attack my high-yield investing

[Alex in Virginia]

response #6 to comments on my high-yield investing

Quote:

Originally Posted by Texas Proud I think something that would help is to put down what you actually are investing into.... just saying 'high yield' is not enough...

Hey, Texas! I was just thinking the same thing last night. So I will do that in this post.

I'm going to list below holdings amounting to 30% of my stock-and-bond portfolio. In this post, I'm going to list some of the "better" or less risky ones (IMHO). I would really like to hear from folks on how risky they think these companies are -- and WHY. I'm listing the "better" ones now, because if the group consensus is that these companies are too risky to invest in, then there won't be any point in listing any others for group review.

A couple of points regarding how I evaluate company financials. First, I rely a good deal on the most current balance sheet, and on the 4 trailing quarterly cash flow statements. Not so much the income statements because (IMO) they can be -- and do get -- gamed. Second, when I analyze balance sheets I zero out "goodwill" as an asset because to me that's just pie-in-the-sky.

Here the are holdings amounting to 30% of my stock-and-bond portfolio:

Stocks
CODI -- a poor man's Berkshire Hathaway. My dividend yield: 9.7%
CPLP -- an oil tanker holding company. My dividend yield: 9.8%
DCIX -- a container ship holding company. My dividend yield: 16.1%
NMM -- a dry ships holding company. My dividend yield: 9.0%
PSEC -- a business development company. My dividend yield: 10.8%

Bonds
GSS -- an oil exploration services company. My interest yield: 12.0%
STON -- cemeteries & funeral homes. My interest yield: 10.1%

Have fun!

Alex in Virginia

[Htown Harry]

Alex, taking the first firm on the list, CODI:

I see their founder and former CEO got busted by the SEC for insider trading:
I. Joseph Massoud (Release No. LR-22553 ; November 30, 2012)

That's enough for me to cross them off the list of firms I would invest in.

BTW, what a remarkable coincidence that both CODI and PSEC are the subject of a Seeking Alpha article today.
Insiders Are Buying These 2 Unconventional High Yielders - Seeking Alpha

[RunningBum]

3 of your 5 stocks are based in Greece. And these are you less risky stocks? Wow. Are they somehow immune if Greece leaves or is booted out of the EEC? Or do you figure that's all factored in already?

[Alex in Virginia]

Quote:

Originally Posted by Htown Harry Alex, taking the first firm on the list, CODI: I see their founder and former CEO got busted by the SEC for insider trading: I. Joseph Massoud (Release No. LR-22553 ; November 30, 2012) That's enough for me to cross them off the list of firms I would invest in.

Harry, that's up to you, certainly. But your rejection of CODI is not based on the risk/reward merits of the company's financial condition and its remarkable internal business diversification.

Let's hear about what CODI's financials and business model say about the company's ability to deliver a sustainably high dividend -- or not.

Quote:

BTW, what a remarkable coincidence that both CODI and PSEC are the subject of a Seeking Alpha article today. Insiders Are Buying These 2 Unconventional High Yielders - Seeking Alpha

Nah. Every day, at least 1 or 2 of the companies I hold stock in appear in Seeking Alpha articles. (I do check the news daily on all companies in my portfolio.)

Alex in Virginia

[Alex in Virginia]

Quote:

Originally Posted by RunningBum 3 of your 5 stocks are based in Greece. And these are you less risky stocks? Wow. Are they somehow immune if Greece leaves or is booted out of the EEC? Or do you figure that's all factored in already?

It's not 3 of my 5 stocks. It's 3 of my 24 stocks.

And, yes, in a very real sense those 3 companies ARE immune to the Greek economic mess because their businesses have nothing to do with Greece -- not the currency they get paid in, not the labor pool they use or the labor laws under which they operate, not their customers, not the shipyards where they have their ships built and maintained, not a thing.

