Will FAANG continue to dominate?
FAANG's collective market capitalization is close to $ 3 trillion, and that's pretty impressive when you consider that the total US market capitalization of quoted shares is only about $ 28 trillion
and here's one Consider the performance of each FAANG share compared to the S & P 500 in the last five years; FAANG was clearly dominant, especially considering their combined market capitalization accounts for a significant portion of the total US stock market.
It is important to note, however, that FAANG stocks have a higher market risk as measured by beta
Note: Beta is a measure of the risk associated with general market movements, as opposed to stock-specific factors. A beta above 1 usually means that a stock is both volatile and tends up and down with the market. Lower beta stocks are often followed by investors seeking to diversify their market risk positions. And more importantly, high-beta stocks during market pullbacks, such as during the bursting of technology, generally sell more off than the rest of the market bubble or the recent financial crisis from 2008 to 2009.
If you're up for it Leave that the revenue from your investments help settle the bills, then you probably can not handle the volatility risks if you hold too many FAANG shares. In a large market downturn you might be forced to stock some stocks near the bottom For sale, just to generate the income you need for livelihood, and these types of "fire sale" forced sales can cause irreparable harm to your hatchery.] For that reason, many investors opted for lower-risk, lower-risk securities, such as the highlighted in this article.
Without further ado, here is our list of …
Top 10-Lucky Opportunities:
For your consideration, we have a "conservative" big-yield opportunity and an "aggressive" one "Big-opportunity opportunity for each category added to our ranking of top 10 big-yield opportunities …
10. Medical Transcription Billing Preferred (MTBCP), Return 11.3%
Preferred Stocks are often overlooked, but this lower-volatility equity hybrid security can provide some attractive return payments with significantly lower volatility as the general stock market. Our "aggressive" idea (MTBC) in this "preferred stock" category shows a much lower absolute price volatility than the average stock in the S & P 500 (its price is generally close to $ 25), it offers a very high dividend, the business was improvement, and the price has recently retreated. We've written extensively on MTBCP in this in-depth article earlier this year:
And since then, MTBC has continued to improve its position as revenue and net income continue to grow. After reading the above linked article, if MTBCP is too "aggressive" for your liking, we also prefer some high-yielding preferred stocks within the maritime industry that we believe offer more "conservative" opportunities for large dividends. For example, we have highlighted such an idea in this article for members only:
Earlier this year, we acquired this attractive 9% preferred stock in our Blue Harbinger CVI portfolio and believe that it remains an attractive option for new investors
In addition, you can access many more conservative preferences for preferred stock in this recently published, free article:
It is worth noting that interest rate risk poses a real threat to many preference shares with lower yields. Interest rates are currently low and rising, and this has a negative impact on preference shares, similar to the pressure they put on bonds (as interest rates rise, prices fall). However, investors can mitigate some of this risk by focusing on higher yielding preference stocks whose prices are more determined by firm idiosyncrasies than interest rate movements (such as MTBPC). And if the interest rate risk is still too strong for you, we'll offer you a high yield, high yield, fixed income preferred option later in this report, with the fixed to floating rate characteristic helping to reduce some of the interest rate risk.
. 9 Adams Diversified Equity Fund (ADX), Yield: 9.8%
Equity closed-end funds ("CEFs") are a category of high-income investments that are often undervalued. Attractive features in this category include high incomes, reduced prices, immediate diversification, active management and the fact that they are "closed" so that they can better control capital gains and there is no forced sale (a challenge, the mutual funds and often ETFs Need to Address It.
Our "conservative" CEF idea is the Adams Diversified Equity Fund (ADX), an internally managed closed-end fund designed to add value over the long-term, and is committed to paying at least 6% annual dividends. which is paid quarterly (and in better years, ADX pays more than 6% over a large year-end spread, for example a total of 9.8% in 2017.) It also offers exposure to a diversified portfolio of large-cap stocks and devotes to the Special attention to risk management. Oh, and his successful, long-term success lanz dates from 1929!
Here are some additional considerations for ADX …
ADX revenue streams:
Considering the fact that this fund invests in large investments. Cap stocks, which typically pay dividends of around 2.5%, may ask how the fund can pay out at least 6% a year (distributions are made quarterly). The answer is a combination of dividend income and capital gains. The management team's track record of making these large payouts available to investors efficiently has enabled many investors to sleep well at night for many years.
ADX Track Record:
The launch date for this fund is 1929. And that's not a typo. This fund has been paying dividends for over 80 years! However, the current management team has not been in office for so long, but it continues the track record of efficiently distributing cash to investors. (more information on fund management). And here you can see the fund's attractive long-term performance track.
