Dear Income Investor,

Here is my latest video where I explain why BDCs are the emerging sector combining the best of high yield payments with strong capital appreciation . . . and how one company we own in our advisory portfolio was up 36% in 2006.

I’m talking about a steady growth stock paying 9% dividends in one of the hot money sectors going—Business Development Companies (BDCs). Check this out:

Invest Like The Rich Do

In recent years, BDCs are a new type of investment vehicle – one that mimics the way the rich have long invested – has become available to everyone else.

In fact, the variety and quality of these investments have really taken off in the last couple of years.

And frankly, I believe every investor – from the most conservative to the most aggressive – should hold at least a portion of their portfolio in these stocks.

Click here to get started finding out more about BDCs and how investments like these can generate big dividends and steady growth in your portfolio.

Thanks,

Bryan

Federal Reserve Chairman Ben Bernanke signaled this week confidence that inflation is headed lower reducing fears of higher interest rates. I wouldn’t be surprised if we see the potential for lower rates as we head into the summer months.

Even after a dozen rate hikes by the Fed over the last three years followed by no increases, bond yields still remain at relatively low levels, with the long bond.

New Classes of Double Digit Income Securities

It's not surprising to see new classes of securities emerge that are custom-tailored to pay much-higher yields than traditional investment to satisfy the appetite of income-oriented investors.

Many folks need a lot better than 4% to 5% to meet their retirement goals, and therefore will take some risk to achieve higher yields.

I want to introduce a class of security that fits right into our search for listed securities that pay out a dividend yield of at least 9%, with the goal of obtaining another 15% upside appreciation in a one-year period. I'm talking about managed option income funds.

These funds buy stocks and sell, or "write," options on them, pocketing the payments, or "premium." With that income, some funds are already yielding 9%-11%, which is awfully attractive in today's low-yield market. Just this year alone, Wall Street has more than $9 billion for some 15 closed-end "buy-write" or "covered call" funds that use this strategy and that are all listed on the NYSE.

The number of available option income funds will grow to more than 25 by over the next year, providing us many choices. Most of the current funds went IPO 2 years ago and underperformed due to the influx of new funds in a sloppy market. But starting in 2006 they began to stabilize with the broader market and are, in my view, starting to look attractive.

This is not the first time option income funds have made their way to Wall Street. They were once popular in the '80s, but fund managers back then only bought stocks that carried the highest premiums, which meant they were in the riskiest stocks. The crash of 1987 brought an end to that wild west strategy, and today's managers shoot for solid underlying stock performance and not just ballistic income.

Various funds take different approaches to how they execute their covered call strategies. Some will buy dividend-paying stocks and sell only index options against the portfolio. This way they never run the risk of being called away.

Pretty smart, huh?

Other funds combine dividend-paying stocks with convertible bonds to lower the volatility. One such name in the group that has caught my eye is the S&P 500 Covered Call Fund (BEP). It invests in all the common stocks that make up the S&P 500, and then sells the SPDR calls against the basket of stocks. Because of the volatility in the market this year, the option premiums have expanded, providing for excellent yields.

Currently, this fund, which carries a $300 million market cap, has an average annual yield of 10.1% -- not bad for a managed option account that pays monthly. And if the market just keeps grinding gradually higher, as I believe it will, then this strategy is appropriate for our model portfolio.

Another well-managed option income fund is the BlackRock Global Opportunities Equity Trust (BOE), which sports a yield of 8.1%. The fund buys foreign stocks and sells covered calls on them all over the globe, so you can have some foreign exposure that pays well at the same time.

When we are selling covered calls on common stocks, we want those underlying stocks to appreciate, but not so quickly as to have the stock called away. The idea is to try to capture the call premium each month without losing the stock. This way you maintain long-term capital appreciation on the underlying common stock while using mini-rallies to sell covered calls and take in premium. It's very much a timing game with this strategy.

Risk vs. Reward

Keep in mind that option income funds carry higher degrees of risk than most other types of income vehicles. The underlying holdings are stocks, which are more volatile than bonds and have a higher risk of losing your principle. But when rates are low, such as we're seeing in the current environment, then the only way you are going to generate more income is to take more risk. There is no free lunch, but good research and good timing can make the difference.

In essence, by investing in option income funds, investors are willing to forgo big gains when the market rallies in lieu of higher current income. In periods where the market rallies strongly, you can bet most of the stocks will be called away, meaning the fund manager has to put on new positions at higher, less-attractive levels.

When purchasing option income funds, I recommend that you resist getting in on any IPOs. As brand-new funds, they haven't yet set their dividend payout, much less invested the monies they have raised. Also, the underwriting fees, as much as 8%, are buried into the initial offering price. Older closed-end funds have already sold off to reflect those fees, so buy the seasoned funds that have been public for at least six months.