These 3 businesses all consist of leasing ships on long-term charters to international mega-corporations based all over the world that in turn transport raw materials and finished goods all over the world. Most of the ships owned by these 3 companies have never even docked in a Greek port.

Check the financials if you want to develop an informed judgment on the risk/reward attached to the high dividends these companies pay. After all, I thought that was the idea behind my being asked to post some of my specific holdings.

Alex in Virginia

[Htown Harry]

Quote:

Originally Posted by Alex in Virginia Harry...your rejection of CODI is not based on the risk/reward merits of the company's financial condition and its remarkable internal business diversification. Let's hear about what CODI's financials and business model say about the company's ability to deliver a sustainably high dividend -- or not.

Ok, fair enough. Using data from Yahoo EOY 12/09, 12/10 and 12/11, for CODI I see long-term debt rising from $74 million to $249 million. from the annual report, it also appears they have sold a substantial number of additional shares of stock during the period. The executive compensation disclosures make no sense to me - they have some sort of "management agreement" with the current CEO that is not familiar or encouraging as it relates to common shareholder value. Although sales are increasing, the net income is all over the place. (As you said, be wary of income statements.)

I agree their portfolio of ten or so subsidiary businesses they bought is diversified. The furniture company is a bust, but others are doing fine.

Looking through the annual report, I'm reminded of some lessons I learned studying leveraged closed end funds. This is a company founded just a few years ago, to go on a buying spree using other people's money.

So be wary of a high dividend being financed by increased debt or by the equivalent of "return of capital". And with the significant dependance on debt, I'd be real interested to know if the LTD is fixed or floating rate.

Pass.

[redduck]

[QUOTE=vxp036000;1270213]I can throw out hard numbers...QUOTE]

Wait a minute here. Numbers is hard once again? Numbers' girl friend would never throw out hard Numbers. So, why would you? You confuse me.

[jimnjana]

Quote:

Originally Posted by Alex in Virginia response #6 to comments on my high-yield investing ... Here the are holdings amounting to 30% of my stock-and-bond portfolio: Stocks CODI -- a poor man's Berkshire Hathaway. My dividend yield: 9.7% CPLP -- an oil tanker holding company. My dividend yield: 9.8% DCIX -- a container ship holding company. My dividend yield: 16.1% NMM -- a dry ships holding company. My dividend yield: 9.0% PSEC -- a business development company. My dividend yield: 10.8% Bonds GSS -- an oil exploration services company. My interest yield: 12.0% STON -- cemeteries & funeral homes. My interest yield: 10.1% Have fun! Alex in Virginia

Alex,

I did look at CODI, I passed on it though. I put it in the same category as PSEC, which I have owned for a few years now. I'm not in any shipping stocks now. DCIX I might look at further. My high Yielders make up about 15% of our total portfolio. They include RSO, WIN, PSEC, and BBEP. We've been reinvesting the income into dividend aristocrat stocks for the most part. Good luck with your strategy. I prefer to diversify between investment styles. A portion in growth, value, dividend growth and high yield not to mention managed and index funds.

[Texas Proud]

Quote:

Originally Posted by Alex in Virginia response #6 to comments on my high-yield investing Here the are holdings amounting to 30% of my stock-and-bond portfolio: Stocks CODI -- a poor man's Berkshire Hathaway. My dividend yield: 9.7% CPLP -- an oil tanker holding company. My dividend yield: 9.8% DCIX -- a container ship holding company. My dividend yield: 16.1% NMM -- a dry ships holding company. My dividend yield: 9.0% PSEC -- a business development company. My dividend yield: 10.8% Bonds GSS -- an oil exploration services company. My interest yield: 12.0% STON -- cemeteries & funeral homes. My interest yield: 10.1% Have fun! Alex in Virginia

PSEC... I owned it for a bit due to the dividend... but went with TICC... I did not like the monthly dividend... HOWEVER, if you do a chart on Yahoo with max time which goes back to the middle of 2004 and compare with the S&P, S&P is up over 30% and PSEC is down 25%... not sure what is better when you add dividends....

