Two ETF's I like. Good income and likely capital gain as well.

Almost from the start of the STI Hedge Fund two ETF's have been in the holdings.  Both of them pay monthly dividends and if you know me you know how I like monthly dividends. Both of them have never missed a monthly payment and both of them have preformed as I have expected.  Currently both of them are also attractively priced in my opinion. The ETF's, JNK and PFF.  An ETF, for those not familiar is nothing more than a market traded mutual fund.  The difference is that the market decides the price of a ETF during the day's trading versus with a mutual fund the price is set a day's trading end when all the underlying stocks are priced and the mutual daily asset value is set. ETF's have the advantage of high liquidity and can be anytime the market is open.

 

JNK...Which basically stands for Junk, as in junk bonds, is what is considered a high yield ETF.   The ETF has over 200 holdings that are more considered industrial than anything else. Industrial in this case could range from a true industrial business, to a hospital, or a casino operation. These are corporate bonds that are generally not BBB rated or above, even thought the ETF does not some of the higher ones as well. Most are BB and below.  However with that said defaults are rare and missed payments on bonds are rare as well. The beauty of this ETF is that risk is spread over so many holdings, even if one or two default the value will not collapse. I also consider high yield corporate bonds as a hedge against inflation as when inflation heats up the underlying companies can raise prices and pay the bonds off easier with cheaper money. Of course you might see some decline in value, but that could be offset with the lessening of risk default. JNK is currently paying around 8.3%, note the monthly payout varies some due to the timing of underlying corporate payments.  I also like the low expense ratio of .40% due to the lack of rotation in bond holdings. JNK would make a good selection to diversify your holdings and add some nice yield.  One final note, if a bond defaults the holder normally is first in line for assets, so all would not be lost. JNK is currently selling around $37.50 and I believe fair value is around $40.  You could have bought JNK at $26 about three years ago.

 

PFF..Is a preferred stock holding ETF.  In this case the majority of the preferred stocks are financial stocks, mostly banks.  There are some international holdings as well such as HBSC. Frankly this ETF might be as safe as they come unless you are of the opinion that banks are going out of business.  Preferred stocks are a step below bonds on the stack of who gets the assets when companies bankrupt,  However again the risk is small that anything in this ETF is going to default. PFF pays out a current yield of about 7.2% and again since the underlying stocks pay on a staggered basis the payout's are not the same each month.  The expense ratio is low at .48% as well.  PFF is selling around $36 and fair value in my opinion is around $39.  You could have bought PFF at $18 about three years ago.

 

All note that neither of these ETF holdings missed a single payment during the recent financial crisis.  Of course as noted you could have bought them much cheaper a few years earlier and be sitting on some nice capital gains as well as much higher invested capital yield.

 

As noted I currently hold long or as options JNK and PFF.

Be careful with Electric Utilties

As a dividend stock investor I was one of the first to invest in electric utilities over a year ago when most investors were selling them off due to concerns over pending cap and trade legislation on the federal level. Indeed there was reason there for fear since cap and trade would hurt utilities profits significantly by increasing costs and not having a release on the other end for regulated electrics to pick up the added costs in added rate increases. But I was confident at the time the votes were not there to pass the onerous regulation.  I mention regulated utilizes because regulated utilities are tied to state regulators for their rates and costs adjustments. Unregulated, where I no longer invest due to the high uncertainty, could likely have added the additional costs into their rate structure. But since many unregulated's do not have a monopoly position in their markets you can be sure customers would have looked for other sources for their energy needs. Recently investing in utilities is popular, since people see them as safe higher yield and a option for those who would normally invest in US treasuries. With all this noted you still need to be very careful when investing in regulated utilities. 

 

When considering investing in regulated utilities all states are not the same. The regulatory atmosphere for many states is downright negative for many regulated electric utilities.  Many states in the western and northeastern part of the country have basically inserted loads of harsh environmental rules on generation of power, some have even placed some social regulations as well. For instance First Energy, symbol FE, is regulated by Maryland regulators who are some of the most hard edged in the country. California can be added to that list. So selection is important so below are the only electric utilities I would consider currently.

