Happy New Year again! I hope 2007 is a wonderful and prosperous year for you and your family.
Two quick updates:
1. My book, The 25% Cash Machine is now coming out on January 16, 2007 instead of next week. My publisher just informed me that due to surge in early pre-publication orders, they’ve increased the print run size and need an extra week to get the book into the stores. So stay tuned for more info.
2. Still looking for your questions on “income investing.” I'll be scanning my Blog for these questions and selecting a few to answer next week. Simply click on the comment link below to enter your question. I’ve got some good ones already, but I’d love to hear from you.
I received a number of great questions from many of you. I’ve aggregated a lot of the common questions and wanted to post them here today for you to read.
The most common question was in regard to Canadian Royalty Trusts (Canroys). Given the recent decision by the Canadian government last October to threaten the trust status of Canroys, I’ve been asked by many income investors, “What do we do with Canadian Trusts? Buy more, sell or hold?”
I will post a special “Canroy” position in the next several days, because so many income investors own Canadian trusts or want to get into them. Canroy's high yields and unique tax status mean that this question deserves more attention then a quick answer. Look for that special “Canroy” post by the end of the week.
Meanwhile, here are my answers to your most common questions:
Question: The question I have regards sector performance in 2007. Do you believe the capital markets, i.e., Apollo, Alliance, etc., and BDCs (Business Development Companies) will continue to perform well and take leadership positions?
Answer: Yes. There's more committed capital in private equities than there was a year ago. I expect deal flow for mid-size companies will be robust in 2007 and I anticipate the BDCs we own will have another exceptional year. I like both Apollo Investment Corporation (AINV) and Ares Capital Corporation (ARCC) in this sector.
Question: How do you factor in premium (or discount) to net asset value (NAV) when you screen for yields?
Answer: Ideally, we want to buy closed end funds at their NAV or at a slight discount. Premium and discount do factor in because a closed end fund trading at a high premium has little potential, whereas a closed end fund trading at a slight discount historically outperforms.
Question: If one were just starting to invest using The 25% Cash Machine and had $100,000 to invest, should the person go ahead and invest $3,000 in each of the 33 stocks even though some of them have grown tremendously since you first started? It seems that if you did this it would severely cut down on your percentage return. If not, how would you ever build a portfolio?
Answer: I provide a continuous Fresh Money buy list with The 25% Cash Machine advisory service, so people can enter at the appropriate price over time. Our Fresh Money buy list affords our subscribers the chance to be disciplined about building their portfolio. The bottom line is that folks can and should buy their favorite stocks on pullbacks. Click here to find out about our “no-risk” trial to The 25% Cash Machine service.
Question: I have one question for you. I do not (yet!) have a large amount of capital to invest, so I'm particularly concerned about transaction fees eroding my investment returns. For how long should we expect, on average, to keep hold of a stock like the ones you recommend with The 25% Cash Machine before selling -- one year, three years, or more?
Answer: We buy every position with the intent that our holding period will be at least one year. That's all the visibility we can reasonably expect from any business. I want to limit turnover to no more than 15% per year. Ideally, we want to own our positions long term, anywhere from 2 to 5 years.
Question: What is your opinion on the use of stops? Should they be put in as a trailing percentage? This has been my practice in the past.
Answer: I don't recommend using stops for the purposes of investing in high yield securities. If a sector begins to weaken, I will typically punch out at market. Some of the securities we invest in that pay 9%, 10%, or more in dividends, may not have the trading volume of an S&P 500 stock where you can safely use stops. I don't use tight stops in a volatile market because, more often than not, the market makers can (and will) take a stock down, clean out the stops and then rally the stock right back up.
Question: It seems harder to get good solid, up-to-date information on some of the "hybrid" high-yield securities from normal Web sources. Closed End Funds, as well as some of the mutual funds, just don't have that much investor information or detail -- like we would find on a normal stock. How can I dig deeper to feel confident in understanding the structure of some of these high-yield securities? Where should we go to get more information? I am having trouble seeing the top- and bottom-line growth rates on some of these securities in order not to just look at yield. Also, it seems that sometimes when I have looked at yield alone, I did get burned -- just like you said. But where should I go to see more of the fundamental data?