CPLP only goes back to 2007 on the chart... but it is down 70% with the market about even...

NMM only goes back to late 2007... down 26% with market about even... I looked at this one (not others) and the dividend is 50 cents higher than profit... so, they are liquidating the company..... not good for the long term holder...

Did not look at the others... but from what I can see of these.... it looks great for the short term, not so for the long term... and even you said these were your good stocks.... I would hate to see what you have as bad stocks...

PS... I do not see anything wrong with having any of these as a small percent of your holdings, I would not have my whole portfolio in them especially if I were spending all the dividends... you will regret it in the future.... IOW, compounding works both ways... if the companies are liquidating, it just gets worse over time..... by the time you realize it, it might be too late...

[Gumby]

Quote:

Originally Posted by Texas Proud NMM only goes back to late 2007... down 26% with market about even... I looked at this one (not others) and the dividend is 50 cents higher than profit... so, they are liquidating the company..... not good for the long term holder...

I had NM, the holding company, until early 2011. Among the bulkers, Navios is one of the best, but they, like all bulkers, are facing a huge overhang of newbuilds (i.e. excess capacity) that is not expected to clear until after 2014. Before then, about half of their charters will expire and will need to be renewed at a time of depressed daily rates.

This chart tells the tale. DryShips Inc.


Can they keep paying a dividend exceeding earnings until the market recovers? Hard to say, but that's why I sold.

[redduck]

Quote:

Originally Posted by vxp036000 I can throw out hard numbers, but you still won't be convinced. I calculated that I'm up 16% from Aug 1, 2011. VTIAX is down 7 % from Aug 1, 2011. How many examples do you want?

Wait a minute here. Numbers is hard once again? Numbers' girl friend would never throw out hard Numbers. So, why would you? You confuse me.

OK, now my first post on this thread should now be much clearer. Actually, I kind of lost the thread of this thread.

[Alex in Virginia]

Quote:

Originally Posted by Htown Harry Ok, fair enough. Using data from Yahoo EOY 12/09, 12/10 and 12/11, for CODI I see long-term debt rising from $74 million to $249 million. from the annual report, it also appears they have sold a substantial number of additional shares of stock during the period. The executive compensation disclosures make no sense to me - they have some sort of "management agreement" with the current CEO that is not familiar or encouraging as it relates to common shareholder value. Although sales are increasing, the net income is all over the place. (As you said, be wary of income statements.) I agree their portfolio of ten or so subsidiary businesses they bought is diversified. The furniture company is a bust, but others are doing fine. Looking through the annual report, I'm reminded of some lessons I learned studying leveraged closed end funds. This is a company founded just a few years ago, to go on a buying spree using other people's money. So be wary of a high dividend being financed by increased debt or by the equivalent of "return of capital". And with the significant dependance on debt, I'd be real interested to know if the LTD is fixed or floating rate. Pass.

Hey, Harry...

Thanks for taking a closer look at CODI. It's interesting how 2 people can look at the same facts and arrive at different conclusions.

CODI's long term debt is actually now $299 million as of their last quarterly report. And yet I am totally comfortable with that when I look at it relative to the company's assets and its ability to service that debt.

Zeroing out "goodwill" (which I always deeply distrust) from the company's assets, leaves CODI with $733 million in assets vs $299 million in long term debt. In my eyes, that's really good coverage and leads me to conclude that the debt load is very reasonable.

Looking at the cost of servicing that debt, I see that over the last 3 quarters CODI has had $49 million in EBITDA vs $20 million in interest to be paid from that EBITDA. That's better than 2x coverage, and -- again -- I'm very comfortable with that.

You're right that, over the last 4 quarters, dividend payments have exceeded operating cash flow, with a very weak-looking (to me, anyway) 0.8x average coverage. When I first started buying CODI, that caused me to "hedge my bet" by limiting my CODI position to 3% of my portfolio vs my "full approval" 6%. However, dividend payout coverage has improved markedly this past quarter to 1.2x and I have been filling that position out in expectation of the positive trend continuing.

