Income Options -- For Better Or Worse

9/14/2009


With yields on 10-year Treasury notes retreating to 3.5%, the lofty yields of nontraditional income investments are tempting.

The table below 35 high-income selections. While we don’t follow most of these investments closely and generally don’t offer specific advice on such shares, they may hold appeal for flexible and risk-tolerant investors. However, before chasing the siren song of double-digit yields, investors should learn about the hidden dangers of nontraditional investments that could sink their returns.

Royalty trusts often invest in oil or natural-gas fields and tend to be riskier than other high-yield securities. Volatile dividend payouts reflect the performance of the underlying assets. These assets deplete over time, so investors should keep in mind that the resources will eventually be exhausted, hampering the trusts’ ability to pay dividends.

Master limited partnerships (MLPs) usually invest in tangible assets, such as real estate or energy pipelines and storage facilities. MLPs don’t pay income taxes, leaving unit holders to cover taxes on their share of the partnership’s income. Many MLPs are small and thinly traded.

Real estate investment trusts (REITs) have historically complemented modest capital gains with high dividends. There are two main types. Equity REITs invest in and own properties, with revenue coming mostly from rent. Mortgage REITs hold mortgages, generating revenue from interest on the loans.

REITs must redistribute at least 90% of their income to investors. While REITs may help diversify your portfolio because their returns often differ from those of both traditional stocks and bonds, the collapse of the real-estate market brought their risks to the forefront.

Preferred stocks have been volatile on fears that issuing companies might not be able to keep up with the payments. Preferred shareholders stand behind bondholders in the line for dividends and principal repayment in the event of bankruptcy. These securities trade on exchanges like stocks but tend to behave like bonds, in that they are more sensitive to interest rates and credit quality than company operating performance.

Most preferred stocks have a “call” provision allowing the issuer to repurchase the shares at any time after the callable date. We recommend investors stick to preferreds with investment-grade credit ratings, at least BBB from Standard & Poor’s or Baa from Moody’s.

Closed-end funds invest in a basket of stocks or other securities managed by an investment company. The funds issue a fixed number of shares at inception that trade on an exchange throughout the day. The value of these shares is based on demand, meaning it can differ from the underlying value of securities in the portfolio, called net asset value.

If a closed-end fund trades at a discount, the underlying per-share value of the fund’s securities is higher than the fund’s per-share price. But, even at a discount, closed-end funds might not be good investments. Unrealized gains can generate tax liabilities. Many closed-end funds use borrowed money (leverage) to provide higher yields and potentially higher returns. But leverage comes at a cost — decreased operating flexibility and increased share-price volatility.

Exchange-traded funds (ETFs) generally offer low costs, trading flexibility, and good tax efficiency, making them a solid choice for most investors. Unlike open-ended mutual funds, ETFs allow trading throughout the day and also hold transparent, usually diversified, portfolios. Note that accurate dividend figures can be difficult to pin down, so reported amounts should be considered estimates. In addition, ETFs may pay dividends less frequently than traditional mutual funds.

NONTRADITIONAL INCOME OPTIONS
Dividend Last
— Five Years —
——————————— Quadrix Scores * ———————————
Est.
Div.
($)
Est.
Yield
(%)
No. of
Hikes
Ann.
Growth
(%)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Industry
Royalty Trusts
BP Prudhoe Bay
($71; BPT)
6.60
9.2
4
35
12
77
92
100
61
32
76
Oil & Gas
Expl. & Prod.
Cross Timbers
($25; CRT)
1.92
7.6
4
20
10
95
82
100
NA
23
78
Oil & Gas
Expl. & Prod.
Great North. Iron Ore
($89; GNI)
7.20
8.1
3
12
88
76
90
97
NA
44
96
Steel
Mesa ($33; MTR)
1.89
5.7
3
20
96
100
94
98
NA
22
99
Oil & Gas
Expl. & Prod.
Sabine ($39; SBR)
2.29
5.9
4
19
25
80
90
100
45
11
76
Oil & Gas
Expl. & Prod.
Master Limited Partnerships
Alliance Resource
($34; ARLP)
2.98
8.9
5
19
72
90
91
77
9
26
88
Coal & Consum.
Fuels
MarkWest Energy
($20; MWE)
2.56
12.9
5
16
84
81
92
70
36
68
94
Oil & Gas
Storage
Penn Virginia Resrcs.
($15; PVR)
1.88
12.2
5
12
47
89
77
73
35
38
79
Coal & Consum.
Fuels
Suburban Propane
($41; SPH)
3.30
8.0
5
6
81
93
77
54
89
37
92
Gas Utilities
Sunoco Logistics
($57; SXL)
4.16
7.3
5
13
70
90
85
59
76
48
92
Oil & Gas
Storage
REITs
Brookfield Properties
($11; BPO)
0.56
5.2
5
20
68
90
87
60
13
76
89
Property
Management
Entertainment Prop.
($31; EPR)
2.60
8.3
5
11
59
86
68
61
43
77
81
Specialized
REIT
National Retail Prop.
($20; NNN)
1.50
7.3
5
3
79
63
62
76
70
69
79
Retail REIT
Rayonier ($42; RYN)
2.00
4.8
5
23
78
50
73
80
79
71
81
Specialized
REIT
Ventas ($38; VTR)
2.05
5.4
5
14
90
42
72
48
70
82
75
Specialized
REIT

