment rate to record levels and allowing us to grow our income stream faster than we would have been able to had the market been flat or rising. (Here's the link to that article.)

This chart shows the current distribution of our portfolio. If it looks familiar, don't be surprised, since I have only tweaked it a bit since April, generally to take advantage of relative values (premiums and discounts) that may have emerged since then.

Asset Class 4/8/19 7/5/19 Change
BDC 9% 7% -1.8%
CLO 13% 15% 1.7%
CEF Funds 3% 4% 0.6%
High Yield 22% 23% 1.1%
HY Convertible 4% 4% -0.3%
MLP 16% 16% -0.1%
Mortgage REIT 7% 4% -2.8%
Real Estate 8% 8% 0.4%
Utilities 1% 0% -1.0%
Equity/Option 15% 16% 0.8%
Multi-Sector 3% 3% -0.2%
Senior Loans 0% 1% 0.9%
100% 100%
(Some inconsistencies due to rounding)

Here are some specifics:

  • I sold down a little of my major holding First Trust Specialty Finance (FGB), taking advantage of its premium price. It's still a favorite and with a yield over 11% and even some appreciation over the years along with that, I believe it is a great way to participate in the BDC market without having to actually do my own intensive analysis of individual BDCs.
  • Added some CenterCoast Brookfield MLP (CEN). It pays a huge distribution, over 15%, that reflects in part how beaten down it and other parts of the MLP market still are. I'm prepared to live with the risk that the distribution might come down at some point, since I believe it will still be substantial even if it does. The management, Brookfield, who just recently took over this fund, is world class so I think they will run it professionally over the long term.
  • My CLO exposure went up as I added OFS Credit (OCCI) to the mix. They are part of what I believe will be a steady effort by the CLO industry (which is the primary market for corporate syndicated bank loans generally) to expand into the retail investing sector. OCCI pays a relatively modest distribution, by CLO standards, of just over 11%. I think that is good, as I'd rather see a new fund "under-promise" and not disappoint.
  • My other CLO funds, Oxford Lane (OXLC) and Eagle Point (ECC) continue to do well and cover their current level of distributions. One institutional investor who invests in CLOs I met with recently pointed out to me that CLOs, while they may seem complicated to us ordinary retail investors, are actually far more transparent and simple than real commercial banks. Remember that a CLO is actually just a "virtual" bank, and CLO equity owners, like stockholders of a bank, get the difference (the spread) between what the bank earns on its loans and other assets and what it pays for its deposits and other liabilities, MINUS its loan losses and other expenses. In reality a CLO is far less complicated to analyze than a real bank, like JP Morgan, Citibank or Bank of America, because real banks have so many other assets and investments that are less liquid or difficult to analyze, than a CLO, whose loans are almost 100% of its assets and are totally public, rated and otherwise transparent. I'm not suggesting that either is easy to analyze, only that CLOs, once you know what they actually are, are not as opaque and mysterious as they first appear. (Or as I know they appear to many Seeking Alpha readers, given the comments and questions that appear after all the CLO-related articles.)
  • I reduced my Nextpoint Credit Strategy (NHF) a bit, agreeing with @Stanford Chemist and others that it was becoming hard to follow and figure out management's strategy re special offerings and the effect on dilution, etc. I did exercise my recent options, after concluding that defensively it was the best thing to do, and it has certainly worked out well. So I have no complaints, but just concluded I didn't want to carry as large a position as previously.
  • I added some PGIM Global High Yield (GHY). 8% yield, -13% discount, Prudential certainly is a pro in the credit markets.
  • Similarly, I added some Ivy High Income Opportunities (IVH). 8.8% yield, -11% discount. Waddell & Reed, the management firm, is well recognized and has been around for 80 years.
  • As many readers know from comments I made to other articles, I ditched my AMZA (AMZA), having determined that while the MLP sector was certainly worth sticking with for the long term, AMZA was not my vehicle of choice (far from it in fact) for doing so. (Here's the link to the comment: https://seekingalpha.com/article/4268992-amza-setup-third-distribution-cut#comment-82018366) Thanks to @Trapping Value for the analysis he/she has done on AMZA.
  • I also added some Blackstone GSO Strategic Credit (BGB) with its 9.6% distribution, -6% discount; and Aberdeen Income Credit (ACP), 11.6% yield, and -2.6% discount; and old favorite Barings Global Short Duration (BGH), 9.9%, -3.4% discount.