 

Southern Company...symbol SO... absolutely the best utility in the country, maybe the safest stock in the country. SO not only has a good growth area in Georgia, Mississippi, and Alabama, they have the best regulatory atmosphere period.  Best management in the utility industry.

 

Scana Corp...symbol SCG...maybe the best regulatory situation in the country being based in South Carolina. If the service area for SCG was as large as SO I would deem it the best utility investment. Still a safe investment for safety concerned investors. SCG just does not do anything stupid.

 

Duke Energy/Progress Energy..symbol DUK..Duke and Progress will be merging soon despite all the hoopla over the merger not going through. It is difficult to argue that customers will not be protected when a company is regulated.  DUK will get improved management once the merger is completed. The current DUK CEO is just not top drawer in my opinion, while the current CEO of Progress who is taking over after the merger is top drawer. The only thing holding the combined company back is the silly rules requiring investments in bio mass and solar energy production in North Carolina. Of course the company will get to add the costs back to rates so customers foot the bill for these rules. New leadership in North Carolina will likely lessen these rules and if so will move DUK to the top of the list.

  

UTG..Reeves Utility Fund...I opined on this closed end fund earlier. The fund contains a good number of solid electric utilities as well as other stocks for solid dividend yield.  Good fund for diversification of investing in this sector. For full report check out my blog for earlier posting.

 

I either own as a long or option SO and DUK.

A sweet little income producer.

Realty Income, symbol O, has been in my portfolio for many years. I learned of this company from Morningstar research and liked what I read. Further research confirmed to me their belief that Realty Income was as good a company as you could buy when it comes to being shareholder friendly. Realty Income does shareholder reports that lets you know everything that is going on in the company, good and bad. They continually look to squeeze every single dollar of profit out of their portfolio of real estate holdings.

 

The triple net leases they use basically puts any increases in property taxes and many expenses on the local renter. It also, in my opinion, makes the renter a partner with the building owner and that makes for good relationships long term.  Realty Income in return will work with renters to keep them renting since they like and encourage long term leases and long term partners.  This real estate investment trust specializes in single tenant free standing buildings such as convenience stores, small restaurants, and other retail that are in high traffic locations. They have in the last year bought some larger multi-tenant buildings, but for the most part it is single tenant. They also are mortgage free desiring to buy buildings with shareholder money and free cash flow without taking on debt.

 

However the thing I like most about Realty Income is that they pay a monthly dividend. Now that is what I call shareholder friendly. The company says right up front they like shareholders who are buy and holders and reward such shareholders. They also increase their dividend quarterly and have done so for so long I no longer keep count. Oh, it is a small increase, but it IS an increase. Currently the stock is selling around $31.80 per share and pays a $1.74225 annual dividend about 5.5%. It is not a tax advantaged dividend, but it is solid and growing. For many retirees who have monthly bills this stock helps you pay for them.

 

Realty Income has traded between $30 and $35 per share for a good bit now and frankly I believe it is fairly priced in that range. A reliable dividend payer with very low risk should trade about 5.0% dividend or so and that is where it is now. If the market trends lower Realty Income will continue to pay you a nice dividend, if the market trends higher you could sell for a nice capital gain.

 

Now if you trade call options, and basically anyone who has an account can qualify, there is a sweet little kicker here to boost your income.  Realty Income has monthly call options and generally the option price runs from a low of 15 cents per share to 75 cents per share. Of course the price varies depending on volatility in the market and how close Realty Income gets to the $35 strike price. But added to the current 14.5 cents monthly dividend you could double, triple, sometimes more your monthly take.  Add in if the stock hits $35 and gets called away you get the $1.50 or so of capital gains too.  Then you just wait until the price drifts down again and buy in and do it all over again. As a monthly dividend there also is no need to deal with call options and ex-dividend dates  As a trader this is one way I make double digit annual profits on stocks and frankly you can too.

 

I own Realty Income long, and as a call and put option.

40 Year Class Reunion...Richlands High School Class of 1971

My high school class just had our 40th high school reunion this past weekend. We had our first one 30 years ago, a less attended one twenty years ago,  and had not had one since.  Your high school classmates are people who you grew up with you,  sometimes attended the same church , and who most likely knew your parents.  All of you lived in or near a town or city where most people even at age of late fifties still have links.  I suppose they are like long lost family in a way.