ADX Discount to NAV:
It is important to note that the difference between NAV Yield and Market Price Yield (top of the Performance Track Record Link) should be noted with the Discount / Premium of closed Funds, and it helps to explain one of the reasons why this fund (NYSE: ADX) is now attractive. In particular, in recent years, the NAV yield has become better in terms of spread or difference between the two than the market price return. This is because the discount at which this fund trades in the market against its NAV, as shown in the graph below, is rising.
Unlike open funds, ADX is a closed-end fund, and that means "creating units". are not used by the management team to keep the market price close to the NAV and therefore large distributions and premiums can be made based on supply and demand. In the case of ADX, it's a big discount, which we think creates an even more attractive buying opportunity.
The discount is likely to persist as investors unwise (in our view) chase more glamorous funds offering higher dividend yields and monthly payouts (rather than quarterly like ADX) and avoid ADX instead (remember, closed Funds are mainly traded on supply and demand). However, to achieve the higher return, the other funds take a higher risk by leveraging and obtaining a high percentage of the capital return payback (ie, when the market moves south, they are often forced to do so) Prices, just to keep their high yields). ADX has a leverage ratio of 0.0% from 1940 (Note: The fund occasionally borrows very small amounts for operational purposes, but not to increase returns, as is the case with many other funds), and this is an important one Reason for the success of the fund since 1929.
For reference, as shown in this link, ADX distributions are dividends and capital gains, NOT capital repayment. For the perspective, other popular large-cap CEFs often use a return on investment to support the payouts rather than from dividends and capital appreciation such as ADX. And this practice can lead to poor results in stressed market conditions such as the financial crisis, a situation that most income-oriented investors want to avoid. From our point of view, ADX is managed conservatively and cautiously, which has contributed to providing such a long history of healthy returns.
We are also attracted to the attitude of ADX, both from the standpoint of style and the sector. As a reference, the style box on this page shows that fund holdings are leaning slightly towards growth.
In general, we prefer value stocks at Blue Harbinger to growth stocks, but in this case the exposure is acceptable for a variety of reasons. First, it's not deep growth, it's actually near the middle (core growth). Second, the long-term difference between growth and value in the large cap sector is historically less pronounced than in the small cap sector (over the long term, +10 years, value stocks tend to outperform growth stocks, but this difference is more pronounced in the small cap area, not in the large cap area, and we also favor some diversification into the large cap area, as this may help to reduce the aggregated portfolio risks, and ADX allows us to do so
Learn more about ADX holdings and sector diversification
ADX Risks :
The Adams Diversified Equity Fund is subject to risks that should be considered.
Stock Market Exposure : First of all, ADX is an equity fund, which means that it suffers many of the same ups and downs as the general stock market However, given the large payouts from this fund, market volatility should be somewhat muted and it should be easier for investors to handle them as they are likely to continue to receive large paychecks each quarter.
Leverage : Another important consideration is leverage. Many equity CEFs use up to 33% leverage to increase their returns, but the leverage effect is of course more risky. For example, if you are leveraged in a market decline, you may be forced to sell stocks at low prices just to meet the payout. However, in the case of ADX, the only leverage is usually only a very small amount (currently 0.0%, but will occasionally rise to the low single digits) to lower operating costs (thus making the fund better in the market, not but has not used speculative leverage like many of its competitors, and this reduces the opportunity for very large profits, but also cautiously reduces the possibility for very large losses.  Management Fees : Another risk for closed-end funds is management fees. At Blue Harbinger, we generally despise the payment of management fees and work hard to help investors avoid them as much as possible. However, in the case of closed-end funds, the higher fees may be acceptable to some investors, for the reasons described in this write-up. Importantly, ADX requires extremely low management fees compared to other closed-end funds. In particular, it is not uncommon for a closed-end fund to charge 1.5% to 2.0% management fees, but the Adams Diversified Equity Fund (ADX) charges only 0.56%, which is extremely attractive if you look at the big payouts, the this fund generates, need.
"Aggressive" Equity CEFs : If you like the benefits of closed-end funds, there are a few others that you may want to consider, such as the very attractive and "more aggressive" small caps that we have highlighted for members:
The two small CEFs in this article are very attractive for the same reasons as ADX. And we currently own all three (ADX plus the two small CEFs).