As to the issuance of shares, there was only a 3% increase in the share count this past year. But, realistically speaking, in the high-dividend-yield space one has to learn to get comfortable with periodic substantial share issuances and dilution. (I finally have.) Given that these companies shovel out their free cash as dividends into the pockets of shareholders, funds for further expansion have to come from somewhere else. Ergo, secondary share issuances and credit facilities. As long as a company's expansion transactions continue to quickly result in accretion to the cash flow and the dividend, I'm certainly OK with that.

So, I guess you and I have different bottom-lines as to the risk/reward of owning CODI. I assume you see debt risk strongly outweighing the reward of a 9.7% dividend. I see it the other way. It's what makes horse races.

Cheers!

Alex in Virginia

[ERD50]

Quote:

Originally Posted by Alex in Virginia Hey, Harry... Thanks for taking a closer look at CODI. It's interesting how 2 people can look at the same facts and arrive at different conclusions. ... Cheers! Alex in Virginia

That's why there is a buyer and a seller for each transaction!

-ERD50

[mathjak107]

just the thought of monitoring 24 stocks of that caliber is enough for me to not even bother.

i want my investing passive not my daily life.

[DJRR]

Quote:

Originally Posted by Alex in Virginia Over the years, I have asked 6 so-called financial advisors to poke holes in my high-yield investment approach. No poked holes, but every one has rolled his/her eyes and told me I don't really want to do what I do. What do you say? I'm going to take the socratic approach on this thread. I'll just give you the bottom line and not bore you up front with the specifics of what and how I do what I do. Then, based on your questions or comments, I will fill in the blanks. For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks. When I started, I set a minimum of 6% yield, but in practice I have been operating on a minimum 8 - 8.5% yield for the last 3+ years. Over the last 6 months, I have begun shifting some money into bonds, but again only high yield (10% or better). This means, of course, that starting next year (at 66), I anticipate a withdrawal rate of 8% per year from my IRA -- without touching the principal (which has doubled since March of 2009). In all my readings, I have never heard of anyone advocating this route. I want to see if I can defend it effectively. So please take your potshot. Thanks.

Alex,

You are 65 years old. Hopefully you have learned that there is no free lunch Maybe you are a late blooming Wall Street genius, but be careful betting your retirement on it. Recent events have shown that many genius' were trading on illegal information or had other shady advantages that you don't.

10 yr treasuries yield under 2%, your junk well researched portfolio yields 8%, yet you do not see any risk. IMO that makes you a sucker. You don't have any better information than Yahoo finance and if you do not know why they yield so much then you are gambling that the risk that you don't understand will not occur.

I use a financial advisor because my wife knows nothing of finance and wants someone involved if I make a sudden departure My portfolio of doing absolutely nothing is up 8.6% annualized for the last 3 years after fees. I am sure others who do not pay as much in fees are up 10% over the period. I am also diversified in over a dozen asset classes and thousands of securities, so not nearly as concentrated as you are. It sounds like you are putting in a lot of effort for little incremental gain, but maybe I misunderstand your returns.

I do pay some attention to the Finance world and notice you are in a lot os shipping stocks. Maybe my memory is bad, but it seems just a few years ago these stocks which are structured to pay out almost all their gains in dividends suffered deeply in the recession when there was a glut of transport capacity. People lost 75% of their value and dividends were cut astronomically. Again, I am not interested in researching the specifics but that is the kind of risk that you could run into.

It seems to me that you have created your own junk annuity with a slightly higher yield, a lot more effort than just buying one, and a lot more risk. You are mostly exposed to interest rate risk, inflation risk, and business risk.

Like any income strategy when the market jumps you will fall behind, when the market falls your fall will be cushioned by the income but having poor credit companies in a falling market could make your drop far worse.