 

That late 50's age thing makes your thinking different. I watched my father attend his last class reunion, which happened to be his 70th and the thinking there was different too. Most people who make it to a 70th class reunion are just glad to be alive, everything else in life has faded in importance. At our 10th reunion classmates wanted to know where you were living and what job you had at the time, and have some fun. Our 40th class reunion found most people past what lifestyle someone has created, and more towards just thrilled to see you. A most common question is " have you retired", usually followed with " be glad when I can". Seems careers and jobs, which meant so much 30 years ago have now become a means to an end. Maybe that was what they were all along?  

 

I had a head start on this reunion since I was part of the steering committee that helped put it together .  Early on we had all kinds of ideas about what to do, how to structure the event, and how to create fun there.  All the planning for activities to do fades fairly quickly in importance when you just find the most enjoyable thing is to catch on one another's life.  You tend to want to know if one another's parents are alive, catch up about what is going on in the home town, and most importantly how is your health.  At 58 years old if you got reasonably good health you know you have won the real lottery in life. Anyone who is worried about how they look or some regrettable action they have done that might come out find out quickly those things mean nothing anymore.  I expect they meant little all along we just did not know it .

 

Many of us did some of the reunion stuff, attended the high school homecoming game as a group , toured the hometown, had a nice BBQ dinner the second night of the reunion and had a DJ who played some of the "old songs" . Of all the things we did frankly two of the most enjoyable was when we took over a local restaurant in town after the annual Homecoming game and just got to talk and laugh and Saturday night when everyone just enjoyed each other's company.

 

I attended my home church in town Sunday morning and got to see people who I have known at the church since being a youngster.  Being " home" I had lunch at the one of the few restaurants in town that was there when I was in high school,  Arnold's Family Restaurant.  Arnold's is old enough to be legend now and I took in the place's famous "Big A burger".

 

I find myself emotionally attached this town and it's citizens and to these 50 plus people at my reunion.  They know my past, they know many of the mistakes I made when young, and they care for me anyway. Sorta like family as I noted earlier.  You also find out that you now want to keep up with these people with whom you share a common past.  As you narrow life down to what you really like to do and learn to not waste precious time on things that do not matter.  You have proved the things you needed proving and lost the friends you needed losing.

 

Like my father's 70th reunion at my 40th you can now see that other common destiny down the road.  Nothing like knowing that life ends to focus your mind on the important.  The important is relationships and in this case people with whom you have known for over half a century.  You also understand that whatever you have gained from life blessings that those blessings have little value unless you can share them.  

 

In the end I think back to when I was part of my high school basketball team. Win or lose just being part of the group gave you a sense of belonging, a sense of sharing the same destiny, the sense of enjoying each other as much as possible.   My hometown high school in 1971 could easily be mistaken for Hickory High in the movie Hoosiers.  Same small basketball gym and same small number of students in school. So in the end I want to say to my classmates, and many others I grew up with there in Richlands,  what coach Norman Dale said to his team at the end of that movie, "I love you guys".

 

 

Municipal bonds vs. US Treasuries

Try as I may I can not understand why investors and savers buy US Treasuries at  .10% which is in all truth paying the US government to hold your money when the same investor can buy North Carolina municipal bonds in the 4.0% to 5.0% range from AAA rated issuers. Add in unlike US Treasuries municipal bonds are triple tax free if you live in North Carolina.  The State of North Carolina and many state agencies can not declare bankruptcy and must pay interest and indebtedness on a timely basis, just like the US government.  These bonds are safe and with the tax advantages of no state and federal tax the effective rate on a 5% bond is 7.35% in a 28% federal and 7% state tax bracket. 