. 8 Macerich Company (MAC), Yield: 5.1%
Real Estate Investment Trusts ("REITs") are a category of high-dividend securities that have attracted the interest of many income-focused investors due to their industry-specific factor the market, and they offer some big split returns. Macerich is our "conservative" idea in this REIT category, because of its high yield, low beta and attractive valuation, but of course risks.
Macerich is a mid-cap retail REIT ($ 8.5 billion market capitalization). And before we address the apparent fears of the retail REIT industry (mainly rising interest rates and growing internet competition), it is worth noting that the non-large cap REITs have an advantage over large cap REITs in our view. In particular, if this sector struggles, we might see increasing consolidation (mergers and acquisitions) and we believe that the large-cap REITs will increasingly consider adopting the smaller capitalization REITs – the large cap companies usually pay a premium and the small cap companies usually get a premium. Otherwise, smaller market capitalization is more attractive (obviously, everything else is not equal, and we'll talk about it shortly).
As far as M & A activity is concerned, we believe that this is a good sign for the industry as a whole. It suggests that some intelligent, deep-seated institutional investors believe the space is undervalued. For example, Unibail-Rodamco, Europe's largest REIT, buys Westfield (a mall owner in the US and UK), and Brookfield Property Partners is trying to acquire GGP in Chicago (you can see GGP's rent and sales per square foot) compared to SPG, in our previous chart). Another example is the European REIT Klepierre, which recently acquired an acquisition of the British company Hammerson. We believe that the industry is likely to have more M & A discussions, and the fact that such discussions are taking place is, in our view, a good sign for REITs in general.
Another important differentiator for Macerich is that it is one of the higher quality retail REITs. In particular, the location of its properties allows its tenants to charge higher rents, and tenants can achieve more sales per square meter, as the graph below shows.
In our view, the less desirable real estate owners Like WPG and CBL (as shown in the graphic above), there will continue to be greater challenges through store closures, tenant bankruptcies, unwanted rental licenses and growing internet competition. On the other hand, the high-traffic, desirable locations, adventure properties like Macerich will not only continue to exist, but they will thrive, and their shares are currently relatively cheap. We wrote more about retail REITs in general and Macerich in particular in this December article:
One of the general responses of many investors when looking at retail REITs is, "Do not try to catch a falling knife." I am not saying that retail REITs have bottomed out, but we say that they are cheap from a valuation perspective, as described in the above linked article. And if you are still unable to invest at these prices, we offer you a very convincing, income-generating options strategy for retail REITs (see, for example, the following section of the Simon Property Group).
And when it comes to retail REITs are still not your cup of tea, then consider some of the Healthcare REITs and Data Center REITs that also offer high returns and attractive prices without exposing them to the risks of changing consumer habits are (eg online retail). In Healthcare, we provide both a "conservative" and an "aggressive" investment idea in these reports:
In addition, the REIT Digital Realty (NYSE: DLR) datacenter is -up in This free article:
Overall, the REIT area currently offers a variety of attractive higher income opportunities and discounted ratings.
BlackRock Credit Allocation Income Trust (BTZ), Yield: 6.4%
Debt-Linked Closed-End Funds ("CEFs") are another category of high-yield securities that income-oriented investors often overlook. Our "conservative" idea in this category is BTZ.
BlackRock Credit Allocation CEF (NYSE: BTZ) is a portfolio of actively selected fixed income securities (bonds) offering a stable return of 6.4% (paid monthly) and doing business at an attractively reduced price relative to its net asset value ("NIW") (more on that now). Two other things we really like about this fund are that it is a closed-end fund (meaning that it can avoid the dangerous "sell-through" situation that can be so damaging to bond funds and bond-traded funds) , and is able to obtain low interest rates for institutional investors for the small, conservative and prudent amount this fund uses (currently 22.2%).
We like this investment-grade allocation because the market-wide credit spreads are currently relatively low (meaning that the market is very confident that nothing "bad" will happen) and as a counterparty over-reliance can be a bad thing). Considering that risk and volatility can rise again at any time, we prefer to keep more, safer, investment-grade debt, such as the mix of bonds in that fund.
Also the current discount to the NAV is available For the purchase of this fund is a very attractive 12.01%. By way of reference, this discount is relatively large compared to the Fund's most recent historical standards, as shown in the graph below.
And the amazing thing about buying this CEF at a reduced price is that you get more return on your money. Given the low risk, you would not be able to achieve such high returns on the open market (because you would have to pay the full price). As they are "closed", CEFs are traded at premiums and discounts to their NAVs based on market buying and selling forces. We prefer to buy low.