Div.
($)
Yield
(%)
52-Week
Price Range
($)
Call Date
Call
Price
($)
Discount
To Call
(%)
S&P Ratings/
Moody's
Rating
Eligible for 15%
Tax Rate
Sector
Preferred Stocks
CBS ($20; CPV)
1.69
8.5
21
-
10
3/27/2012
25
(21)
BBB/Baa3
No

Consumer
Discret.

Consolidated Edison N.Y.
($86; ED-A)
5.00
5.8
95
-
71
10/14/2008
105
(18)
BBB/Baa3
Yes
Utility
MetLife ($22; MET-B)
1.63
7.2
24
-
8
9/15/2010
25
(10)
BBB/Baa1
Yes
Financial
RenaissanceRe
($20; RNR-D)
1.65
8.1
24
-
7
12/1/2011
25
(18)
BBB+/Baa3
Yes
Financial
Vornado Realty Trust
($21; VNO-I)
1.66
8.0
23
-
9
8/31/2010
25
(17)
BBB-/Baa3
No
Financial

 

Premium/
—Discount —
— Market Return —
Est.
Div.
($)
Est.
Yield
(%)
Current
(%)
2009
Avg.
(%)
YTD
(%)
1 Year
(%)
3 Years
(%)
Net
Assets
($Mil.)
Manager
Tenure
(Years)
Exp.
Ratio
(%)
Category
Closed-End Funds
Eaton Vance Enhanced Equity
($14; EOI)
1.64
12.1
2
(4)
24.2
(0.8)
(2.2)
515
3
1.10
Large Growth
Eaton Vance Tax Advantaged
Div. ($14; EVT)
1.29
9.1
(9)
(15)
29.9
(16.3)
(10.3)
1,094
4
0.98
Large Value
Gabelli Dividend & Income
($11; GDV)
0.72
6.3
(20)
(16)
20.2
(20.3)
(7.7)
10
6
1.17
Large Value

Nuveen Equity Prem.
Opportunity ($13; JSN)

1.34
10.6
(4)
(12)
27.2
(3.0)
(2.3)
861
5
0.68
Large Blend
Zweig ($3; ZF)
0.36
11.5
(16)
(18)
17.2
(13.7)
(4.6)
445
6
1.22
Large Blend

 

———— Total Return ————
– Overall Scores * –
Est.
Div.
($)
Est.
Yield
(%)
Distribution
Schedule
YTD
(%)
1 Year
(%)
3 Years
(Annual.)
(%)
Exp.
Ratio
(%)
Wtd.
Avg.
% of
Assets
> 80
Category
Exchange-Traded Funds
Claymore/SWM Canad. Energy
($14; ENY)
0.62
4.4
Quarterly
31.4
(28.6)
NA
0.71
NA
NA
Energy Trusts
iShares Dow Jones Select Div.
($40; DVY)
1.59
4.0
Quarterly
(0.6)
(22.9)
(11.9)
0.40
62
17
Large-Cap
Value
iShares S&P U.S. Preferred Stock
($35; PFF)
2.95
8.5
Monthly
27.3
11.1
NA
0.48
NA
NA
Preferred
Stock
PowerShares Div. Achievers
($12; PFM)
0.46
4.0
Quarterly
1.9
(20.2)
(8.3)
0.60
69
33
Large-Cap
Value
PowerShares HighYld. Div. Achiev.
($7; PEY)
0.30
4.1
Monthly
(4.6)
(28.2)
(17.8)
0.60
48
9
Midcap
Value
SPDR S&P Dividend ($43; SDY)
1.70
4.0
Quarterly
8.0
(9.8)
(5.9)
0.35
57
17
Large-Cap
Value
Vanguard REIT Index ETF
($39; VNQ)
1.94
5.0
Quarterly
10.5
(31.9)
(13.6)
0.11
43
1
Real Estate
Vanguard Utilities ETF ($61; VPU)
2.47
4.1
Quarterly
2.0
(13.3)
(2.4)
0.25
69
19
Utilities
WisdomTree Div. Ex-Financials
($37; DTN)
1.46
4.0
Quarterly
8.9
(19.6)
(8.9)
0.38
63
19
Large-Cap
Blend
WisdomTree SmallCap Div.
($36; DES)
1.37
3.8
Quarterly
10.1
(16.5)
(8.8)
0.38
63
19
Small-Cap
Blend
* Quadrix scores are percentile ranks, with 100 the best.   

 

 

 

 


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