Here is the current portfolio:

Income Factory - July 5, 2019 Symbol Distribution Yield Discount/ Premium Total Quarterly Portfolio Income % Total Portfolio Income % Last Quarter Increase/ Decrease
Brookfield Real Assets (RA) 11.00% -9.1% 7.02% 7.00% 0.02%
Eagle Point Credit Co. (ECC) 13.10% 30.0% 6.64% 6.61% 0.03%
Centercoast Brookfield MLP & Infra (CEN) 15.69% 0.9% 6.30% 5.13% 1.17%
Oxford Lane Capital (OXLC) 15.96% 34.3% 6.05% 6.02% 0.03%
First Trust Specialty Financial Oppty (FGB) 11.22% 6.5% 5.44% 7.27% -1.83%
Miller Howard High Income (HIE) 12.59 3.6% 5.14% 5.12% 0.02%
Guggenheim Enhanced Equity Inc (GPM) 11.85% 1.3% 4.63% 4.61% 0.02%
Neuberger Berman Real Estate (NRO) 9.50% -7.6% 4.33% 4.19% 0.14%
CS X Links 2XLeveraged Mtge REIT (REML) 23.00% 4.23% 4.49% -0.26%
Barings Global Short Duration (BGH) 9.90% -3.4% 4.16% 3.48% 0.68%
Clough Global Opportunities (GLO) 11.38% -14.1% 3.77% 3.19% 0.58%
Aberdeen Global Premier Property (AWP) 9.57 -7.5% 3.65% 3.17% 0.48%
Rivernorth Opportunity (RIV) 11.87% -1.9% 3.16% 3.15% 0.01%
Calamos Global Dynamic Income (CHW) 10.32% -1.7% 2.81% 2.80% 0.01%
Aberdeen Income Credit Strategies (ACP) 11.60 -2.6% 2.70% 2.02% 0.68%
Clearbridge Energy MLP Oppty (EMO) 11.92% -12.8% 2.34% 2.33% 0.01%
Fiduciary Claymore MLP Oppty (FMO) 13.08% -7.6% 2.18% 2.17% 0.01%
Allianz Convertible & Income II (NCZ) 10.59% 0.4% 2.15% 2.14% 0.01%
OFS Credit (OCCI) 11.27% -5.6% 2.1% 0 2.05%
Nexpoint Credit Strategy (NHF) 12.70% -13.4% 1.99% 3.95% -1.96%
Kayne Anderson MLP Midstream (KYN) 9.30% -10.8% 1.80% 1.54% 0.26%
KKR Income Opportunity (KIO) 9.57% -4.5% 1.79% 1.75% 0.04%
Duff & Phelps Select Energy MLP (DSE) 12.12% -5.0% 1.66% 1.32% 0.34%
Nuveen All Cap Energy MLP Oppty (JMLP) 11.81% -9.8% 1.61% 1.60% 0.01%
Advent Claymore Conv Sec & Income (AVK) 9.38% -10.9% 1.57% 1.52% 0.05%
UBS ETRACS Leveraged BDC (BDCL) 16.00% 1.24% 1.24% 0.00%
Voya Global Equity Dividend (IGD) 11.52% -8.0% 1.23% 0.57% 0.66%
Apollo Tactical Income (AIF) 8.09% -11.7% 1.21% 1.24% -0.03%
PGIM Global High Yield (GHY) 8.32% -13.1% 1.19% 0 1.19%
Wells Fargo Multi-Sector Income (ERC) 9.38% -5.1% 1.11% 1.05% 0.06%
Wells Fargo Incom Opportunity (EAD) 8.55% -8.0% 1.05% 1.05% 0.00%
Eaton Vance Risk Mgd Div Eq Inc (ETJ) 9.62% -0.1% 1.01% 1.00% 0.01%
Blackstone GSO Strategic Credit (BGB) 9.33% -6.0% 0.94% 0 0.94%
Ivy High Income Opportunity (IVH) 8.80% -11.0% 0.68% 0 0.68%
Cohen & Steers Closed-End Oppty (FOF) 8.06% -3.2% 0.46% 0 0.46%
Nuveen Real Estate Income (JRS) 7.20% -6.2% 0.39% 0.28% 0.11%
New America Income (HYB) 7.50% -10.8% 0.33% 0.33% 0.00%

I have not had a chance to run the numbers on how our Widow & Orphans Income Factory is doing, but will try to get that out shortly. Even though that is a theoretical portfolio, rather than a real one, it is useful to see how a lower risk/reward targeted strategy matches up with our "classic" Savvy Senior Income Factory.

In the meantime, thanks to all of my readers and followers, and especially to other contributors who continue to serve up ideas and analysis that are so helpful to me and others here on the SA site.

(If you like the "Income Factory" approach to investing, please check out my other articles and consider "following" me here on Seeking Alpha. My book "The Income Factory: An Investor's Guide to Consistent Lifetime Returns" is currently in the works and is due to be published by McGraw-Hill in January 2020.)

Disclosure: I am/we are long ECC, OXLC, CEN, OCCI, GHY, BGH, FGB, ACP, NHF, IVH, BGB. 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.

Additional disclosure: I am long all the funds listed in the Income Factory portfolio, listed in the table.