This report is the members-only, part-2 version of our free report titled "Top 10 Big-Yields." However, this version includes the Top 5.
Without further ado, here are the details...
5. Enterprise Products Partners (EPD), Yield: 7.0%
Master Limited Partnerships ("MLPs"): Enterprise Products Partners price has declined this year, yet its distribution continues to rise. In fact, EPD’s big distribution has been raised for 55 consecutive quarters. And despite recent questions in the midstream space (arising from new FERC rules regarding the recovery of certain income taxes), EPD is largely unaffected and continues to have strong cash generation power.
According to a recent Morningstar report, regarding EPD:
"It is the pre-eminent midstream infrastructure company, vertically integrated with best-in-class assets at nearly every point in the midstream value chain. It can aggregate supply of every type of hydrocarbon from multiple sources in major producing basins (Permian, Eagle Ford, DJ, Piceance, Green River) and deliver it to multiple end markets (refiners, petrochemicals, exports). These assets are the linchpins for both shippers and end users."
EPD also enjoys a relatively strong credit rating compared to peers (Baa1/BBB+) that keeps its cost of capital lower.
We first wrote about EPD in detail in May of 2017 where we described it as offering “Big Yield, Stable Growing Income” (see: Enterprise Products Partners: Big Yield, Stable Growing Income). Since that time EPD has raised its distribution multiple times, a trend we expect to continue, especially based on its expansion into Gulf Coast petrochemical activities. EPD's business arrangements are backed by long-term contracts which help ensure stable long-term income for the firm and its investors.
And if you're not comfortable with EPD (which we consider our "conservative" MLP idea), we offer another MLP idea for members to consider in this recent article:
- More aggressive: MLP Sell-Off: Attractive 9.8% Yield Fixed-To-Floating Rate Preferred
4. Select FAANG and "FAANG-ish" type stocks
Captial Gains: Since we have been considering the implications of taxes on our investments, we’d be remiss to NOT bring up the benefits of taking some capital gains (i.e. selling some of your winners) to generate the income/spending cash you need. Adding this tool to your belt affords you the valuable opportunity to more broadly diversify outside of the traditional income-focused segments of the market and thereby reduce your risks (i.e. diversification can reduce risks and keep expected returns high). Further still, if you own a significant portion of your investments within an individual retirement account, you can sell some of your winners to meet those required minimum distributions anyway.
FAANG-ish type stocks can be difficult for income-focused value investors to even consider because of their often very high PE ratios, higher volatility, and the often non-existent dividends. However, we believe in complimenting an income-focused investment portfolio with at least a few aggressive open-end growth stocks. For example, if you had allowed yourself to own some FAANG stocks, your nest egg would be significantly larger over the last few years than if you only owned dividend stocks, as shown in our FAANG performance chart near the beginning of this article. And if you are trying to decide which FAANG stocks to consider, our all-time favorite hedge fund had two in its top 10 holdings at the end of last month.
And if the very large market capitalization of the FAANG stocks is not appealing to you, we have highlighted two additional smaller market cap growth stocks with FAANG qualities for members only, in these articles:
- In 5 Years, You'll Probably Wish You Bought A Few Shares Of This Stock (Especially After The Recent Sell-Off)
- New Purchase: Not Waiting For A Massive Sell-Off On This One
Also worth mentioning, Jeff Miller recently completed a round trip trade of a FAANG stock as noted in his recent article:
As a side note, we help Jeff edit this weekly "Stock Exchange" series; it focuses on technical trading indicators (such as momentum and dip-buying), and it can be a very useful tool.
Overall, adding a few non-income securities (i.e. "FAANG-ish" stocks) can be beneficial for diversification and long-term total return reasons, depending on your personal situation.
*Honorable Mention: Business Development Companies:
Business Development Companies ("BDCs") are another category of high yield investments (often yielding in the 5% to +10% range) that income-focused investors may like to consider. These companies are basically varying flavors of loan/financing arrangements made to a basket of lower middle market companies (i.e. companies with revenues in the $10 million to $500 million range). Because these vehicles are essentially a basket of loans, it's challenging to identify attractive idiosyncratic opportunities. Also, the loans are made to lower credit quality companies, and therefore BDCs often trade with a higher correlation to high-yield credit spreads. Further, because credit spreads remain relatively narrow (as shown in the following chart) we're exercising some patience in pursuing these opportunities.
Specifically, when credit spreads widen, BDCs are likely to get less expensive.
One very important current bit of information related to the BDC industry is the recent news that they'll essentially be allowed to double the amount of leverage (borrowing) they use to make there investments. This change was included with the latest spending bill signed by president Trump. This change will bring opportunities for higher returns (because BDCs can invest in more businesses) but also more risks (as leverage increases volatility). Net-net, we view the change as positive. In fact, the change is arguably needed considering the lower cap rates industry-wide as the distress of the financial crises falls further into the rearview mirror and early vintage year BDC investments roll off the books.
We currently own one BDC within our Blue Harbinger Income Equity portfolio. And a couple of the characteristics we pay attention to is the price (discount) versus book value, as well as the Net Investment Income compared to the size of the dividend (a bigger dividend than NII is generally a red flag).
Nonetheless, the group trades at a relatively low level, as per the BDC index (BDCS) as shown in the following chart. Nonetheless, we’re waiting patiently for an attractive sell-off (wider credit spreads) to add more exposure to BDCs.
3. Frontier Communications (FTR) Bonds, Yield: 10.1%
Individual Bonds pay income, not dividends, but they can offer attractive yields and price appreciation. Many investors are avoiding bonds because they fear rising interest rates will put downward pressure on prices. However, there are still attractive corporate bond opportunities, particularly higher yielding bonds, where the price is driven more by perceived idiosyncratic credit risks than by interest rates. Bonds can also be a great diversifier within an otherwise equity-dominated investment portfolio.
Frontier Communications (FTR) is an ugly telecom stock that first reduced and then suspended its dividend, however the bonds are interesting (we are including the bonds as our “aggressive” big-income idea in this category). In particular, this is a company that is making the tough decisions to get its debts under control, and their actions bode well for the future value of its very high yield debt.
For starters, the dividend cut was bad for stock holders (the stock price tanked) but good for bond holders because it freed up more cash to support the debt. Next, Frontier has recently launched a cash tender offer for $1.6 billion of debt; this is also good because it will allow Frontier to reduce its debt servicing obligations by buying back bonds from frightened investors willing to relinquish at a discount. 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 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. Also, 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 is 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 that still timely report:
1. Simon Property (SPG) Put Options, Yield: +10%
Conservative Income-Generating Put Option Sales: 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. For example, we sometimes 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.
SPG has been offering continuing opportunities to generate attractive income over the last year by selling out-of-the money put options. 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 Simon put sales in the following free article released last week:
Additionally, we offer another attractive income-generating put sale idea in another retail REIT, Macerich (MAC) in this recent article:
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.
For reference, you can view all of our current holdings here.