 

 The bond scarecrows of last winter have been proved wrong as most municipals have regained their capital value standing and continue to pay dividends.  In my municipal bond portfolio currently there are well over 50 different issuers in the state of North Carolina and not a single one is even near default and all have never missed a bond payment in over 30 years of my owning municipal bonds. In fact if you had kept your cool back in this past winter and even more so in the big panic of late 2008 and early 2009 and bought municipal bonds then you could also be sitting on some fat capital gains. For instance I bought some Carteret County school bonds in late 2008 for 75 cents on the dollar with a coupon paying 4.5% and now they are valued at 105 cents on the dollar.  That is a 40% gain in bond value in three years again pointing out the time to buy bonds is when people are either selling them in a panic or when rates are higher than normal.  Of course I am not selling as my bond interest on capital invested is what would be a 8.8% taxable yield. Try getting that in a no risk environment nowadays. When the bond matures in 2025 I will get 100 cents on the dollar for the 75 cents invested so I will still get my capital gain.

 

There are two types of municipal bonds, revenue bonds and general obligation bonds known as GO's. Revenue bonds are based on entities like airports, hospitals, electric utility systems or nursing homes. The interest is paid out of operating revenues of these institutions and the principal paid back when due via a sinking fund that pays off the indebtedness over time as required. Revenue bonds are considered as having more risk, but I consider them safe if you choose wisely. Take an airport bond.  An airport like Raleigh-Durham builds a building and pays for it via tickets from passengers and frankly can raise prices on tickets anytime needed to pay for the bonds. Safe bond in my opinion unless the airport goes out of business which frankly will not happen.  Many county hospitals issue revenue bonds,  the hospital just adds into the cost of service the cost of bond payments.  Of course you again do some research and choose carefully when buying.  For instance I own some Wake Med bonds and we all know that hospital is not going out of business. General Obligation bonds such as the Carteret County school bond I mentioned earlier are considered super safe, since schools are here forever and the county pays for these via general property tax. So when the county decides the tax rate they just add in bond service into their annual budget and raise taxes accordingly.  Other GO's include water systems and road bonds. 

 

One other category of municipal bonds that many overlook are federal mandated triple tax free offshore bonds.  I currently own bonds issued on Puerto Rico, Guam, and the Virgin Islands.  To help the economy in these areas the federal government long ago passed law that makes the interest on these bonds triple tax free to anybody in any state.  The risk here is a bit greater, but so is the coupon on the bonds.  Rarely do you find one paying less than 5%. A good bond portfolio could mix in some of these and be considered good diversification. 

 

 Smart investors use municipals to do what I suggested back in an earlier posting and "salt" away some safe money into these for future income and good sleep at night.  So next time you consider US Treasuries take a look at municipals first. 

 

Full disclosure: I own NC municipal bonds.

 

 

                

Getting my picture on the front of Rolling Stone.

This posting is not about getting my picture on the front of Rolling Stone, but the more mundane thought of having my picture or name somewhere inside some corporate annual report.  Taking that a step further the fact is that I likely have absolutely no chance of either ever occurring and that my readers is one reason why corporations are not liked by many people.

 

Let me explain. I have over 36 years of business experience. During those over three decades I have worked with small business extensively and know I have as good an understanding of how they operate and the daily problems with which they deal as anybody. I have operated a small business for a time as well.  I have worked in over a dozen different county business environments from growing to stagnant. Have been a member of and chaired several professional and civic boards and still currently sit on a few.  Finally I likely know as much about investing and corporate structure as anyone having been an active investor for over 32 years .

 

All that is not to blow up my resume, but to point out I believe I am qualified to sit on any corporate board most anywhere in the medium to small company range. To be honest I have actually applied and sent my resume to some just to see if they would consider me out of curiosity.  At this point not a single one has offered me to sit on their board. No one has even considered me for all I know.

 

Now it is not necessarily me that is not being offered to sit on these boards, it is many others in the general public who have even more qualifications to sit on these board who do not get invitations either. These boards make decisions about the business direction of companies, make decisions about corporate pay, and make decisions about issues where these companies interact with the public relations. Unfortunately for the most part almost no PUBLIC sits on these corporate boards. No one who actually lives and works in real public environments has any influence and say on these boards.

 

These same corporations wonder why they are so disliked by the public and this lack of public representation is a good reason why.  This frankly is the REAL reason why CEO pay is out of this world and make many in the public angry.  This is how companies make stupid marketing mistakes as well. You would think some of these corporations would actually want to avoid these PR problems. Truth be told corporate boards, both big and small corporations, are populated with friends, close business associates, and others who CEO's know will do their bidding.  Add in that many of these people who sit on corporate boards sits on several boards at one time as well. Actually many CEO's sit on each other's board. So we really have no real public oversight of corporations, and lots of "you take care of me I take care of you" relationships. There would seem to be room for some smart attorneys to take many boards to court over fiduciary responsibility, but maybe the legal side is in on the game too.

