Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘high yield investing’

Getting High Yields from Closed-End Funds

This is the second in the investing for monthly income series: how to get high yields from closed-end funds.

What is a closed-end funds (CEF) and how is it different from other investments? A closed-end fund is legally know as a ‘closed-end company.” It is one of three investment types of investment companies. The other two are mutual funds and unit investment trusts. Unlike mutual funds, closed-end funds sale a fixed number of shares at one time that trade on the major stock exchanges such as NYSE, NASDAQ, etc.

The price of CEFs are set by the market and can be above or below their net asset value. Generally, CEFs do not redeem shares from investors as the shares are bought and sold at market value on the exchanges.

CEFs come in many varieties with different objectives, strategies and payment time frames.  These funds can easily be purchased through any discount brokerage in both taxable and tax-deferred accounts.  The CEFs we are interested in pay monthly dividends and provide a high yield. When these funds trade at a discount (share price is lower than net asset value), their dividend yield is higher. This creates an opportunity for potential capital gains in addition to monthly income.

Upon receipt of monthly dividends, you can reinvest some or all into more shares of CEFs or other dividend investments. Reinvestment of dividends creates a compounding effect that will grow your income each month. There are rumors that former President Bill Clinton receives $84,000 per month in dividend income. This is a large supplement to the $16,750 Clinton receives from his government pension per month. This is one method that helps the rich get richer. However, you can accomplish the same objective by investing for monthly income.

Where can you find a list of CEFs? I personally use CEF Connect to track a list of CEFs in a portfolio. This is a free service (requires registration) with a search engine that will separate monthly payers from the flock. At last count, there was more than 400 CEFs that pay monthly dividends. There is a comprehensive list in Get Rich – Stay Rich.

The best time to buy CEFs is when they pull back in share price. The one caveat is to ensure their earnings per share is more than their dividend payout (this is available at CEF Connect under the distribution tab). If not, then you should sell and evaluate another CEF. The other item to watch is that the CEF pays distributions from ordinary income and does not pay from return of funds. Any return of capital means the CEF is giving back capital in the form of dividends which means the company did not earn their pay. Sell immediately if you see a return of capital.

The more you research CEFs, the more you come to like the total return and consistency of monthly paychecks. Keep in mind that financial independence is replacing your current income with passive income. CEFs are one investment to help get you closer to living a life within your comforts.

Here are two preferred stock CEFs for consideration:

The AllianzGI Convertible and Income Fund 5.62% (NCV) cumulative preferred stock is now trading in the $24.61 area to give it a current yield of 5.71%. This issue is rated AAA by Fitch. The issue had an excellent asset coverage ratio of 353% when it last reported.

AllianzGI Convertible and Income Fund II 5.50% coupon preferred (NCZ) is trading in the $24.04 area to offer a current yield of 5.73%. With a rating of AAA from Fitch, it a very safe issue. This CEF issue has an asset coverage ratio of 368% at last report.

Most of the CEF preferreds from Gabelli are now trading with current yields in the 5.2% to 5.3% range, indicating that the AllianzGI issues are relatively underpriced and present a good opportunity to purchase the safety of a AAA-rated preferred stock issue.

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How to Invest for Monthly Dividends

This is the first in a series of articles based on types of vehicles that pay monthly dividends.

Many people have the desire to increase their monthly income which leads to various activities to accomplish this objective. They may work extra hours at their job, start a side business or stuff envelopes for a few extra dollars. These tasks are all legitimate ways to make more money. But most are not aware of the simple way to increase monthly income by getting monthly dividend checks.

Truth is that many people don’t realize that this is a great time to invest in dividend securities. Yes, the market was scary throughout 2008 and 2009 as the markets tanked and the economy sunk into a recession. Unemployment reached double digits in many areas across the United States. During volatile times, investors watch as their growth and technology stocks get hammered until they reach new lows in price. However, the best time to invest is when there are signs of an improving economy. This is what has happen over the last six to 12 months as the markets started trending up and stock prices reached new 52-week highs.

So why would you invest when the market has already started to recover? During the economic meltdown lead by the imploding debt crisis, companies started to batten down the hatches by conserving their cash. During the last few quarters, companies in the S&P 500 had more cash and current assets on their balance sheet than in the last decade. There are several things companies can do with this cash. But the one that is of interest to us is companies using the cash to increase dividends. Therefore, if you purchase stock in a stable company, there is a better than average chance that the dividend will increase in the future.

This increase in dividends will be a positive for many investments that pay monthly dividends. The result being that your dividend yield on cost increasing over the next few years. Generally, when dividends increase the share price will follow. the investor will have more income from the dividend increase and potential for a capital gain if share prices increase. This is the reason why now is a good time for dividend investing.

How do you invest for monthly income? Today, there are several investment vehicles designed to pay monthly dividends. These include closed-end ETFs, business development companies, royalty trusts, REITs and even high-yield corporate bonds. As we progress through this series, each of these investments will be examined in greater detail with specific company names that are potential investments paying dividends of 10% of more. Yes, some of these investments pay at or above 15% yields today.

Here is a couple monthly dividend payers to consider:

Global Net Lease (GNL)

Dividend Yield: 11.22%

Global Net Lease (NYSE:GNL) is another REIT, primarily serving the commercial market. It owns properties in the United States and Europe, and rents to quality tenantslike FedExFamily Dollar and ING Bank, organizations that can not only reliably pay their rent as it comes due, but outfits that tend to stay put once they establish roots.