Answer: That's actually an easy answer to provide. Do what I do, which is to pick up the phone and call the company and talk to management -- but that’s a lot of work. Or, you can take the easy way out, subscribe to my advisory service, The 25% Cash Machine, and let me make the calls for you. Some funds and securities are obscure which is what makes them special, and where my service and I come in handy. I do all of that work for you. Click here to find out about our “no-risk” trial to The 25% Cash Machine service.
Question: When storing cash for a longer period of time, am I better off placing it in say, MO for an upside potential 4% yield, than say a 5% savings account?
Answer: That's not quite what I would recommend, but you are on the right track. I would take the cash dividends and reinvest them to build a new position in The 25% Cash Machine recommendation. Buying Altria Group is only going to lower your overall yield and my goal for income investors is to achieve a 10% yield -- overall. You could start with the one of the securities I mentioned above, Apollo Investment Corporation (AINV) or Ares Capital Corporation (ARCC).
Thanks again for your great questions. My book, The 25% Cash Machine, hits the bookstores and online sellers Tuesday, January 16, 2007.
Stay tuned to this Blog for a special announcement about the book and a great opportunity for you to get started building your own “25% Cash Machine!”
Mini-Seminar “The One Stock Every Income Investor Should Own.”
Dear Income Investor,
I just put the finishing touches on the taping of a new mini-seminar, "The One Stock Every Investor Should Own", and it's ready for you view right now. Just push play:
I hope you enjoyed the seminar.
This security pays a nice 10% dividend, is in the hot "growth sector" of China/Asia growing economy, and I expect this stock to move up 15% to 20% in the next 6 months.
Good luck in 2007,
Bryan
P.S. Check back on this Blog for a special announcement about my new book, The 25% Cash Machine, which is due out in bookstores and online on Tuesday, January 16, 2007.
I know a number of you had problems viewing my Mini-Seminar on the Blog. I just posted a new version which should be viewable with all versions of Windows Media Player.
See the Mini-Seminar posted below.
I apologize for the problems this may have caused you.
We had a lot of questions on the Blog about the Canadian Royalty Trusts (Caroys) sector and I promised I would answer them in one complete update.
Since so many of the questions were the same, I’ve consolidated them and here is my position at this time:
Question: What is happening with the Canadian Royalty Trusts? If I own them, should I sell, and if I don’t own any, should I buy?
Answer: In a nutshell, many of the non-energy related Canadian Income Trusts are marching to a different drummer. Some trusts like Arctic Glacier (AGUNF) told me they intend to raise their dividend enough, down the road, to offset the forthcoming tax so shareholders can still maintain their after-tax yield at current levels. This probably explains why the stock has rebounded so well.
Others, like VersaCold Income Fund (VCLDF), are also back in the black since the announcement while the Priszm Income Fund (PSZMF) raised its dividend and is showing some recovery.
KCP Income Fund (KCPIF) has not rebounded with the other business trusts and is still down on the mat. I put a call in to the CEO after the company posted a story that they are exploring alternatives to enhance shareholder value, so I would sit tight until we learn the whole story.
So it’s a mixed bag for many of the Canadian income trusts. Some are moving back up, many are flat or still down, but remember, most of these are excellent businesses that still pay large dividends.
Needless to say, the rough spot in the Canroys are the Canadian Energy Income Trusts. They are beset by lower oil and natural gas prices of late, and these stocks are back down to their early-November "reaction lows" and seem to be once again groping for a bottom. My advice here is that if you own them, hold them. It looks like winter is finally going to show up for us next week in the Northeast, and I'm beginning to see some firming in the sector today.
At this point, investors have to look at these oil and gas trusts as energy stocks with benefits. Nothing in the U.S. energy patch pays the kind of dividend yields these stocks pay. They grow their reserves every year and will pay out whopping yields for the next four years -- at which time they will pay out an after-tax yield of about 8%. Folks, that is still way above anything else out there in energy-related securities. Be patient here, and we'll expect some cold weather to breathe some life back into the group.
If you don't own these stocks and you want to buy this pullback, I would consider the two higher-quality stocks Penn West Energy (PWE) and Provident Energy (PVX). They have very low payout ratios, which means they should have no trouble maintaining, or perhaps increasing, their dividends. They have little or no leverage and are the institutional favorites when that kind of money comes back into the sector. At current prices, their yields are up more than 11%, and both are showing excellent profit growth.