You are planning on spending all the income, so it does not look long term viable to me. The market will fall 20% guaranteed sometime in the future. You do not have the cash to ride it out. The real question is not how your strategy works in a bull market, but how it will work in the next bear. Maybe you will be different, but most cannot handle the emotional strain of the bear when it is their life savings at risk. They will either be in denial of the risks they did not understand and ride it all the way into the ground or ride it half way down and sell out while there is still something to salvage right before it bounces back. Your 8% income might not be so comforting if your principal is down 50%,

Anyhow, just my $.02. We are all geniuses since March 2009

[Alex in Virginia]

DJRR...

Thank you for your well-thought out comments.

Quote:

Originally Posted by DJRR 10 yr treasuries yield under 2%, your junk well researched portfolio yields 8%, yet you do not see any risk. IMO that makes you a sucker.

Oh, no, I DO see risk and believe I understand it. Of course I see it. But I'm making my investment decisions weighing my estimation of risk against perceived reward, all in the context of my investment goals and needs, and taking into account the diversification in my portfolio.

Quote:

My portfolio of doing absolutely nothing is up 8.6% annualized for the last 3 years after fees. I am sure others who do not pay as much in fees are up 10% over the period. I am also diversified in over a dozen asset classes and thousands of securities, so not nearly as concentrated as you are. It sounds like you are putting in a lot of effort for little incremental gain, but maybe I misunderstand your returns.

Maybe. The annual dividend+interest yield on my portfolio varies weekly from 8% to 9%+, depending on how much cash has "dropped" out of the holdings due to GTC gain-harvesting sales. If I count those gain-harvesting sales, then my total average realized annual return has been around 20% over the last 3 years.

Quote:

I do pay some attention to the Finance world and notice you are in a lot of shipping stocks. Maybe my memory is bad, but it seems just a few years ago these stocks which are structured to pay out almost all their gains in dividends suffered deeply in the recession when there was a glut of transport capacity. People lost 75% of their value and dividends were cut astronomically. Again, I am not interested in researching the specifics but that is the kind of risk that you could run into.

I know. I also know that, for these companies, if the dividends go down, then eventually they come back up. I'm prepared to ride the downdrafts.

Quote:

You are planning on spending all the income, so it does not look long term viable to me. The market will fall 20% guaranteed sometime in the future. You do not have the cash to ride it out.

You're the first person to pose that question explicitly. I do have 4 years worth of cash, even if Soc. Sec. implodes. If it doesn't, then I have 10+ years worth of cash. And I actually don't HAVE to spend all the income from the portfolio to meet the portion of my expenses that Soc. Sec doesn't cover (only about 20% of it).

Quote:

The real question is not how your strategy works in a bull market, but how it will work in the next bear. Maybe you will be different, but most cannot handle the emotional strain of the bear when it is their life savings at risk. They will either be in denial of the risks they did not understand and ride it all the way into the ground or ride it half way down and sell out while there is still something to salvage right before it bounces back. Your 8% income might not be so comforting if your principal is down 50%.

Thanks, but I'm OK with riding that wave too. At the risk (or certainty?) of causing a flurry of shocked posts, I will tell you that during the last 3 years my portfolio's market value has consistently run 25% to 30% in the red (partly because of my practice of setting GTC gain-harvesting sales on all my buys as soon as I make those buys). But on the other hand, and this is what really matters to me, during that same time my portfolio's book value is up 55% and my dividend+interest annual income stream is also up over 50%.

Quote:

Anyhow, just my $.02. We are all geniuses since March 2009

Isn't that the truth. That's why I've stopped including my 2009 results whenever I'm talking about my recently past returns. I just go from 2010 onwards.

Thanks again for your post.


Alex in Virginia

[Mick Dundee]

The problem with passive investment even though its so easy and doesn't require any systems or hours of studying and filtering stocks is that you get a pitiful pathetic average return.

