Yield-Chasing is one of the 7 Deadly Sins of Long-Term Investing. For example, when an investment offers a double-digit yield, it can be a red flag—perhaps an indication of distress. However, we believe the 10 ideas presented in this article are all attractive from a risk-versus-reward standpoint. Without further ado, here is our ranking of top big-yield opportunities, starting with #10 and counting down to #1.
10. Tsakos Preferred Shares (TNP-D), Yield: 8.8%
Tsakos is an international searborne crude oil transportation company, and we think investors are incorrectly interpreting and extrapolating poor recent performance. Specifically, we believe there are three reasons why Tsakos future prospects are better than they look, and the Series-D preferred shares should NOT have recently sold off, as shown in the following chart.
Note: it’s important to recognize the shares now trade at an attractive discount to the $25 redemption price (Tsakos can redeem these shares at $25 anytime on or after 4/29/2020).
First, even though Tsakos missed expectations by two cents when it announced earnings at the end of November, it did beat on revenues (a good thing). It missed earnings because they included $2.5 million of special survey costs that would normally have been incurred at a later stage and have been spread over a longer period (according to management: “we took advantage of the very weak market of the third quarter to bring forward three of our surveys.”). But on a go-forward basis, it’s good they’ve gotten this out of the way. Also earnings suffered from refinery outages, and high inventories and OPEC cuts. These negative events are exceptions, not the norm (Tsakos will benefit from not having them every quarter).
Secondly, Tsakos just completed a large capital expenditure cycle that positions it for more growth and higher free cash flow in the future. Per the following graphic, the newbuilding vessels are expected to increase revenues by 30%.
With this newbuilding capex largely behind them, a large amount of free cash flow will be generated from increased revenues and simply from not spending so much on capex. This will be helpful to the dividend (more on this later).
Thirdly, many investors are ignoring the expected turn upward in the market cycle (see chart below) and instead they’re incorrectly extrapolating recent weak performance into the future.
We wrote about Tsakos in more detail in this members-only report. Overall, we believe these Series D preferred shares are now attractive, and worth considering.
9. New Residential (NRZ), Yield: 11.2%
New Residential focuses on investments related to residential real estate, and the company has been doing an exceptional job in recent years to evolve with the evolving residential mortgage market. Specifically, the company was an innovator in the Excess Mortgage Servicing Rights industry following the housing crisis whereby NRZ picked up some of the risky business "Big Banks" were forced to shed. However, NRZ managed the Excess MSR business in a way that allowed it to avoid some of the industry pitfalls (such as legacy lawsuits) while generating strong profits (and huge dividends) for investors.
The more recent problem for NRZ is that opportunities to grow the Excess MSR business have diminished as NRZ has already captured a huge portion of this market, and also the growth opportunities for the Excess MSR business are diminished because the distress of the financial crisis is falling further into the rearview mirror. Further, NRZ's inability to actually service mortgages in-house limited the deals they were able to make (NRZ owned the servicing rights, but they didn't actually service the mortgages - this was outsourced). Excess MSRs have been a fantastic business over the last few years, but as the industry moves forward, NRZ needs to keep evolving, and that's exactly what the company has been doing. Specifically, NRZ is acquiring mortgage servicer, Shellpoint Partners.
It was announced earlier this month that NRZ is acquiring Shellpoint Partners, and this is a smart move in multiple ways because it will allow NRZ to continue evolving with the evolving industry. Specifically, NRZ is gaining a mortgage servicer and originator. This is huge for NRZ because it allows the business to keep growing. For example, the acquisition will not only give NRZ access to more deals (because they'll soon be able to actually service in-house), but it will also allow NRZ to grow new business opportunities with its origination capabilities.
The other big advantage of this deal is that it reduces the risk associated with a couple of distressed mortgage servicers upon which NRZ has been highly dependent (Ocwen (and Ditech) as described in detail in our previous NRZ article.
