| There are five distinct categories of high yield | | | | future demand for oil and natural gas, where it |
| dividend investments to choose from that offer | | | | comes from and how it is distributed. With the |
| the best yields. They are: Real Estate Investment | | | | recent expansion of off shore oil exploration, and |
| Trusts (REITs), Master Limited Partnerships | | | | the increase in natural gas availability in the US, it |
| (MLPs), Business Development Companies (BDCs), | | | | would appear that all three areas: exploration, |
| Utilities, and certain high yield dividend paying | | | | development, and distribution will be healthy for |
| foreign equities. There are advantages and | | | | the foreseeable future unless interest rates rise |
| disadvantages to each, and there is a best and | | | | so quickly that they cause another recession |
| worst time to buy into each of these categories | | | | significantly reducing the demand for oil and |
| depending on where we are in the domestic | | | | natural gas. For the time being, it would appear |
| economic cycle, as well as what is happening | | | | that the market is still right for further increases |
| internationally. Given the unique situation that we | | | | in price per unit as well as increases in distributions |
| are in right now as we are just coming out of the | | | | in the MLP sector. |
| "great recession," which of these categories | | | | BDCs |
| offers the best opportunities for sustained high | | | | Business Development Companies are entities |
| yield and capital gains? After all, high income with | | | | created by the government to enable the |
| loss of equity is no income at all. Let's look at | | | | average investor to participate in the |
| each of these segments individually. | | | | development and growth of new businesses. Like |
| REITs | | | | REITs and MLPs, they too are tax advantaged |
| Real Estate Investment Trusts are tax | | | | and do not have to pay corporate income taxes, |
| advantaged entities that pool the money of | | | | and must pass along at least 90% of their |
| individual investors for the purpose of acquiring | | | | taxable income to shareholders. The best Business |
| and managing income producing properties. A | | | | Development Companies were essentially in |
| close relative is a mortgage real estate | | | | hibernation during the recession. Now that we are |
| investment trust which buys or originates loans | | | | coming out of the business downturn the quality |
| that are secured by real estate. In both cases | | | | BDCs have their choice of a multitude of |
| part of the reason for the higher than average | | | | businesses that are looking for money. By |
| payout is that, as long as they pay out 90% of | | | | carefully selecting which companies to add to their |
| their taxable income in dividends to the | | | | investment portfolios, BDCs have an opportunity |
| shareholders a REIT, or MREIT, pays no | | | | to grow and prosper as the economic cycle |
| corporate income taxes. As the economy picks | | | | improves. Over-extended or poorly managed |
| up, occupancy rates in malls, residential rental | | | | BDCs, and many venture capitalist type |
| properties, and commercial locations will improve, | | | | companies that had flourished during the boom |
| and subsequently returns on REITs should rise. | | | | years, when everything was growing, were |
| This is currently being anticipated by the market, | | | | weeded out during the recession. This leaves the |
| and share prices for REITs have been rising | | | | best managed and healthiest to prosper as the |
| accordingly despite the fact that unemployment is | | | | economy improves. When interest rates rise it will |
| still at or near 10% and significant improvement in | | | | put somewhat of a brake on what BDCs are able |
| occupancy rates has yet to materialize. When it | | | | to accomplish, but for right now the market is |
| does become a reality there should be a | | | | ripe and the best quality BDCs should thrive. |
| continued rise in share price in these real estate | | | | Utilities |
| oriented entities. Mortgage REITS, on the other | | | | Lets face it, quality utilities are considered a |
| hand, make their money by the spread between | | | | relatively a safe haven in just about any market. |
| the cost for them to borrow money, and the | | | | The key here is quality. There are some utilities |
| rates that they charge their customers. The | | | | that are paying high dividends due to the higher |
| historically low interest rate environment created | | | | risk. Others are paying a higher dividend because |
| by the FED Funds target rate, which has been at | | | | their focus is on dividends rather than |
| 0 to 0.25% since December 16, 2008, has enabled | | | | improvement in share price. Some are in growing |
| those MREITs, that survived the banking crisis and | | | | markets, others are in declining markets. Like |
| recession, to prosper in terms of share price. | | | | bonds dividend paying utilities tend to drop in |
| However, now that the economy seems to have | | | | share price as interest rates go up and security |
| turned the corner, and with many economists | | | | seeking investors leave utilities for the safety of |