I mean VXP1800-troll got 16% in 18 months all I got for my etf against the asx200 last year for just over 12 months was a 20.71% return. Thats after fees and tax.

I know hardly worth it right if only i had his expertise and system I could make some real money.

Note asx 200 up 14.6% in 2012 already up about 2.7% to date and roughly 4% average dividends....

[Alex in Virginia]

Quote:

Originally Posted by Texas Proud NMM only goes back to late 2007... down 26% with market about even... I looked at this one (not others) and the dividend is 50 cents higher than profit... so, they are liquidating the company..... not good for the long term holder...

Texas,

I'm looking at the latest NMM cash flow statement for the first 9 months of 2012.

Net cash provided by operating activities was $115 million vs distributions of $79 million. So distribution coverage is 1.46x, which is more than good.

Cash raised from stock sales $69 million + net borrowings of $44 million = $113 million vs $110 million put into new ships and investments to keep the distributions growing.

So from that statement I don't see (as you seem to) NMM in the process of liquidating, or burning cash to prop up a distribution. My take-away is very different.

There's a very similar picture when I look at the annual cash flow statements for the 3 years 2009 - 2011.

Over those 3 years, net cash provided by operating activities was $304 million vs $206 million in distributions paid. That's a distribution coverage of 1.48x.

From 2009 - 2011, cash raised from stock sales plus net borrowings totalled $562 million vs capital investments of $637 million (with another $75 million of cash on hand applied to those investments).

And at the end of 2011, the company had $20 million cash more than it had at the beginning of 2009.

Other financial ratios look just as good to me. At its current stock price, what I see is a 12%-plus dividend payer with very healthy financials. (As I keep saying, in my humble opinion income statements are very misleading and one should give much more credence to cash flow statements.)

As to the decline in NMM's stock price since 2007... what I see is that it's because NMM's stock price has been wittled down over the last 6 years that its steady dividend has kept getting more and more attractive. I only wish I had room in my portfolio to buy more.

Cheers...

Alex in Virginia

[gerrym51]

Quote:

Originally Posted by Alex in Virginia Over the years, I have asked 6 so-called financial advisors to poke holes in my high-yield investment approach. No poked holes, but every one has rolled his/her eyes and told me I don't really want to do what I do. What do you say? I'm going to take the socratic approach on this thread. I'll just give you the bottom line and not bore you up front with the specifics of what and how I do what I do. Then, based on your questions or comments, I will fill in the blanks. For almost 4 years, I have invested my IRA funds only in high-yield dividend stocks. When I started, I set a minimum of 6% yield, but in practice I have been operating on a minimum 8 - 8.5% yield for the last 3+ years. Over the last 6 months, I have begun shifting some money into bonds, but again only high yield (10% or better). This means, of course, that starting next year (at 66), I anticipate a withdrawal rate of 8% per year from my IRA -- without touching the principal (which has doubled since March of 2009). In all my readings, I have never heard of anyone advocating this route. I want to see if I can defend it effectively. So please take your potshot. Thanks.

WHY? if your making 8 percent would you ask us.

[Gumby]

Alex:

As I look at the 2011 Form 20F for NMM, I see that while its cash position increased by $49 million in 2009, it decreased by $26.6 million in 2010 and decreased again by $3.2 million in 2011. In both 2010 and 2011, NMM paid more in dividends to common stock than it earned per share of common. In trying to predict the future, I would weight the more recent years more heavily.

And, as I mentioned before, between year end 2011 and the predicted end of the newbuild glut at year-end 2014, NMM needed to obtain re-charters for 12 of its 18 vessels. I'll admit that I have not followed their re-charters this year, but with the BDI in the cellar, things are not looking good for charter rates.

Maybe they'll be able to maintain the dividend, but I wouldn't count on it.

That said, if you bought at today's price and can afford to wait until things turn around should the dividend be cut, things may turn out fine for you.

Best of luck with this and all your other positions,

Gumby