Also importantly, the new Shellpoint deal will help ensure NRZ is able to keep covering and growing its big dividend. For perspective, the following chart shows that NRZ has been covering its dividend with a healthy margin of safety.
Overall, we believe NRZ's dividend is well-covered and its business continues to have growth opportunities thanks to management's consistent smart decisions to evolve with the evolving industry.
8. CBL & Associates (CBL) 2024 Bonds, Yield: 6.4%
CBL is a B-Class shopping mall REIT, and we believe the recent dividend cut on the common shares is an indication from management that there are significant challenges ahead. We have no interest in owning the common shares, but the bonds are interesting. Specifically, we believe the company has the financial wherewithal to continue supporting the bonds, and the recent dividend cut (as well as any future dividend cuts) actually free up more cash to support the bonds (bonds are ahead of stock in the capital structure).
We wrote about CBL (and the Internet versus brick-and-mortal retail battle) in more detail in this recent article: Amazon Insurance: 5 Attractive High-Income Retail REITs Overall, we believe these bonds are relatively safe, attractively priced (you not only get the coupon payments, but you also get the capital appreciation—the bonds trade at 89 cents on the dollar), and worth considering if you are an income-focused investor.
7. Royce MicroCap Trust (RMT), Royce Value Trust (RVT), Yields: 7.1 and 7.3%
Small cap value stocks are poised for strong performance in 2018; and this is an allocation that we believe should be considered for most equity portfolios. Not only does small cap value have a long history of outperforming other styles (e.g. growth, large cap), but small cap value has been underperforming in recent years, thereby making now an even more attractive opportunity to invest, in our view. And economically speaking, if the economy remains strong, so too should small cap value stocks surge ahead as the recovery strengthens.
The small cap (and microcap value) closed-end funds offered by Royce (i.e. the Royce Value Trust (RVT) and the Royce MicroCap Trust (RVT)) are both very attractive high-income investments right now. In a nutshell, these two Closed-End Funds ("CEFs") check all the boxes for an attractive CEF including attractive double discounts, strong management, relatively low fees, prudent leverage, and big healthy yields. We wrote about these two opportunities (as well as a few additional attractive CEFs) in this recent members-only report.
6. AmeriGas (APU), Yield: 8.2%
AmeriGas is the largest propane distributor across the US, with operations in all 50 states. It's organized as an MLP and it offers a big growing distribution yield, currently 8.2%.
And the good news for AmeriGas is that we're finally having some cold weather across the US and this will help the company's bottom line.
Specifically, the company has been challenged by warmer than normal winters across the US in recent years, which puts pressure on the company's revenues. However, despite the warmer winters, AmeriGas recently reported its fiscal year 2017 results (in November) and it grew its full-year adjusted EBITDA versus 2016, as shown in the following graphic.
Worth noting, the company has a standby equity commitment on hand if it needs extra cash to support its business (and the big distribution payments to investors). However, the company explains it is not currently needed, and the relatively colder winter we've been having so far (versus the last two years) helps ensure the company will have plenty of cash flow generated by operations.
We're certainly not claiming to have a working crystal ball, but according to the Old Farmer's Almanac "the long-range winter forecast for the rest of 2017-2018 shows generally colder temperatures than last winter for the U.S. and Canada" which is a good thing for AmeriGas.
We've owned units of AmeriGas since mid-March of this year. And while we've experienced some price appreciation, healthy distributions payments, and one distribution increase, we believe this company has more upside ahead, especially considering winter weather is likely to revert toward the averages in the upcoming years, which will be a great improvement for the company. Also worth mentioning, AmeriGas has an extremely low beta (around 0.3) which is good for volatility reducing diversification benefits within a larger income-focused investment portfolio. Investors should be aware of the tax implications of investing in an MLP (e.g. K-1 statements at year-end), but if you are an income-focused investor, AmeriGas' 8.2% yield is worth considering.