Tag Archives: income

Monthly Paying Closed-End Fund NRO Offers 8% Return

Summary NRO pays $0.03 per month per share and currently returns 8%. NRO is currently selling at a 17% discount to NAV. The share price of NRO should grow as REITs gain favor again with investors. I wrote an article in June suggesting Neuberger Berman Real Estate Securities Income Fund (NYSEMKT: NRO ) was a good closed equity fund to place one’s money to get a 7% distribution on a monthly basis. At that time NRO was offering a 7% yield and was selling about 15% below NAV. The issue was selling for about $5.00 per share and was paying $0.03 per share a month. Since the company is now selling at about $4.54 per share (9/16/15), I thought I would take another look at this CEF again to see what is happening. NRO is still paying $0.03 per share a month which takes the distribution return up to 8% at the current price. It reports a NAV of $5.47 per share as of 9/16/2015 and therefore is selling at a 17% discount to its assets. The market price of NRO is down about 7% from the beginning of the year. This coincides with the price drop seen in REITs from the beginning of the year. It appears that investors are running scared from REITs because the FED is threatening to increase interest rates. I am convinced that the threat is much greater than the reality. It will be a long time before the FED gets interest rates up to 2% and REITS will continue to fare well in this low interest rate environment. If I am correct, both the NAV and the market price of NRO will do well over the next year or two. The price of REITs will rise when people realize that government bonds and CDs are not going to pay much more than they currently offer over the next few months. Investors will again pour their funds into REITs to reap a much better return and that in turn will likely cause the price of NRO to rise. The price of NRO’s holdings will rise since it has many REITs where prices have declined because of investor fears over interest rates. A list of the top 10 holdings by number of shares and their price decline is shown below: Ticker Description Shares Price 1/2/15 Price 9/16/15 Difference Current Yield SRC Spirit Reality Cap 617,000 12.06 9.25 -25% 7.4% ROIC Retail Opp. Inv. 593,000 16.98 16.40 -3.5% 4.1% STWD Starwood Prop. Trust 583,000 23.41 21.52 -8% 8.9% BPY Brookfield Prop. Ptnrs. 553,100 22.95 21.40 -7% 5.0% NRF Northstar Realty Fin. 531,900 17.88 13.96 -22% 11.5% CBL CBL & Assoc. Prop. Trust 509,700 19.75 14.68 -25% 7.2% LXP Lexington Realty Trust 497,200 11.19 8.30 -26% 8.2% KIM Kimco Realty Corp. 474,600 25.46 23.60 -7% 4.1% NRFpB Northstar Pref. B 444,484 25.00 24.27 -3% 8.3% UBA Urstadt Biddle Class A 425,693 22.10 18.67 -16% 5.5% Source: My own work with figures from Interactive Brokers The chart indicates that the prices of all REITs have dropped; Some REITs declined as much as 25% to as low as 3%. The REITs that dropped the most are mortgage REITs since high interest rates would hurt their earnings the most. The following chart lists the top 10 holdings of NRO by dollar value and the decline in prices from the beginning of the year. Ticker Description Shares Price 1/2/15 Price 9/16/15 Difference Current Yield OHI Omega Healthcare Inv 396,700 40.43 33.64 -17% 6.5% PSA Public Storage Reit 70,100 187.23 205.65 +9% 3.3% STWD Starwood Prop. Trust 583,000 23.41 21.52 -8% 8.9% HCP HCP Inc. Reit 321,800 44.85 32.72 -27% 6.0% KIM Kimco Realty Corp. 474,600 25.46 23.60 -7% 4.1% HIW Highwoods Prop. Inc. 272,880 44.94 39.00 -13% 7.2% BPY Brookfield Prop. Ptnrs. 553,100 22.95 21.40 -7% 5.0% NRFpB Northstar Pref. B 444,484 25.00 24.27 -3% 8.3% PSApY Public Storage Pref Y 400,000 26.37 26.10 -1% 6.1% ROIC Retail Opp. Inv. 593,000 16.98 16.40 -3.5% 4.1% Source: My own work with figures from Interactive Brokers This chart shows nearly the same declines as the prior chart. There is one major difference in that PSA actually increased in price between the beginning of the year and now. It is also surprising to see the 27% decline in the price of HCP. HCP is a hybrid REIT that invests in both property and loans in the healthcare industry. The price has declined as if it were a pure mortgage REIT. Doing this chart for NRO indicates that HCP should be poised to rise quite a bit as well. Both charts indicate that prices of most of the investments that NRO holds as of 7/31/2015 have declined considerably since the beginning of the year. As these prices regain momentum after investors realize that interest rates are not rising as fast or as soon as expected, the discount between the stock price of NRO and NAV will increase or the price of NRO must increase with them. Conclusion: With NRO currently offering an 8% return along with a huge discount from NAV, it looks like an outstanding buy. Furthermore, it appears to be positioned to make some capital gains as investors begin to realize that interest rates are not going to rise very quickly over the next 2 years. The landscape for this closed fund looks especially good at the current time for an outstanding dividend and possible capital gains in the future. Disclosure: I am/we are long NRO, OHI, HCP, SRC, LXP. (More…) 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.