Overall, the BlackRock Credit Allocation Fund (BTZ), because of its attractive features and reasonable prices, is worth considering if you are looking for a secure high income (monthly payment). And in addition to BTZ (we currently own BTZ shares), we also have another, more "aggressive" and higher (+ 8.6%) CEF bond, which we've written down extensively in this article for members only:  The return of the more aggressive CEF bond we own has fallen slightly since buying in late January (as the stock price has risen), but it is still attractively valued if you look for a "more aggressive" but still relatively low one Price search volatility, bond CEF.
. 6 Pioneer Municipal High Income (MHI) CEF,
Yield: 5.6%, tax equivalent yield + 8.6%
Municipal Bonds CEF : One of the disadvantages of bond investments is that the income payments to your normal income Tax rates are taxed instead of the reduced qualified dividend rate to which many equity securities are entitled. This higher tax rate can be particularly frustrating if you are in a high tax bracket. However, municipal bond CEFs can provide tax-free income and all other attractive benefits of CEF in general.
The Pioneer Municipal High Income Fund has a variety of attractive qualities that you should consider for an attractive high-yield diversifier, especially if you are in a high tax bracket. In the event that you are in the tax bracket 35% for 2018, the taxable return for this fund increases to a very attractive 8.6%.
This fund invests in world-class municipal securities and pays its investors monthly. And what's also very attractive, apart from the tax-exempt return, is that the payouts were 100% paid in the past (no capital gains or capital returns), which is a good thing; CEF investors need to look at the sources of income distribution as capital gains and capital returns can have unexpected tax consequences.
What we like about this fund is that its closed structure allows management to hold the bonds to maturity, eliminating the forcible selling risks that many ETFs and mutual funds are struggling with. This also helps to control the volatility of interest rate risk, as the management team can essentially hold each bond to maturity at maturity, thus recording the returns at which it has bought.
This fund continues to use prudent leverage (26.1%) to improve performance and efficiency. And importantly, the fund can leverage this at institutional rates (ie, lower interest rates than most individual investors)
Most importantly, the fund is trading at a discount from its net asset value, which essentially means investors are buying the High yield for a reduced price. This is a very attractive way to increase your income. More information about this fund can be found at this link.
And while MHI is our "conservative" option within our CEF category for municipal bonds, our "more aggressive" option is reserved for members only. We think the aggressive option is more aggressive because it uses more leverage, offers a higher return, and trades at a historically attractive discount to the NAV. You can read the idea of members here .
. 5 Enterprise Products Partners (EPD), ROI: 7.0%
Master Limited Partnerships ("MLPs") : The price of Enterprise Products Partners has dropped this year, but continues to spread. In fact, the proliferation of EPD has increased in 55 consecutive quarters. And despite the recent midstream issues (resulting from the new FERC rules on the recovery of certain income taxes), EPD is largely unaffected and still has strong cash generation.
According to a recent Morningstar EPD report:  "It is the leading midstream infrastructure company vertically integrated with best-in-class assets at almost every point in the midstream value chain Supplying all types of multi-source hydrocarbons in major production basins (perm, Eagle Ford, DJ, Piceance, Green River) and delivering them to several end markets (refineries, petrochemicals, exports) .These assets are the linchpin for both shippers and operators for end users. "
EPD also enjoys a relatively high credit rating compared to peers (Baa1 / BBB +), which lower their cost of capital.
The EPD rating (EV / EBITDA) remains attractive, as the following chart shows.
First, in May 2017, we wrote extensively on EPD, where we described it as "big return, stable income growth" (see: Enterprise Products Partner: High Yield, Stable Growing Income ). Since then, EPD has increased its distribution multiple times, a trend we expect, in particular due to its expansion into the petrochemical activities in the Gulf Coast. EPD's business arrangements are backed by long-term contracts that help ensure long-term, stable earnings for the Company and its investors.
And if you're not satisfied with the EPD (which we hold our "conservative" MLP idea), there are two more MLP ideas that members should consider in these recent articles:
4. Select FAANG and "FAANG-ish" Type Stocks
Captial Gains: As we have looked at the impact of taxes on our investments, it would be remiss to take advantage of some capital gains (selling some of your winners) to generate the money you need. Adding this instrument to your belt gives you the opportunity to diversify broadly outside the traditional income-driven segments of the market, thereby reducing your risk (ie, diversification can reduce risk and keep expected returns high). If you hold a substantial portion of your investments on an individual retirement account, you can sell some of your winners to still meet the required minimum distributions.