This is just another way you can diversify your income-oriented assets and get the kind of returns we need to accomplish our retirement goals. Don't settle for 5% when there are astute methods by which we can double that yield and still grow our assets.

If you’re looking for high yields like these option income funds, then check out this special offer on my newsletter, The 25% Cash Machine, by clicking here.

Stay tuned for more.

Bryan

One overlooked corner of high income paying investments is in the once rarified air of master limited partnerships (MLPs).

These are limited partnerships that are publicly traded on the security exchanges. They combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.

And these babies are only taxed once at the corporate level leaving plenty of cash to pay back in the form of dividends to its shareholders.

Master Limited Partnerships (MLPs)

Never heard of an MLP? That’s not unusual. They don’t show up on the radar screen of most individual investors.

From the outside, they look complicated. They don’t get played up by the talking heads on TV. And, they suffered a big reputation hit in the 80’s and 90’s when many MLPs were involved in a number of investment scams. Secret deals. Serious debt problems. A few big partners got left holding the bag.

MLPs were once only the investment playground for the rich and big institutions. All of that’s changed now.

Today, MLPs have been cleaned up and have gone main stream. Most of them are traded on the New York Stock Exchange.

You can purchase shares directly from your broker. Ownership is in the form of units as opposed to shares which in effect makes you a limited partner.

MLPs are limited partnerships whose interests (limited partner units) are traded on public exchange just like corporate stock (shares). MLPs consist of a general partner (GP) and limited partners (LPs).

Why Do I Like Master Limited Partnerships?

First, they pay a nice high yield. Usually 7% to 9% and most pay dividends on a quarterly basis. MLPs earnings are taxed only once, at the unit-holder level. By contrast, the earnings of most publicly traded corporations are taxed twice, once at the corporate level and once again at the shareholder level.

As a result, the MLP can pay out significantly more of its cash flow to you, the unit-holder.

Second, a number of MLPs are increasing their dividends. That’s because many MLPs are in mature, asset-rich businesses that generate large amounts of cash flow.

Third, they are relatively safe investments. Most MLPS are energy exploration and production companies, natural gas liquids businesses and pipelines. These businesses are not affected by the rise or fall of oil prices, and their rates are set by regulatory agencies, keeping them predictable and stable.

And fourth, unit-holders, in turn, enjoy real tax deferment. You get enhanced distributions of cash because of the tax shelter provided by the pass-through of the non-cash expenses, at a time when tax shelters are particularly hard to find. This means you will not pay taxes until it’s time to sell the MLP . . . perhaps in retirement when you are in a lower tax bracket.

This tax deferment can be a big plus for investors. While the explanation behind the deferment is too complicated to go into in this article, it’s worth noting that you will receive a separate IRS form from the partnership outlining the tax deferments making it easy for you or your tax adviser include it on your returns.

That’s why MLPs are good long-term investments. You’re not going to want to trade in and out of these companies.

What Do I Look For in an MLP?

First, I look for a MLP that’s paying a big distribution.
Most of the MLPs that I follow all pay out between 6% and 10% annually. Take Dorechester Minerals LP (DMLP) for one, which paid 8.70% this past year and is looking at a 9% plus forward looking dividend.

I look at the financial strength of the partnership. In particular, I keep an eye out for debt. Any partnership carrying a debt-to-capital ratio below 60% is a safe play by me. Another company I follow, Energy Transfer Partners LP (ETP) carries less than a 50% debt-to-capital ratio while paying a growing dividend of 7.5%.

I also look for companies with good management.
Terra Nitrogen Co. LP (TNH) fits that profile. A company engaged in the business of manufacturing fertilizer, has a solid management team and a good long term growth record. TNH has doubled its stock price over the last year while paying out a nice 7.6% dividend.

And finally, I like to go with companies that are in the safe and mature businesses, less exposed to the wild swings in commodities. Pipeline companies are a good example of a relatively safe bet because their prices are regulated. A good name is Valero LP (VLI), a company involved in the energy production and pipeline business with a great track record, and it pays a decent 6% dividend.

MLPs—High Dividend Payments and Steady Price Appreciation

Like any equity, there are risks to MLPs including lack of capitalization, changing regulatory environment and any kind of major economic downturn.

Their prices could turn down if interest rates rise too rapidly. But unlike bonds, MLP prices are regulated, giving them a softer landing and slow rate of change.

So if you’re looking for an investment with reasonable price appreciation while getting paid a nice dividend and with less volatility than the average large cap stock, then consider Master Limited Partnerships.

Combine that with the ability to defer tax payments, MLPs look like one investment that should be in everyone’s portfolio.

If you’re interested in finding out more about Master Limited Partnerships and a whole insight into high yield income investments, then click here to find out more about The 25% Cash Machine.

Bryan