In the first two articles of this series, we established a steady and pretty smooth monthly high-dividend income stream using a variety of monthly-paying and quarterly-paying high-dividend stocks.
Each article added 10 new stocks, at a cost of $10,000 each, ($100K in total value), for a total of $200K invested thus far:
Monthly Dividend Payers (Part 1):
Quarterly Dividend Payers (Part 2):
(Please refer to the previous two articles for more details about the 20 stocks in the two tables above.)
In this final article, we're also including some debt issues, and some closed-end funds - CEFs, to round out the portfolio to an invested total of $300K. Each position represents 3.33% of the $300K portfolio.
We'll also give you relative valuations and financial metrics for each of these 10 new income vehicles, which are:
Colony Capital Series C Preferred shares, (CLNY-C), NuStar Logistics LP, Hannon Armstrong (HASI), Navios Maritime Midstream Partners LP (NAP), Seaspan Series E Preferred shares, (SSW-E), Columbia Seligman Premium Tech Fund, (STK), Hercules Capital, (HTGC), MFA Financial Series B Preferred shares, (MFA-B), Brookfield Infrastructure Partners LP (BIP), and AllianceBernstein Global High Income Fund, (AWF).
Summary of New Holdings: We faced two main challenges in trying to maintain an even monthly income stream and attractive sector allocation:
1. Finding attractive, high-yielding income vehicles which pay in a January-April-July-October cycle was difficult. We ended up with a trifecta of preferred REIT shares, CLNY-C, a Financial diversified REIT, HASI, and a "baby bond" from the Energy patch, NSS.
2. Finding high yields in the tech universe has never been easy, so we opted for a combo of a closed-end tech fund, STK, and a Business Development Corp., (otherwise known as BDCs), HTGC. We previously added another tech BDC, Horizon Technology Finance (HRZN), in part 1 of this series.
Preferred/Baby Bonds: As usual, the preferred shares have the best dividend coverage, in this case ranging from 2.14x for SSW-E to 3.56x for CLNY-C, to a bodacious 20.93x coverage factor for MFA-B. (Preferred dividends are usually deducted from income, in order to determine net income for common shareholders.)
NSS is what's known as a "baby bond" due to its $25.00 par value. It trades on the NYSE, and was rated Ba2 by Moody's and B+ by S&P, as of 2/18/16. NuStar Energy LP (NS) is the parent company of NuStar Logistics.
Looking at NS's cash flow statement revealed a 1x coverage of this issue, which is an interesting hybrid - it's callable starting 1/15/18, but doesn't mature until 1/15/43. However, it will then pay a floating rate that is 673.4 basis points above the three-month LIBOR rate, which should insulate investors from rate risk.
(We'll address the premium valuations of all four of these issues in the Valuations section further on in this article.)
Final Dividend Calendar: So, how did we end up? As we've mentioned before, most high-dividend stocks tend to pay in a February-May-August-November cycle, so it's not surprising that these months had the highest income, ranging from around $3,473.00 to $3,700.00.
The March-June-September-December cycle came in second, with a monthly income range of around $3,075.00 to $3,348.00.
The more sparse January-April-July-October cycle was our lowest-paying group, with monthly income range of $3,161.00.
The 11 monthly-paying high-dividend stocks we utilized in this portfolio served to give us a steady monthly income base of around $714.00, which represents 36% of this portfolio's total annual income.
Upcoming Dividends: As with part 2 of this series, we built a table of the approximate next ex-dividend and pay dates for these new vehicles, together with dividend coverage.
Our High Dividend Stocks By Sector Tables track all of the shares in this table.
Sector Review: Even with utilizing the two tech BDCs, HRZN and HTGC, and the tech closed-end fund, STK, we still only reached around half of the market's current 20% Tech sector allocation.
We're also under-represented in the industrials, by our own doing. We classified Enviva Partners (EVA) as a basic materials stock, but the financial websites list it as an industrial. But, come on, these guys make wood chips, that sounds like a rather "basic material" to us.
Not surprisingly, we ended up with heavier allocations in typical high-dividend-yielding sectors - financials, basic materials and real estate.
Gadzooks! It looks like we're not represented at all in the energy sector - How could this happen?!
Here's where we enter the wonderful "chasing your tail" world of sector designations. Our services sector allocation actually includes energy-related issues - NAP, a tanker company, NSS - whose parent company is a midstream Energy firm, and KNOP, a tanker shuttle company. And then there's Royal Dutch Shell (RDS.A) (RDS.B) which is listed as a basic materials company.
Closed-End Funds Details: STK is invested in 52 holdings (100% US-listed equities) and has a total expense ratio of 1.17%, so your actual net yield would be 9.17%. Here are its top holdings.
AWF has a total expense ratio of 1.01% so your actual net yield would be 6.87%. It uses leverage of 6.61%, which is actually quite low for income closed-end funds, many of which have leverage in the 30%-plus range. Here are its top holdings:
Here are AFW's debt holdings breakdown by style:
AFW invests in medium-term duration debt instruments, which are mainly below investment grade ratings, in order to achieve higher yields:
(Source: cefconnect.com)
Valuations: Since this is such a mixed bag of investments, we decided to contrast their valuations on a premium vs. discount basis. Premium valuations are listed as positive percentages, above book value, net asset value, or a preferred stock's call value.
Conversely, those shares that are selling at a discount are listed with a negative percentage, such -14.12% for NAP and -9.26% for AWF.
We also listed each vehicle's industry average premium/discount to get a better, "apples-to-apples" sense of how they're currently valued.
It appears that, on that basis, NAP and AWF are the most undervalued, with STK following. Even though BIP is commanding a 110% price/book premium, that's still cheaper than its industry average of 189%. HASI and HTGC look the most overvalued, and the three preferred shares are all less than 1% above their $25 call value, while NSS is 2.6% above its $25 call value:
Financials: We've also listed management efficiency ratios, debt/equity ratios and operating margins for the underlying equities and common stocks in this group.
Parting Thoughts:
1. We kept the purchases at $10K each to simplify this illustration. You'll want to tweak it for your own needs.
2. Don't ever buy a stock or a bond just because it pays in a certain monthly cycle. Do your due diligence, and, if you can't find an attractive payer in your target months, try to allocate more funds to stocks you prefer, which pay in adjacent months.
3. The one big thing this model portfolio is missing is cash. How much cash are you comfortable holding? Keep some powder dry for the next pullback so you can buy at more attractive prices.
4. We kept each position at a 3.33% of the portfolio for diversification. The old "don't keep all your eggs in one basket" adage is important in building a safe portfolio.
We welcome you to visit our website:
In addition to maintaining Dividend By Sector Tables, we also maintain a Covered Calls Table, which tracks call option-selling trades for over 25 different stocks daily.
We also maintain a Cash Secured Puts Table, where you can see more details for over 25 income-producing, put-selling trades.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
Double Dividend Stocks
Robert Hauver, MBA, aka “Double Dividend Stocks” was VP of Finance for an industry-leading corporation for 18 years and has been investing for more than 30 years. He focuses on undercovered and undervalued income vehicles and he leads the investing group Hidden Dividend Stocks Plus.
With Hidden Dividend Stocks Plus he scours the world's markets to find solid income opportunities with dividend yields ranging from 5% to 10% or more, backed by strong earnings. Features include: a portfolio with up to 40 holdings at a time including links to associated articles, a dividend calendar, weekly research articles, exclusive ideas, and trade alerts. Learn More.
Analyst’s Disclosure: I am/we are long BIP, NAP, EVA, HRZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
We're also long MFA-B and NSS
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