Canetic Resources (CNE), Harvest Energy (HTE) and Precision Drilling (PDS) carry higher risk, due to higher payout ratios and debt on their balance sheets, so they'll definitely want to see crude prices hold at $54 per barrel and gas prices hold above $5.50 per million cubic feet. I would hold off buying new or adding to your position with either of these two stocks at this time.
The bottom line here is that we still aren't out of the woods with the Canadian royalty trusts. I believe the overall perception of the sector is improving, but we do need some firmer energy prices to help us get further out of the woods with these positions.
So, if you own or have positions in Canadian Trusts, you need to exhibit patience here as I believe that selling out at this point would be tantamount to bailing out at the bottom. I don't want to hold anything that weighs down your portfolio, but I think you will get a much better chance to lighten up on some of your Canadian exposure at better prices than we are seeing now, and some solid Q4 earnings in the coming weeks should definitely help that happen.
Stay tuned to this Blog on Tuesday, January 16, 2007. That’s when my book, The 25% Cash Machine, is available in book stores and online.
I will e-mail you with special announcement about the book on Tuesday.
I know a number of you had trouble viewing my special One Stock Every Income Investor Show Own Now video post. We did manage to get it fixed for a number of viewers, but not everyone, so I apologize.
Here is the write-up that I used in the Video. I apologize for any problems this may have caused. I still like the investment. Nothing has changed there.
Thank you for your patience.
Bryan
Diana Shipping (DSX)
Every time I read a story about the future economic growth rate of China and India, I feel like we are way too underexposed to the potential rewards offered by such a "big-picture" macro trend. Both China and India possess enormous opportunities for investors, but few of those opportunities pay anything close to a double-digit dividend yield. That makes it a bit of a challenge for me to find suitable high-yield Chindia (a new word created by combining China and India) investments that fit our25% Cash Machine profile -- but not impossible.
Enter the dry bulk shipping stocks.
This relatively new asset class is a direct beneficiary of increased global trade. It specifically benefits from raw materials shipped to Chindia.
In fact, one of the first recommendations in my 25% Cash Machine Online Seminar last year, was Eagle Bulk Shipping (EGLE) that has provided us with a 23.51% total return in 2006. The business conditions are steadily improving as Chindia's build-out continues, and my view is that it will continue for the next 10 years, easy!
Here's the basis for my decision to go with Diana Shipping.
Diana Shipping is incorporated in the Marshall Islands, with principal executive offices in Athens, Greece. It completed an initial public offering (IPO) on March 23, 2005, and its shares are traded on the New York Stock Exchange under the symbol DSX.
COMPANY PROFILE
Diana Shipping is a global provider of shipping transportation services. They specialize in transporting dry bulk cargoes, including iron ore, coal, grain and other similar commodities along worldwide shipping routes. Their combined fleet consists of 13 modern panamax dry bulk carriers and two cape size dry bulk carriers, with a combined carrying capacity of approximately 1.3 million deadweight tonnage (DWT) measured as a long ton and equal to 2,240 pounds. The weighted average age of the vessels is 3.6 years (as of Dec. 1, 2006) without taking into account the two vessels to be delivered in 2010. So DSX has one of the youngest fleets in the dry bulk cargo business.
Among the distinguishing strengths that provide DSX with a competitive advantage in the dry bulk shipping industry are the following:
* They own a modern, high-quality fleet of dry bulk carriers.
* Their fleet includes four groups of sister ships, providing operational and scheduling flexibility, and cost efficiencies.
* They have an experienced management team.
* They have a strong balance sheet and a relatively low level of indebtedness.
The main objective of Diana Shipping's business model is to manage and expand their fleet in a manner that will enable them to pay attractive dividends and enhance shareholder value.
To accomplish this objective, DSX intends to pursue highly focused business strategies, including:
* Operating a high quality fleet.
* Strategically expanding the size of their fleet.
* Pursuing an appropriate balance of short-term and long-term time charters.
* Maintaining a strong balance sheet with low leverage.
* And maintaining low-cost, highly efficient operations.