 

Let's add in here too that many government, semi-public, and educational boards have the same problem, but not to the extent that public corporation boards do however.

 

When doing research for my hedge fund I spend time reading many annual reports and  note who is on these boards and take into account such when deciding if the company has anything close to decent oversight. When I see decent oversight you will note I will say these boards are shareholder friendly.  Maybe I am wasting my time, but I fill out annual board voting and an selective about who I vote for and against.

 

Now back to the original point of this post, how about one or more of you people who pick corporate boards pick me for your board and make me a liar here. Since I do full exclosure I will note that too.  Besides I could use the income and perks:)

                

Fourth Quarter Trading Portfolio

Twenty two holdings to be trimmed to 17 by year end.  We continue to take out non performers and concentrate on blue chip dividend stocks. That concentrates holdings in each stock at a higher value, which not perfect is good for this economic environment.

 

 

AGNC...I continue to like the agency reits in this interest rate environment. High dividend and solid capital preservation. Nice high options.

 

ARCC...This stock is slated to be sold out of the portfolio by the end of the year. However I still like it as a holding once the economy improves.  This BDC is the best of the breed.

 

BCE... Has held up very well in this market. Continues to produce portfolio income and is in Canada away from political issues in US. Like owning AT&T in Canada.

 

CTL..great value stock with high dividend. I own it at too high a price but will keep it due to value. Is best of breed for legacy telecom carriers and is doing a good job with assets.

 

DUK..has also held up well in price during tough market. As merger gets closer investors begin to consider upside in stock via expense savings and CEO change.  Possible upside here.

 

ERF..I am deep in this stock as well price wise, but will keep it for it's high dividend and value. Keeps producing income for portfolio. Second largest holding.

 

FTR.. to be sold out of portfolio by year end. Has had some earnings problems of late.

 

GS.. What a huge trading mistake. Deep in the money here and will sell out of portfolio by year end.

 

HCN... another stock that has held up well. Good dividend and income producer for portfolio.  Continues to be undervalued.

 

HTS... another agency reit. I bought this one before I decided to prefer AGNC.  Will likely sell this one out of portfolio. Good stock however. NC based company.

 

JNK.. continues to be a good monthly dividend, despite not being a solid income producer for the portfolio. Will keep for future recovery. Third largest holding

 

LO..largest holding and solid performer income and dividend wise. Has held value plus since stock market downturn. Keeper. Is also undervalued. On a side note LO makes the brand of cigs Obama smokes.

 

MO..Ditto for holding value during downtown and good income producer too. Government guaranteed annuity.

 

NNN..Solid Solid Solid. This stock continues to be a pleasant surprise as it has gained value during downturn and just keeps on being a great performer. Might now be best real estate company in the country.

 

O..A tad bit overvalued, but the monthly dividend and solid performer due to shareholder friendly company makes it a long term holding.  I continue to like O very much.

 

PFF..down a good bit since it has financial stocks in the portfolio. But I will keep it for recovery and monthly dividend. 

 

RAI...Tobacco stock that just hold values and keep adding income to the portfolio.

 

RRD..Has been a disappointment the last quarter. Good dividend, but I am likely selling it out of portfolio by year end.

 

SCCO..way down in price and I am deep in the money. But I like copper and will keep it for recovery.  Frankly the market has made a mistake on copper use and this stock should rebound once that becomes apparent.

 

SO..My vote for safest stock on the planet. During downturn, during upswing it just does what it does best and keeps rewarding shareholders. Makes you sleep like a baby.

 

T..newest addition to the portfolio for safety and it has been just that. I added after t-mobile merger was put on ice and price got hit.

 

WIN,, Good dividend and ok options. Will likely keep it for awhile since it should recover. Good company fundamental wise.

 

PM..Phillip Morris is on the watch list as it gets sold off due to currency concerns and we might enter this stock if the price drops  more. PM is just a fabulous company with great management.