FAANG stock equities may be difficult for income-driven value investors due to their often very high P / E ratios, even higher volatility and often non-existent dividends. However, we believe in an income-driven investment portfolio with at least some aggressive open-ended growth stocks. For example, if you had allowed yourself to own some FAANG stock, your Nest egg would have been significantly larger in recent years than if you had only dividend stocks, as shown in our FAANG performance chart at the beginning of this article. And if you're trying to decide which FAANG stocks to consider, our very favorite favorite hedge fund had two of its top 10 holdings at the end of last month.
And if the very large market capitalization of the FAANG shares is not appealing, we have highlighted two additional smaller market capitalization growth stocks with FAANG qualities for members only in these articles:
- In 5 years you will probably want them bought a few shares of it Stock (Especially after the recent sale)
- New purchase: Not waiting for a massive sale of this
It is also worth noting that Jeff Miller recently launched a round trip Trading has completed FAANG's stock, as mentioned in its last article:
As a side note, we're helping Jeff edit this weekly "Stock Exchange" series; It focuses on technical trade indicators (such as momentum and dip buying) and can be a very useful tool.
Overall, it may be beneficial to add some non-income securities (ie, "FAANG-ish") to diversification and long-term total return reasons, depending on your personal situation.
* Lobende Erwähnung: Business Development Companies:
Business Development Companies ("BDCs") sind eine weitere Kategorie von High-Yield-Investments (oft mit Renditen zwischen 5% und +10%), die auf einkommensorientierte Anleger ausgerichtet sind mag es in Erwägung zu ziehen. Bei diesen Unternehmen handelt es sich im Wesentlichen um unterschiedliche Kredit- / Finanzierungsvereinbarungen, die für einen Korb von Unternehmen des unteren Mittelmarkts (d. H. Unternehmen mit einem Umsatz zwischen 10 und 500 Mio. USD) getroffen werden. Da es sich bei diesen Vehikeln im Wesentlichen um einen Kreditkorb handelt, ist es eine Herausforderung, attraktive idiosynkratische Chancen zu identifizieren. Außerdem werden die Kredite an Unternehmen mit geringerer Bonität vergeben, und daher handeln BDCs häufig mit einer höheren Korrelation zu hochverzinslichen Kreditspreads. Da die Kreditspreads weiterhin relativ eng sind (wie in der folgenden Grafik dargestellt), üben wir etwas Geduld aus, um diese Gelegenheiten zu verfolgen.
Insbesondere, wenn sich die Kreditspreads ausweiten, werden BDCs wahrscheinlich weniger teuer.
Wichtige aktuelle Informationen über die BDC-Branche sind die jüngsten Nachrichten, dass es ihnen im Wesentlichen erlaubt sein wird, die Höhe der Hebelwirkung (Kreditaufnahme) zu verdoppeln, die sie für ihre Investitionen verwenden. Diese Änderung wurde in die jüngste von Präsident Trump unterzeichnete Ausgabenrechnung aufgenommen. Diese Änderung bringt Chancen für höhere Renditen (weil BDCs in mehr Unternehmen investieren können), aber auch mehr Risiken (da Hebelwirkung die Volatilität erhöht). Net-Net sehen wir die Veränderung als positiv an. In der Tat ist die Änderung angesichts der branchenüblichen niedrigeren Zinsen unausweichlich, da die Notlage der Finanzkrisen weiter in den Rückspiegel fällt und die BDC-Investitionen des frühen Jahrgangs aus den Büchern rollen.
Wir besitzen derzeit einen BDC in unserem Blue Harbinger Income Equity-Portfolio. Und einige der Merkmale, auf die wir achten, sind der Preis (Diskont) gegenüber dem Buchwert sowie das Nettoanlageeinkommen im Vergleich zur Höhe der Dividende (eine höhere Dividende als NII ist im Allgemeinen eine rote Flagge).
Dennoch handelt die Gruppe auf einem relativ niedrigen Niveau, wie der BDC-Index (NYSEARCA: BDCS) zeigt, wie in der folgenden Grafik dargestellt. Nichtsdestotrotz warten wir geduldig auf einen attraktiven Ausverkauf (breitere Kreditspreads), um die Engagements der BDCs zu erhöhen.
3. Frontier Communications (FTR) Anleihen, Rendite: 10,1%
Einzelne Anleihen zahlen Einkommen, keine Dividenden, können aber attraktive Renditen und Kurssteigerungen bieten. Viele Anleger meiden Anleihen, weil sie befürchten, dass steigende Zinsen die Preise drücken werden. Es bestehen jedoch nach wie vor attraktive Gelegenheiten für Unternehmensanleihen, insbesondere höher rentierliche Anleihen, bei denen der Preis eher durch wahrgenommene idiosynkratische Kreditrisiken als durch Zinssätze bestimmt wird. Anleihen können auch eine große Diversifikation innerhalb eines ansonsten kapital-dominierten Anlageportfolios sein.