Utilities Funds In Focus If Fed Delays Rate Hike

All eyes are now on the two-day FOMC policy meeting that gets underway today. The importance of this particular meeting has surged ever since hopes started surging of the Fed lifting the key interest rates in the September meeting. Nonetheless, expectations of a September rate hike have started fading as uncertainty took over in recent days. Today, let’s look at funds in focus if the Fed does not announce a rate hike. During the July meeting, the Fed had not provided any clue about the timing of the rate hike, but had somehow left the door open for a September hike. Nonetheless, many new events have changed the financial world scenario since the last Federal Open Market Committee meeting that was held in July. Subdued inflation is a worry, though labor data has been encouraging. But the latest batch of economic data has not really clarified if the Fed can raise rates. Meanwhile, China, the second largest economy, has consistently reported dismal economic data of late; sparking global economic slowdown fears that led to global market sell-offs. Moreover, what is causing much of the uncertainty is market volatility. Rate Hike Uncertainty Moving beyond the economic data, a strong reason for not hiking the rate is market volatility. It may not be easy for the Fed to raise rates amid such a volatile market. In fact, the Fed has never raised the key Federal funds rate when the CBOE Volatility Index (VIX) has been above 25 in the last 20 years. The average level of VIX has been just 15.7 when rates have gone up. This is even lower than the long-run average of 20. VIX is “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.” What is worse for investors is that volatility is predicted to continue for some more time. According to the Wells Fargo Advantage Funds chief portfolio strategist Brian Jacobsen, volatility may continue for three to four months. China, one of the primary reasons for the market rout, cannot assure less volatility. Recently, in China, a measure of 50-day volatility had increased to its highest point in 18 years. While a 0.25% rate hike cannot be ruled out completely, recent comments and other events have also come in to suggest otherwise. While traders of short-term interest rate futures are giving a one-in-four chance of a rate hike, primary dealers or economists from banks dealing directly with the Fed have picked December to have a higher chance of the rate hike coming in. Conflicting data points also have intensified the uncertainty. As said, the inconclusiveness is prominent. Opinion Polls Go Against Rate Hike According to The Wall Street Journal , 46% of economists surveyed last week forecasted a rate hike in the September 16-17 meeting, while the majority of them expects a rate hike later this year. The tally fell sharply from an early August poll that saw 82% of economists supporting a rate hike in September. A Bloomberg calculation shows that chances of a rate hike in September have dropped to 30% now. At the start of August, it was at 54%. Meanwhile, Goldman Sachs also forecasts a rate hike in December. Volatile markets and inflation data falling short of expectations strengthened their conviction that a September rate hike is too early. Additionally, the Bankrate Economic Indicator survey shows that China’s currency devaluation leading to a massive sell-off in stocks will compel the Fed to stay on hold with its liftoff this month. Funds in Focus on No Rate Hike The Fed seems to be stuck between global central bank easing and dollar strengthening, deflationary pressures arising from the energy sector and troubles in the global economy. Whether lifting the monetary policy stimulus would be a prudent move is the question that the Fed needs to answer. Going by the chance of the Fed not hiking interest rates now, Utilities funds are the natural choice to buy. Utilities is one of the most rate-sensitive sectors due to its high level of debt volume. Utilities are capital-intensive businesses, and the funds generated from internal sources are not always sufficient for meeting their