A good discussion whipped up about yield after yesterday's post, thanks to everyone who participated.I'll try to weigh in on some of the comments people left.
MikeC says a 10% return is a 10% return, period. I agree that in taking a reasonable income from a portfolio it does not matter whether it comes from dividends or price appreciation. It will always be a combination of both and the makeup just depends on what is going on in the market and remember the idea is for the account to grow a little faster than the withdrawal need.
One point to add to Mike's comment is that the 10% matters in the context of how much risk one takes to get his 10% or 12% or 8%. This has nothing to do with Mike's point but is relevant to everyone's big picture.
One reader is thinking about increasing yield with Canadian Royalty Trusts and shipping stocks. The reader notes the yields are very high but believes that mixing these types of stock in with other growthier stocks would make for a good mix.
The yields in those two areas are fantastic but anytime you can get 12% in a 5% world you are taking a risk somewhere. Maybe you see it and maybe you don't but it is there.
Fundamentally the trusts and the shippers should not be subject to volatility in the oil patch but I am not sure the fundies matter. I would tell anyone looking at shippers and royalty trusts to check how these stocks did during the last couple of crude oil price declines before buying in. I would further suggest looking at as many names as you can find in this regard to give you a better idea of what might happen the next time energy gets hit.
I specifically don't own shippers or royalty trusts because I believe the volatility is very high. if you want to step in I would urge moderation. Allocating 10% between the two is very likely to cause anguish at some point in the future.
HoosierDaddy lays out a reasonable comment that makes an argument for 80% munis and 20% equities. It might work but that is not an allocation I would ever put someone into without getting them to sign a waiver absolving me of any legal liability.
A comment was left with a link to a Fortune Magazine post with 40 stocks to retire on. I hate articles like this. Just build a diversified portfolio. Use some stocks, use some ETFs, use a couple of CEFs and cover your bases intelligently.
Finally a reader asks about funds that sell covered calls and write puts. A lot of the "call writing" funds also sell puts. The reader is concerned that call writing funds would be vulnerable to a bear market. As the question is about CEFs a fund that just wrote puts (if one even exists) would face the same general decline that call writing funds would face in terms of market price. I don't think the market would sort out any difference. I am a huge huge fan of call writing funds, as I have written many times but most clients only have one fund that takes up about 3% of the portfolio, I make the point of moderation over and over where these funds are concerned.
In adding various things to bring up the overall yield of the portfolio I think it makes sense to draw in different types of products that are vulnerable to different things. For example I have disclosed owning Macquarie Infrastructure (MIC) many times before. At my cost basis for most clients the yield is close to 8%. The call writing fund that most clients own also yields close to 8%.
Beyond interest rate risk these two have nothing to do with each other. If the entire call writing genre blows up as couple of folks think MIC won't realistically be threatened, in fact it may draw some assets that had been in the call writing funds (again assuming some sort of blowup).
Likewise is MIC turns out to be a fraud the call writing funds won't blowup in sympathy, IMO.
7 comments:
Insightful comments Roger.
"I agree that in taking a reasonable income from a portfolio it does not matter whether it comes from dividends or price appreciation. It will always be a combination of both and the makeup just depends on what is going on in the market and remember the idea is for the account to grow a little faster than the withdrawal need.
One point to add to Mike's comment is that the 10% matters in the context of how much risk one takes to get his 10% or 12% or 8%. This has nothing to do with Mike's point but is relevant to everyone's big picture.
I think the part I bolded captures the essence of the issue. What risk are you taking to achieve the particular return or portfolio yield?
I think if one buys GE to get that 3% yield one is taking very little risk. GE has a long history of stable earnings growth, and consistently raising their dividend. On the other hand, if you buy the Canadian Energy Trusts, one is certainly going alot higher on the risk spectrum.
David Merkel had a great post over on his blog regarding dividends:
http://alephblog.com/?p=187
"I still like dividends, but I like businesses that grow in value yet more. Aim for good returns in cash generating businesses, and the dividends will follow. Stretching for dividends is as bad as stretching for yield on bonds. That extra bit of yield can be poisonous, leading to capital losses far greater than the incremental yield obtained."
I think he hit the nail on the head. I think buying high-yielding investments can make alot of sense, especially if you think the investment is attractive on a total return basis for the risk taken. What I think is a mistake and potentially dangerous is to say, "I gotta have a portfolio yield of 5%" because the 5% is what I am going to live off of. That is likely to lead to buying the wrong investments for the wrong reasons, and exposing the portfolio to capital losses.