Frontier Communications (NYSE: FTR) ist eine hässliche Telekom-Aktie, die zunächst ihre Dividende reduziert und dann ausgesetzt hat, aber die Anleihen sind interessant (wir sind die Anleihen als unsere "aggressive" große Einkommensidee in dieser Kategorie. Insbesondere ist dies ein Unternehmen, das die schwierigen Entscheidungen trifft, um seine Schulden in den Griff zu bekommen, und ihre Handlungen verheißen Gutes für den zukünftigen Wert ihrer sehr hochverzinslichen Schuld.
Zunächst war die Dividendenkürzung schlecht für die Aktienbesitzer (Der Aktienkurs tankte), aber gut für Anleiheinhaber, weil es mehr Geld freigab, um die Schuld zu stützen. Als nächstes hat Frontier kürzlich ein Bar-Tender-Angebot für Schulden in Höhe von 1,6 Milliarden Dollar veröffentlicht; das ist auch gut, weil es Frontier ermöglicht, seine Schuldendienstverpflichtungen zu reduzieren, indem es Anleihen von verängstigten Anlegern zurückkauft, die bereit sind, mit einem Abschlag aufzugeben. Further, Frontier will finance the tender offer with a private debt offering of notes that aren’t due until 2026; this allows Frontier to essentially kick the can down the road further, which is a good thing for investors holding bonds that mature before 2026.
And as a result of these actions, the bond prices have actually started to perk up lately—a good sign.
And if you’re looking for more high-yield bond ideas, we can point you in several directions. First consider this free report we wrote back in February highlighting a handful of high-yielders that you may want to consider. Next, you can glean a few more interesting bond ideas from the top 10 holdings list of our all-time favorite hedge fund. And third, we have highlighted several more high-yield bond ideas in this recent members-only article:
Keep in mind, owning individual high-yield bonds is risky, and it is not for everyone. However, when owned within a diversified income-focused portfolio, perhaps consisting of a mix of 40% bonds and 60% stocks, bonds can be an excellent source of volatility lowering income.
2. Teekay Preferred (TGP-B) Fixed/Float, Yield: 9.1%
Floating Rate Preferred stocks offer some very attractive qualities that income-focused investors may want to consider, not the least of which are the reduction in interest rate risk from the floating rate feature. And that’s in addition to the high yield and low volatility.
And in particular, if you like high-yield, low-volatility, discounted-prices, reduced interest rate risk, and improving businesses, then Teekay’s fixed-to-floating rate preferred units (TGP-B) are worth considering for a spot in your diversified income-focused investment-portfolio. We own shares of TGP-B.
We first wrote about this security back in March, and here is a long (but hopefully valuable) excerpt:
The preferred security we are talking about is the relatively new Teekay LNG Partners (TGP) 8.50% Series B Fixed/Float Cumulative Redeemable Perpetual Preferred Units (TGP-B). Teekay LNG Partners provides marine transportation services for liquefied natural gas, liquefied petroleum gas and crude oil.
8 Reasons Why We Like this Opportunity:
1. High-Yield: For starters, we like the attractive high-yield that these preferreds are paying. They started trading in October 2017 at $25, and have since fallen to a discounted price of $23.81. Originally, offering an 8.5% yield, it has risen to 8,9% as a function of the price decline. The main reason the price declined is because TGP sold off in sympathy when the parent entity (Teekay Corp (NYSE:TK)) issued new (dilutive) common units (and some convertible bonds) in late January that were perceived by the market to also be an indication of more liquidity challenges. In reality, these capital raises have strengthened the Teekay family, and made for a more attractive buying opportunity for new purchasers of these TGP preferred units, as we’ll discuss more later.
2. Fixed-to-Floating Rate: Before getting into more of the company/market specific details of TGP, it’s worth considering the value of the fixed-to-floating rate income payments as relief to the fear of rising market wide interest rates. Starting on 10/15/2027, the distribution rate per annum will be a floating rate equal to three-month LIBOR plus a spread of 6.241%. This may seem like a long-way off, but in the meantime it’ll keep the value of these preferreds from falling as far as fixed rate preferreds as market wide interest rates rise. Like bonds, as interest rates rise, the value of preferred can also fall. This interest rate risk is a big reason many investors are afraid of investing in bonds and/or preferred stocks under our current market conditions (i.e. rising rates). In the case of these TGP preferreds, the market is overly fearful in our view (more on this later) and the fixed-to-floating rate will also help strengthen the unit price. In a nutshell, the fixed-to-floating rate distribution payments are attractive.