In addition, they intend to capitalize on their strong reputation for high standards of performance, reliability and safety. Strong leadership is a hugely important component for success in this industry and Simeon Palios has served as DSX director since Mar. 9, 1999, and CEO and chairman since Feb. 21, 2005.
Since 1972, when he formed Diana Shipping Agencies S.A., Palios has had the overall responsibility for the company's activities. He has 39 years experience in the shipping industry and expertise in technical and operational issues. Palios served as an ensign in the Greek Navy (as a passenger boat inspector), and is qualified as a naval architect and engineer. What credentials! He da' man!
YIELD POWER
Diana is throwing off some serious cash flow. As stated in their IPO-offering prospectus, the company intends to pay out all its cash flow to shareholders after meeting the company's operating expenses. Last quarter alone, the company generated 40 cents per share in free cash flow. Take the 40 cents and multiply it by four quarterly dividend payments, and we come up with an annual dividend payout of $1.60 per share. And that translates into a current dividend yield of 10.50%.
I want to see improving fundamentals that justify the notion of future dividend hikes, and capital appreciation that has the potential to deliver a total yearly return of 25%. Diana's recent performance suggests to me that the company can attain that goal for us in 2007. Just look at the most recent numbers and the company's observations from their third quarter results posted back in November 2006.
Voyage and time charter revenues were $30.6 million for the third-quarter of 2006, compared to $25.8 million for the same period of 2005, representing a top line growth rate of 18.6%. This gain was due to an increase in the number of vessels in the company's fleet, which was partially offset by decreased hire rates.
Earnings per share (EPS) have continued its positive trend during the first three quarters of 2006. EPS rose to 32 cents (U.S.) in the third quarter, up from 28 cents in the second quarter and 26 cents in the first quarter. The rising tide of profits has resulted in DSX being able to increase the dividend for the third-quarter 2006 to 40 cents from 35.5 cents per share paid out from second-quarter 2006 operations.
One important note: The 32 cent EPS is calculated after deducting tax write offs of 8 cents per share. DSX generated 40 cents per share in free cash flow. Deduct the 8 cents for depreciation and amortization and you get 32 cents in earnings. So, in case you were wondering, they are neither borrowing money nor paying out more than they earn.
Looking forward, a consensus of eight Wall Street analysts see DSX revenues climbing from $110 million in 2006 to $141 million in 2007 -- a 28% growth. Diana is enjoying profit margins of approximately 52% of revenues, making this a cash cow for 2007 as long as day rates hold relatively stable. If expenses remain constant, or become a smaller percentage of revenues, then I expect the company to raise the dividend payout further during the course of the year.
SECTOR STRENGTH
In a recent 35-page report released in late November -- and based on a roundtable of six Wall Street analysts that follow the dry bulk shipping sector -- they found some particular business elements to be very favorable. They all tend to agree that the real driver is the intense demand for shipping, especially from China. The consensus forecast dry bulk order book -- a continuous measure of supply versus demand -- shows demand exceeding supply during the next five years.
One analyst from Lazard Capital Markets said it well. "It's not that tough of a business to analyze from the perspective that it takes a long time for ships to get delivered. It takes a lot of money for them to get ordered, asset prices are at all-time highs and staying up there, and charter rates are still quite good going forward."
Diana Shipping has 60% of their charter rates locked up for 2007, leaving another 40% open to what is called "spot market pricing," or day-to-day pricing. This simply means that the company has fixed its pricing for 60% of its fleet for one year or longer. But if day rates for hauling cargo overseas rise, as I believe they will, then the company stands to benefit from the 40% of its fleet capacity that is not committed to long-term contracts.
This is where the big pop in sales and profits for 2007 should come from -- by scaling into what should be higher day rates and raising overall average daily charter revenue for DSX.
Buy Diana Shipping (DSX). Buy it here and buy it now
Today’s Income Investments are Paying Whopping Yields
Dear Income Investor,
Just because a company pays a high dividend, doesn’t mean it’s a great investment. You have to look beyond the high yield to the financial health of the company. It’s not unusual in the 80’s and 90’s for companies to hide questionable financing or results behind a big fat dividend.
