Dear Income Investor,
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.
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!”
Bryan