3. Market Conditions are Improving: One of the business-related reasons we like these preferreds is because market conditions are improving for TGP. For starters, here is a look at global LNG imports and LNG carrier spot rates—both are improving. The entire industry has been struggling since the second half of 2014 when energy prices declined dramatically, and these improving conditions are a welcome trend for the industry in general and for TGP in particular.
Next, here is a look at expected LNG exports in the coming years. Specifically, exports are set to rise which is also a very good thing for TGP because it means they’ll have more business and more revenues to support more distributions to investors.
4. Teekay LNG is Positioned for Growth: In addition to improving general market conditions, Teekay LNG in particular is positioned for growth. For starters, here is a look at the Street estimates for Teekay LNG (note: this is Teekay LNG (NYSE:TGP) common units, not the the preferreds).
Analysts are positive considering there are currently no sell recommendations, and price targets indicate expected price increases. And a big part of this lack of negativity is due to TGP’s six new carriers that have been delivered in the last two quarters. Specifically, these new carriers will increase the company’s revenue, which strengthens the distributions to investors.
And looking further down the road, TGP is expected to put more vessels into use which will further increase the cash available to support distributions to investors.
5. Long-Term Contracts With Strong Companies: Important to note, TGP’s business is with large financially strong, energy-related companies, thereby adding to the strength and security of the business. And as shown in the previous chart (above) the contracts are long-term, which means the company has steady, non-volatile, long-term cash inflows to support distributions to investors.
6. Liquidity Position is Strengthening: If you don’t know, Teekay LNG (as well as sister organization Teekay Offshore and parent Teekay Corp) reduced their distributions in 2015 as the industry faced challenges from the dramatic declines in energy prices. However, Teekay has been working diligently to strengthen its balance sheet. Conditions have improved considerably, and the organization is now turning the corner.
For reference, here is a look at the sources of capital TGP has been using since 2013.
And more specifically, here is a look at TGPs liquidity position as the company progresses through 2018.
And importantly, TGP has already financed and sourced most of its liquidity needs for the year. This important because 2018 is a big year for debt maturities, as shown in the following chart.
Remember, TGP is has just completed six new vessels that will add to future cash flows, and TGP has more vessels coming as market conditions continue to strengthen (as described earlier).
7. The Common Still Pays a Distribution: Another reason we like TGP’s preferred units, is because the common units still pay a distribution. We view this as a sign of financial strength, and also as a source of additional cash flow if needed. Specifically, TGP can always eliminate the common unit distributions if they need more liquidity (remember, preferreds are higher than common in the capital structure). However, based on improving market conditions, it’s more likely TGP will eventually increase the distribution on the common units (more later on why we prefer TGP preferred units over TGP common).
8. Cumulative and Perpetual: Another reason we like TGP’s fixed-to-floating rate preferreds is because they are cumulative and perpetual. Regarding cumulative, that means if TGP ever misses a distribution, they’re on the hook to make it up later. In a bankruptcy situation (we do NOT at all believe one is coming) the bond holders are still ahead of the preferred holders, but the preferred holders are ahead of the common. We also like that this is a perpetual preferred, which may sound odd in a rising interest rate environment. Normally, rising rates can be bad for preferreds (as interest rates rise, preferred prices face pressure). However, because these are fixed-to-floating rate preferreds, that reduces the interest rate risk, and it makes the perpetual characteristic more attractive.
Be Aware of the K-1
Very important for investors to keep in mind, these are not qualified dividends, these payments are classified as distributions and investors will receive a K-1 statement at tax time. Receiving the annual K-1 may be perfectly acceptable for many investors. However, you may not want to hold these preferred units in an IRA for example, because it can set off some tax consequences that basically nullify the benefits of having the IRA in the first place. According to QuantumOnline: “Holders of the Preferred Units will receive specific tax information from the company, including a Schedule K-1 which generally would be expected to provide a single income item equal to the preferred return.”
IDRs: TGP’s Parent Common Units (TK) Have an Advantage
We like the preferred units of TGP (because of their high yield, lower volatility, discounted price, and decreasing risks stemming mainly from the improving business/market outlook), but if you’re willing to take on the greater volatility of common units in search of more upside potential, you may want to consider the parent entity common units, Teekay Corporation (TK), instead of TGP common units because the incentive distribution rights (“IDRs”) seem to tip the scales significantly in favor of TK in an up market. Granted, there are more moving parts to Teekay Corp (the other big one is Teekay Offshore—which by the way is also improving for reasons similar to TGP. You can view our recent Teekey Offshore (TOO) article here), but it’s worth considering Teekay Corp at this point in the cycle if you’re comfortable with significantly higher volatility.