High-Yield Use to Mean High-Risk
Back in early “80s, the term “high yield” was reserved for the junk bond market, which was about the only place one could find yields topping 10%. Most of us have been around long enough to remember Drexel Burnham Lambert and its famous CEO Michael Miliken, who earned a whopping $550 million for himself in 1987.
At that time the perceived engine of the takeover movement was the junk bond. Some argue that this debt instrument itself was the cornerstone of a decades marked for its excesses on a massive scale bordering lunacy. Research departments of boutique junk bond firms would prostitute their research for the purpose of deceiving innocent buyers, leading most investors in the late 1980s convinced the high yield market was tainted by manipulation and deceitful practices.
Those companies issuing debt with 10%-15% coupons had highly leveraged balance sheets and carried a lot of risk versus the potential reward. Companies issuing high-yield debt at any time are considered to be financially questionable, which is why they have big coupons, to compensate for the big risk associated with this kind of debt.
It’s Not Your Father’s High Yield Market Anymore
Today, smart investors are finding new companies within industries that pay out yields in excess of 9% as a result of passing through higher profits from strong operations. The stocks you can purchase in today’s market are by design pass-through securities, meaning they pass through 80%-90% of all net income to shareholders in the form of dividends and distributions.
Check out this video where I talk about the “whopping yields” some of these new high income securities are paying out today.
We are investing in royalty trusts, grantor trusts, master limited partnerships and REITS that are raising their payouts because business conditions are strengthening, not because they are leveraged to the eyeballs like the companies financed by junk bonds. The companies we own aren’t servicing double-digit debt like the companies of the 1980s.
In today’s market, mergers and acquisitions get financed if companies aren’t issuing low-grade debt securities? Companies tend to use their own stock as currency to merge with other companies in the form of stock swaps.
Rarely do we see a company issue high yield debt to buy another company. Those days are over.
Another attribute to the investments available today are that as these companies raise their monthly and quarterly payouts, their dividend yields rise resulting in rising stock prices as investors chase the rising yield on these classes of securities. You don’t get that with fixed income investments like corporate bonds.
Let's take a look at just one of the players in the “pass through” securities market—American Capital Strategies (ACAS). Here's a company that has $5 billion invested in a portfolio of 150 companies with a dividend yield of 8.5%. The shares are up from $35 to $47, or 34% over the last 12 months.
And that is just one name in the sector that is raising payouts to shareholders, reflecting strong business conditions.
My point here is that these high-income stocks hold up way better than 90% of all other common stocks. They just don't get hit that badly on bad news days because of the attractiveness of the yields.
This is what I'm talking about ... being in companies that are STRUCTURED TO PAY OUT a generous portion of their profits to their shareholders because they are generating higher cash flows from their underlying businesses.
ACAS and the other specialty finance income stocks that are benefiting from the current interest rate environment make for a great swap out of those losing, low-yielding bank stocks that are fighting the Fed.
You see, well-run businesses don't raise their dividends unless they believe they can maintain them. At a time when most investors are dragging around their stock portfolios like a bag of rocks, our strategic high-income model portfolio was up 17% in 2005, while all three major averages were less than 10% for the year.
So when you think high yield, it’s a different ball-game today.
Yesterday’s high yield was based on weak balance sheets and poor conditions. During the past 20 years a dozen classes of securities have come to market that are structured to deliver payouts commensurate with business conditions. This way, companies don’t pay out more that their current cash flow can accommodate.
Today’s high yield market, aside from the sub-prime corporate bond market, is based on strengthening business conditions, not weak fundamentals.
And now we have choices that simply didn't exist 20 or even 10 years ago, and if you are concerned that you are going to burn through your savings to maintain your lifestyle in your retirement years, then I suggest you start to consider getting involved in strategic high-yield investing.
You just have to be willing to listen, learn and put into action the right strategies at the right time. Isn’t it time to start looking again at high yield investments like “pass through” securities for your income needs?
Bryan
P.S. Thanks to your help, my The 25% Cash Machine book reached #2 on the Amazon.com investment books best-seller list and #10 at Barnesandnoble.com. I want to thank many of you who already bought the book. It’s great to see so many people interested in building a truth 25% cash machine.
If you haven’t had the chance to buy the book, there is still plenty of time. Just click on either of the following online bookstores: Amazon.com or BarnesandNoble.com
