Five Burning Questions (and Answers) for Income Investors
Even the most persistent toddler couldn’t hold a candle to D&I Daily readers.
Ever since we launched, you’ve been firing off questions in rapid succession… Why? Why? Why?
Am I annoyed? Not the least bit. As I told you last month, I actually couldn’t be happier about it.
Why? (Sorry, I couldn’t resist.)
Because it means there’s a void in the marketplace for honest, unbiased information. By no means do I plan on ignoring that need, either.
Just like I did last month, I’m going to take some time out from our regularly scheduled commentary and research to answer your questions.
If you want a chance at instant internet fame in next month’s Mailbag, speak up!
Drop us a line at feedback@DividendsAndIncomeDaily.com with your questions, comments and biting criticisms. We’re on the ready and eager to respond to each one.
Remember, though, I can’t provide individual investment advice. But I can answer your general questions, which means you just need to be clever with your wording. (Wink. Wink.)
Without further ado…
Comment: Your post warning about the problems with leveraged REITs, and specifically the “leverage on steroids” version, was excellent. My experience has been that avoiding big blow-ups via high-risk vehicles is at least as important as finding quality investments in achieving satisfactory returns. – D.C.
I’m a sucker for positive reinforcement, so thanks for the kind words. And thanks for raising a key point about investing…
Forget “at least as important,” as you put it. Avoiding blowups is more important than finding quality investments.
After all, if we lose all our capital in high-risk opportunities, it won’t matter if we find a high-quality one. We won’t have any money to take advantage of it.
Accordingly, you can count on us to keep providing timely research and warnings about income investments that could be harmful to your wealth.
As far as the situation with mortgage REITs – specifically, UBS’s ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSE: MORL) – I do want to bring some new research to your attention.
Hat tip to fixed income manager, David Schawel, for sharing this analogy and key chart via the CFA Institute blog:
“In short, there’s an insatiable appetite for yield in the fixed-income markets. Think of it as being like a ‘yield piñata’: Investors far and wide are scrambling to pick up as much yield as possible before it’s all gone. Investment-grade corporate bonds, high-yield, leveraged loans, non-agency MBS, and commercial mortgage-backed securities (CMBS) are just a few asset classes that have seen prices charge higher.
“Both institutional and retail investors have been smitten with mortgage REITs…The chart below from J.P. Morgan shows mortgage REIT MBS holdings over the past 10 years in a hockey stick-shaped chart. Does this look healthy?”
I’d say that chart’s downright scary, David.
As I said in my original write-up, leverage cuts both ways. When mortgage REITs roll over, investors are going to get stabbed to death if they’re not careful. Consider yourself warned!
Question: I have frequently been stymied when trying to compare stocks by their dividend growth history on my go-to page, Yahoo Finance. Do you have a suggestion for how to quickly find a reasonably comprehensive table for any dividend paying stock? – B.R.
I’m from New Jersey, so of course I’ve got a guy for you. Or in this case, a website.
Check out Morningstar.com. It’s got the most user-friendly, interactive financial information available on the web. And it’s free.
For comparing potential stocks side-by-side, be sure to check out the Stock Compare tool here. The “Valuation” option in the results tab should help you out. It provides a comparison of dividend yields and, more importantly, five-year dividend growth rates.
Question: Why are you only going to do the Dividend Stock Wars once per month? How about once per week? – J.N.
We don’t want to spoil you!
Honestly, though, conducting the research for each battle takes considerable time. But we’ll see if we can hire some cheap interns to help us up the frequency.
Or maybe we can get some volunteers from one of the political parties. They’re all about battles. And literally hundreds are going to be out of work come next week. Stay tuned.
Questions: Can you include closed-end funds in recommendations? They seem perfect for retirees looking for monthly dividends. – J.W.
What are the problems and pitfalls regarding closed-end stocks? – M.S.
I wouldn’t say “perfect.” Not now, at least.
As a result of investors’ insatiable hunger for yield, they’re bidding up closed-end funds to expensive levels. Like, Louis Vuitton expensive.
Take the PIMCO High Income Fund (NYSE: PHK), for example. It’s trading at a whopping 43% premium to Net Asset Value (NAV). I don’t care if it does yield 10.45%. It’s not worth paying that much of a premium for it.
I’m actually finishing up a research piece about the troubling situation in the closed-end market and how best to proceed. I plan to share it within the next two weeks or so. When I do, I’ll make sure to highlight “the problems and pitfalls” and include some timely recommendations, too. Sound good?
That’s it for today. Be sure to submit your questions to feedback@DividendsAndIncomeDaily.com before our next installment of the D&I Daily Mailbag.