requirements. As a result, the companies have to approach the capital markets for raising funds. As a result, a movement in interest rate has a significant impact on this sector. The capital-intensive Utilities industry needs to access external sources of funds to expand its operations. The low interest rate environment, which has, for some time, been near a zero level, has been extremely conducive for its growth. A continued low interest rate environment would thus be favorable for Utilities funds. However, the problem with many Utilities funds is that they are in the negative territory considering the year-to-date return. This does not, however, mean that they do not have the potential to gain going forward. With a high yield, some Utilities funds may be on investors’ radar. If the Fed decides against a rate hike now, investors may even buy these funds at a discounted price. Carrying a Zacks Mutual Fund Rank #1 (Strong Buy) , American Century Utilities Fund Investor (MUTF: BULIX ) has high yield of 3.19%. Its portfolio is constructed based on quantitative and qualitative management techniques. Though it is down year to date, the fund comes at a discount and should be a good pick for income-seeking investors. Its 3-year and 5-year annualized returns are 7.1% and 9.9%, respectively. Its annual expense ratio of just 0.67%, as compared to the industry average of 1.18%, also makes BULIX an inexpensive fund to add to the portfolio. Franklin Utilities Fund A (MUTF: FKUTX ) has an yield of 2.79%. It seeks capital growth and current income over the long run. The fund invests a large chunk of its assets in Utilities companies that are involved in providing electricity, natural gas, water, and communications services. The 3-year and 5-year annualized returns are 7.5% and 10.4%, respectively. Its annual expense ratio of 0.75% is also lower than the category average of 1.18%. FKUTX currently carries a Zacks Mutual Fund Rank #2 (Buy) . Another fund with a decent yield is Invesco Dividend Income Fund Inst (MUTF: IAUYX ). A large chunk of the assets of IAUYX is invested in dividend-paying securities and other instruments having similar economic characteristics. IAUYX has a dividend yield of 2.18%. The fund’s annual expense ratio of 0.87% is lower than the category average of 1.10%. Original Post

Vanguard Dividend Growth Fund: A Solid Core Holding

Summary VDIGX has low expenses and has outperformed its peers over the years. Don Kilbride looks for stocks that can pay a steady and growing stream of dividends. Vanguard also offers a Dividend Appreciation Index fund which will compete with VDIGX. Overall Objective and Strategy: Growth and Income The Vanguard Dividend Growth Fund (MUTF: VDIGX ) seeks to provide a growing income stream along with long term capital growth by investing in high quality companies that not only pay a dividend, but also have good prospects for growth in both earnings and dividends. Dividend yield is expected to be above the market average, but stocks with very high dividends but no growth are avoided. Stays diversified across all market sectors. Can allocate up to 25% of assets to foreign securities. Benchmark: the NASDAQ U.S. Dividend Achievers Select Index. Fund Expenses The expense ratio for VDIGX is 0.32% which is very low for an actively managed equity fund. Morningstar has computed the average expense ratio of similar funds to be 1.04%, so you pick up over 70 basis points of relative outperformance through lower expenses alone. Vanguard does not offer a lower cost Admiral share class for this fund. Vanguard does offer a passively managed index fund with similar goals to VDIGX – the Vanguard Dividend Appreciation Index Fund (MUTF: VDADX ) which requires a $10,000 minimum investment with an expense ratio of only 0.10%. VDADX is weighted more to mega-cap companies and has a higher allocation to the Consumer Staples sector than VDIGX. Minimum Investment VDIGX has a minimum initial investment of $3,000. Past Performance VDIGX is classified by Morningstar in the “Large Blend” or LB category. Compared with other mutual funds in this category, VDIGX has