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