| predicting that rates will be going up by the end | | | | treasuries, CDs and other "safer" investments. |
| of the year, there will be a time relatively soon | | | | Ironically, by going into a "secure" fixed income |
| that market perception, if past history is any | | | | equity, investors put their capital at risk if rates |
| judge of future results, will turn against MREITs. | | | | continue to climb. Investing in high quality utilities, |
| Despite the extraordinary high yields (some as | | | | for the risk averse investor, will serve them well |
| high as 15-20%) share prices will drop as these | | | | regardless of which way interest rates go. For |
| shares are sold off in anticipation of a more | | | | now, interest rates have no place to go but up, |
| difficult profit environment. In the past, this type | | | | so utilities are probably not the most |
| of sell off impacts the entire category regardless | | | | advantageous place to invest if one is looking for |
| of the fact that some MREITs are hedged against | | | | both high yield and capital gains, but it is not the |
| interest rate increases, some are only invested in | | | | riskiest place to be either. |
| government backed mortgages, and some are | | | | High Yield Foreign Stocks |
| invested in less risky mortgages than others. | | | | This is perhaps the most difficult area of the five. |
| Therefore, within the sub-category of REITS, | | | | Foreign equities for an American investor are |
| based on current market conditions, it would | | | | impacted not only by the quality of their |
| appear that as the economy improves, and | | | | management, but by currency fluctuations, foreign |
| unemployment declines, that the REITs invested | | | | economic cycles that may or may not be in |
| in brick and mortar buildings is the place to be | | | | concert with the US economy, and by securities |
| versus the MREITs that are invested in interest | | | | and exchange regulations that may be totally |
| rate sensitive mortgages. | | | | different than those in the United States. |
| MLPs | | | | Nevertheless there are some great opportunities |
| Master Limited Partnerships, like REITs were | | | | for high yields that cannot be ignored. In doing due |
| established by the government as tax | | | | diligence in foreign equities it is important to |
| advantaged entities designed to enable the | | | | evaluate the stability of the country as well as the |
| average investor to become involved in the very | | | | company. Investments in New Zealand and |
| capital intensive development of the infrastructure | | | | Australia, for example, would be more appealing |
| dealing with commodities such as oil and natural | | | | to me than investment in Venezuela, or Russia |
| gas exploration, development and distribution. | | | | where the markets can be extremely volatile and |
| MLPs pay no corporate tax, and unit holders' tax | | | | impacted by political tides. At present, with the US |
| advantage is that generally 80% to 90% of | | | | economy coming out of the doldrums, and the |
| distributions are tax-deferred for federal income | | | | wide variety of high yield opportunities |
| tax purposes. Distributions are only taxed when | | | | domestically, I would probably limit my overseas |
| units are sold, and if held for more than a year, | | | | allocation of dividend seeking funds to 5%. I |
| are considered long-term capital gains rather than | | | | believe that the potential for growth in both share |
| ordinary income. | | | | price and dividends in quality stocks in the US, in |
| Recently, with interest rates so low, the market | | | | consideration of all the risk/reward factors, is |
| has perceived high yielding MLPs as an | | | | generally better than overseas. For that limited |
| extraordinary place to secure anywhere from a 5 | | | | portion of the funds that I would invest overseas, |
| to 10% yield, and many MLPs have soared in unit | | | | I would be very judicious as to not only which |
| price over the past 12 months from the March, | | | | companies I invested in, but which countries that |
| 2009 low in the market averages. As we near to | | | | they are located in. |
| the time when the FED will be raising interest | | | | Whether it is for retirement planning, investing for |
| rates there is some cause for concern. Since | | | | college, or some other investment objective, and |
| most MLP growth comes through acquisitions | | | | regardless of where and when you determine is |
| higher interest rates make it more expensive for | | | | the best place and time to invest your money, be |
| them to grow, unlike the recent past where | | | | it REITs, MLPs, BDCs, or whether it is domestic |
| capital for expansion has been at record low | | | | or overseas, be sure that you do your own due |
| rates. Slower growth can translate into fewer, | | | | diligence and insure that the equities that you |
| smaller or even non-existent distribution increases. | | | | invest in meet your own specific criteria and fall |
| The anticipation of slower growth may dampen | | | | within your own tolerance for risk. Remember, no |
| the market enthusiasm for MLPs. This negative | | | | one cares more about your money than you do! |
| possibility should be considered in light of the | | | | |