performed quite well, largely because of its low expenses and consistent stock selection. These are the annual performance figures computed by Morningstar since inception in December 2013 (as of September 14, 2015). Investors who compare their performance to the S&P 500, might be a little disappointed with the recent performance of VDIGX, since its five year performance of 13.56% lags the 14.13% performance of the S&P 500. But I wouldn’t blame the fund for this, since its Dividend Appreciation strategy has been a bit out of favor for the last five years. I believe the fund should outperform the S&P 500 over a full market cycle including some bear market periods. VDIGX Category (LB) +/- Category Percentile Rank in Category YTD -3.85% -4.48% +0.63% 41 1 Year +1.08% -1.58% +2.66% 17 3 Year +11.79% +11.37% +0.43% 48 5 Year +13.56% +12.58% +0.97% 34 10 Year +8.42% +6.25% +2.17% 4 15 Year +5.07% +3.97% +1.10% NA Source: Morningstar Mutual Fund Ratings Lipper Ranking : Funds are ranked based on total return within a universe of funds with similar investment objectives. The Lipper peer group is Equity Income. 1 Yr #21 out of 509 funds 5 Yr #23 out of 299 funds 10 Yr #5 out of 192 funds Morningstar Rating : Overall 4 Stars (out of 1,388 funds) 3 Yr 3 Stars (out of 1,388 funds) 5 Yr 4 Stars (out of 1,225 funds) 10 Yr 5 Stars (out of 872 funds) Fund Management The fund has been managed by Donald Kilbride since February 2006. Kilbride seeks to build a portfolio that produces a steady and growing stream of dividends. He looks for companies that have the ability and the willingness to increase their dividends over time. Kilbride does not buy non-dividend paying companies that may begin to offer a payout in the future- he wants the dividends now. Volatility Measures Beta: 0.91 (less volatile than the S&P 500) R- Squared: 0.93 (fairly high correlation with S&P 500) Sharpe Ratio: 1.39 Standard Deviation: 9.27 Comments VDIGX is a concentrated fund and is not an index hugger. It has $24 billion in assets invested in only 46 securities. These are the top ten holdings as of June 30, 2015: Top 10 Holdings % Weight United Parcel Service (NYSE: UPS ) 3.21% Microsoft (NASDAQ: MSFT ) 2.92% UnitedHealth Group Inc (NYSE: UNH ) 2.90% TJX Companies (NYSE: TJX ) 2.87% Honeywell (NYSE: HON ) 2.74% Nike Inc (NYSE: NKE ) 2.69% ACE Ltd (NYSE: ACE ) 2.68% Coca-Cola (NYSE: KO ) 2.60% Accenture PLC (NYSE: ACN ) 2.60% Praxair Inc (NYSE: PX ) 2.49% VDIGX is an excellent mutual fund that can serve as a core holding, especially in a retirement account. In 2008, it held up relatively well losing only 25.57% versus a 37.79% loss for its category peers and a 37% drop in the S&P 500. In times of severe financial stress, VDIGX is a good way to continue investing, since its holdings are very solid and unlikely to go into bankruptcy. Vanguard has set up an interesting competition between VDIGX and VDADX (which is pegged to the Dividend Appreciation Index). These two funds are good test vehicles for active versus passive management using the same basic strategy and it will be interesting to see whether Kilbride can outperform over the longer term. Last year, there was a friendly controversy here on Seeking Alpha between Geoff Considine and Larry Swedroe. Considine listed reasons why dividends are a valid basis upon which to select stocks, while Swedroe disagreed citing some research from DFA. Take a look at this Seeking Alpha article from last year for more information- ” Why Dividends Matter: A Review of Recent Research “. Considine later published a summary on Advisor Perspectives- ” Understanding the Controversy over Dividend‐Based Investing “. I believe that dividend-based investing has a place in any diversified portfolio, especially in retirement accounts. But for those in a higher tax bracket, I think it also makes sense to hold some non-dividend paying stocks (like Berkshire Hathaway (NYSE: BRK.A )) in taxable accounts. Over time, the tax savings will add up. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VDIGX over the next 72 hours. (More…) 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.