For reference, here is a look at the Teekay organization chart:
And if you’re curious, here is a look at TGP’s operating subsidiaries.
Importantly, you can see in the following ownership table, Teekay Corp is a very large owner of Teekay LNG.
Here’s what Teekay Corp had to say in its annual report about it’s ownership of Teekay LNG and its IDRs, in particular (emphasis is ours).
“Our organizational structure includes, among others, our interests in Teekay Offshore, Teekay LNG and Teekay Tankers, which are our publicly listed subsidiaries. We created Teekay Offshore and Teekay LNG primarily to hold our assets that generate long-term fixed-rate cash flows. The strategic rationale for establishing these two limited partnerships was to:
* illuminate higher value of fixed-rate cash flows to Teekay investors;
*realize advantages of a lower cost of equity when investing in new offshore or LNG projects; and
*enhance returns to Teekay through fee-based revenue and ownership of the limited partnership’s incentive distribution rights, which entitle the holder to disproportionate distributions of available cash as cash distribution levels to unitholders increase.
We also established Teekay Offshore, Teekay LNG and Teekay Tankers to increase our access to capital to grow each of our businesses in the offshore, LNG, and conventional tanker markets.”
It’s those IDRs that make the common units of Teekay Corp so attractive right now, if you believe the Teekay Group is truly turning the corner. However, again, we prefer the TGP preferreds for investors seeking higher yields and much lower volatility.
For reference, the following table provides a high-level overview of the current dynamics of the Teekay family of organizations.
Teekay Bottom Line:
If you are looking for high-yield and low volatility, Teekay LNG’s fixed-to-floating preferreds are worth considering for a spot in your diversified investment portfolio. Obviously there are risks involved as Teekay works to keep improving its financial position (the yield wouldn’t be so high if there were no risks). However, we believe Teekay is turning the corner, and there are many indications that these preferreds will deliver the high-income and low volatility (plus even a little price appreciation) that many investors are looking for.
Members of our Marketplace service can read about another attractive fixed-to-floating rate preferred stock in this article: MLP Sell-Off: Attractive 9.8% Yield Fixed-To-Floating Rate Preferred
1. Simon Property (SPG) Put Options, Yield: +10%
Conservative Income-Generating Options Trades: If you like the idea of big-dividends and discounted prices, but you’re afraid that the market could still fall significantly lower than its current level, then you may want to consider some conservative income-generating options trades. As one example, we like to sell out-of-the money put options on big-dividend stocks because it gives us the possibility of owning attractive shares at an even lower price (if the shares get put to us), and it also pays us attractive premium income up-front that we get to keep no matter what.
We generally like to sell put options with about 1-month to expiration and at a strike price of about 5-10% out of the money. We also prefer to sell the put options immediately after a noisy market sell off because that’s usually when the premium income is highest. And critically important, we never sell puts on stocks unless we’d be happy to own them for the long-term.
We have been having continued success generating attractive income over the last year by selling out-of-the money put options on Simon Property Group. SPG tends to be one of those battleground REITs where opinions are strong on both the bull and bear sides of the aisle. And it is this difference of opinion that keeps volatility and options premiums high and attractive.
We have detailed information about Simon and our recent put sales in the following free article released last week:
And members of our marketplace service have been receiving real time email alerts every time we place a new income-generating options trade, which we tend to do on average at least three times per month, and often more. And if Simon is not attractive to you, then consider our top “aggressive” income-generating options trade idea which has been reserved for members only. It’s been generating very large premium income, and our members have been actively participating and discussing the trade within The Value & Income Forum:
There are plenty of reasons to believe FAANG stocks will continue to dominate, as the global economy remains strong, and as these innovators continue to innovate. However, FAANG stocks are more volatile, they don’t pay big-dividends, and if the market pulls-back significantly, there is a good chance they’ll pull back significantly more. If you prefer to generate higher income with lower market risk, then you may want to consider a few of the ideas presented in this article.
Disclosure: I am/we are long FB, AMZN, NFLX, ADX, OHI, DLR, BTZ, FTR Bonds, TGP Preferreds, and short SPG Put Options.
I wrote this article myself, and it expresses my own opinions. I can not get any compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.