There’s a bit of a twist Global Net Lease brings to the table that allows it to juice its payout to its current yield of 11.22%, however. It also acquires much of its rental real estate through an arrangement called a sale-leaseback.

In simplest terms, a sale-leaseback lets a property-owning company free up the value of real estate by selling a space it owns to a landlord like Global Net Lease, and then remain in that space as a tenant. It’s a win-win scenario, as the renter enjoys a big cash infusion and Global Net Lease has a tenant already lined up.

Horizon Technology Finance (HRZN)

Dividend Yield: 10.23%

Finally, Horizon Technology Finance (NASDAQ:HRZN) has earned a spot on a list of monthly dividend stocks to mull. As the name suggests, Horizon Technology Finance provides capital to young, upcoming technology outfits, though it doesn’t cater strictly to the tech sector.

It’s also heavily involved in the development of life science and biotechnology companies. Its portfolio includes biotech names like AccuVein and Celsion, along with traditional tech plays like cybersecurity company Control Scan and communications technology player Xtera.

Its results are as erratic as what you’d expect from major technology names, but it’s worth the wild ride. Horizon’s yielding 10.23% at its current price, and it has not had any sustained trouble affording its dividend payment.

Learn more about investing for monthly income here.

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This Monthly Dividend Stock May be Worth a Look

Fifth Street Finance Corp.(FSC) may be an ideal name for aggressive income investors. This is one of the top business development companies. The consensus price target is $11.50. Investors receive a 10.47% dividend with monthly distributions.  First Call consensus has a buy recommendation with a 2.5 rating.

Fifth Street reported net investment income of $0.27 (excluding gains on convert repurchase, diluted), in line with prior quarter and our estimate. This was a result of lower interest income earned on a larger average portfolio. Book value increased by $0.02 following a net $2.5 million unrealized appreciation on investments.

Liquidity: As of this week, FSC increased its available liquidity to $738 million following the post quarter end note issuance, capital raise, and credit facility expansion. FSC is well positioned for the acquisition of Healthcare Financial Group as management works toward its target leverage.

Valuation: Fifth Street is trading 12% premium, 1% above the peer group average, and yielding 10.47%, above the peer group average of 9.1%.

Estimates: Analyst lowered the 2013 estimate to $1.08 (from $1.10) to reflect a larger liquidity drag than previously expected. The 2014 and 2015 estimates remain unchanged at $1.15 and $1.20.

Maintain Buy: FSC is well positioned from a liquidity and capital standpoint to continue to take advantage of a strong pipeline of growth. The next step for the stock is to translate that into higher ROEs by achieving and maintaining higher levels of leverage.

In May, FSC announced that it has entered into an agreement to purchase a specialty lender, Healthcare Finance Group, that provides lending to healthcare companies. FSC will be investing $100 million, financed by cash and liquidity mentioned above.

OnMay 6, 2013, upon expiration of our existing stock repurchase program, the Board of Directors authorized a stock repurchase program to acquire up to$50 millionof outstanding common stock. Stock repurchases under this program would be made through the open market at times and in such amounts as management deems appropriate, provided they are below the most recently published net asset value per share.

2 Aggressive Investments in Business Development Companies

The BDC business model is to lend to small and midsized companies at high yield equivalent rates while also at times taking equity stakes in such companies.  BDCs can also take an active part in assessing the borrower’s prospects and modifying business practices if necessary with the goal of ensuring a favorable
return for shareholders and principals in the company.  The combination of making loans and taking equity stakes has the potential for relatively high, stable cash distributions with the additional benefit of capitalizing on the equity performance of the borrower.

Now, BDCs are offered as bundles in ETNs that come as a normal ETN (BDCS) and a 2X leveraged ETN (BDCL) for aggressive investors.

The ETRACS Linked to the Wells Fargo Business Development Company Index due April 26, 2041 (BDCS) is designed to track an investment in the Wells Fargo Business Development Company Index, and may pay a variable quarterly coupon linked to the cash distributions associated with the underlying BDC constituents, less investor fees.  BDCS is trading at $22.34 with a quarterly dividend yield of 9.78%.  Year to date, BDCS has a market return of 12.5% compared to 9.5% for the S&P 500.  Here are the top holdings:

ACAS     American Capital Ltd

ARCC     Ares Capital Corp

SUNS     Solar Senior Capital Ltd

AINV     Apollo Investment Corp

FSC         Fifth Street Finance Corp

TAXI       Medallion Financial Corp

BKCC     Blackrock Kelso Capital Corp

SLRC      Solar Capital Ltd

HTGC     Hercules Technology Growth Capital Inc

MCC      Medley Capital Corp

For the most aggressive investors, the ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index (BDCL) is designed to track a leveraged investment in the Wells Fargo Business Development Company Index and pay a variable quarterly coupon linked to the leveraged cash distributions associated with the underlying Business Development Company (“BDC”) constituents, less financing costs and investor fees.  BDCL is trading at $20.65 with a dividend yield of 16%% based on its most recent quarterly distribution of $0.8197 in January 2012.  Year to date, BDCL has a market return of 24.81% compared to 9.5% for the S&P 500.  The portfolio is like BDCS except the ETF is leveraged 2 times.

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