I have a friend who I tried to persuade to sell some of his REIT position not too long ago. He was reluctant to sell because of the dividend yield. The recent decline from the peak in February erased many quarters of dividends, and he finally did decide to trim the position somewhat. His desire to maintain yield cost him alot in capital losses.
The yields in those two areas are fantastic but anytime you can get 12% in a 5% world you are taking a risk somewhere. Maybe you see it and maybe you don't but it is there.
Fundamentally the trusts and the shippers should not be subject to volatility in the oil patch but I am not sure the fundies matter. I would tell anyone looking at shippers and royalty trusts to check how these stocks did during the last couple of crude oil price declines before buying in. I would further suggest looking at as many names as you can find in this regard to give you a better idea of what might happen the next time energy gets hit.
I specifically don't own shippers or royalty trusts because I believe the volatility is very high. if you want to step in I would urge moderation. Allocating 10% between the two is very likely to cause anguish at some point in the future.
Just wanted to say how deadly accurate I think what you say above is. The danger is in someone who decides to load up on these bigtime in order to obtain a particular portfolio yield.
Those yields on the energy trusts and shipping stocks are nowhere near as secure as GE at 3%, or JNJ at 3% or WFC at 3%, and probably exposed to higher capital losses on certain scenarios.
The industry that comes to my mind is the MREITs. You go back to 2003/2004 when ST rates were still low, and the yield curve was steep, and these guys were printing money and had very high dividend yields. Of course, they were very exposed to the risk of ST rates rising and the yield curve flattening. Once that happened, those high dividends got sliced substantially and the share prices collapsed.
Take Annaly (NLY). 2 years ago, it traded around $20. I don't recall the exact dividend yield but it was high. Presently, it trades around $14 which is 30% lower, but at one point it had gotten sliced in half.
It has been an interesting discussion which is why I asked the question here rather than on some other blogs.
There are a variety of investing styles and most of them work some of the time. But, none work all of the time. The reference to alephblog was a fine example. So, it appears that we have to analyze our own style and how it is working and be prepared to modify the style as conditions change. I was reading somewhere that value stocks do well in a low interest environment because the companies can borrow cheaply, but in a high interest environment the value companies put their investments on hold while the growth companies try to raise money by issuing new stock.
In any case, my total exposure to royalty trusts and ocean shippers is about 3%. So, that doesn't seem too far out of line with Roger's thinking.
On the other hand Annaly (NLY) may not be such a good example. They are, after all, in the mortgage business. Even now they are yielding around 6.8%. I do remember them going down into the 11's, though. As far as GE is concerned, weren't they approaching 50 in 2000? So, even after a good quarter, they are still down 20% over 5 years.
If this were easy, there would be a formula rather than 12,212 different formulas.
Rick C.
Rick C.
Roger - great site. Two things to add: Check to see how big the fleet is if you are going to buy shipping stocks - 6 boats yielding 20% and one breaks down...you have issues. AP Moller Maresk traded only in Europe is the largest and best shipper, but it only yields 1.5%ish and trades for 14kUSD. Canadian Enrgy Trusts - Baytex Energy yielding closer to 10% than not and traded on the US exchange under BTE is an interesting stock that only pays out 50% of its cashflow while reinvesting the rest (yes buying more at these crazy prices) but as always, do your own homework and see how it fits...I beleive they can survive if the tax laws get pushed through as is...and or may be taken over.
Roger - speaking of yield, do you have an opinion on the new Bear Stearns ETN of Master Limited Partnerships, BSR?
For those who might not know, Morningstar has a discussion board on Income and Dividend Investing. It's free to read, but I think requires premium membership to post. There were well over 22,000 posts the last time that I visited. As you might expect, REITs and CanRoys have gotten lots of attention there recently.
I just checked on the insider trading at MIC from 7/13-7/18 and there have been a few folks placing multiple buy orders on the stock. hmmm...interesting.
As for the Canadian oil trusts; I stated in a couple of earlier posts that they are tanking (no pun intended) right now, and I sold mine off.
I also wrote that they go down considerably arould this time of year. The latest time-frame being the start of September to hold them to. Now is not the time to buy these stocks. Oil inventories are up now due to refineries output. Late December or January when they bottom out is a good time to buy in. And be sure to sell them off around July again.
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