I like high-yield stocks. I like management whose ethos is to distribute all cash not required to fund operations. After all, my cash flow matters too.
It should come as no surprise, then, that I like companies like Altria (NYSE: MO), Chevron (NYSE: CVX), and AT&T (NYSE: T) – companies managed by executives and directors who embrace this cash-distributing ethos.
Of course, I'm not alone in my fondness for Altria, Chevron, and AT&T. Many investors are attracted to these blue-chip companies, and for good reason. All three religiously raise their dividends annually; all three are market-exceeding high-yield stocks.
But there is a shortcoming with these stocks, especially from the perspective of investors who rely on investment income to meet their budgetary needs: their dividends are paid quarterly, but bills arrive monthly. There is a disconnect matching cash inflows to cash outflows.
Monthly cash distributing investments provide a remedy, and the following investments are three of the better remedies. These investments adhere to the cash-distributing ethos. They offer an income stream and yield that far exceed most other investments, and that includes the three fine blue chips mentioned above.
Anyone seeking income knows to bypass U.S. government debt, thanks to the Federal Reserve ringing all yield out of these securities. Fortunately, many other countries' central banks refuse to follow the Fed's lead. PowerShares Emerging Markets Sovereign Debt ETF (NYSE: PCY) specializes in investing in this higher-yield, sovereign-debt market.
Specifically, PowerShares invests in U.S. dollar-denominated government bonds issued by 22 emerging-market countries. Top holdings include debt issued by the governments of Romania, Pakistan, South Korea, and Vietnam. That said, no one country accounts for more than 5% of the fund's portfolio value.
You might think a portfolio composed of emerging-market debt would be volatile. That's not the case: PowerShares' beta is only 0.44, which means its share price tends to move only 44% as much as the overall stock market.
Over the past two years, PowerShares' share price has traded mostly within a two-dollar band. Over the past year, that share price has trended mostly higher, but it still provides an income stream that yields 5%, and of course, that income is distributed monthly.
There is another debt, or I should say debt-like, investment that investors should consider, and that's preferred stocks. I say debt-like because preferred stocks are hybrid securities; that is, they have characteristics of both stocks and bonds. Preferred stocks are like common stocks in that dividends are paid and shares trade like any shares on the major exchanges.
Preferred stocks are like bonds in that they are issued with a coupon payment based on par value. In other words, you know what payment to expect. There is no wondering if the payout will change. The payout on preferred stock is contractual.
Nuveen Quality Preferred Income Fund II (NYSE: JPS), a closed-end fund, is one of my favorite preferred-stock investments. I like this fund because of low management fees and broad diversification in highly rated preferred stocks. Its $1.5 billion portfolio is spread over 212 issues, 90% of which are rated BBB or higher.
Through the judicial use of leverage – around 28% of its portfolio – Nuveen is also able to “leverage up” its distribution. That means Nuveen offers a distribution yield that is a full percentage point over most individual preferred stocks.
Nuveen's “leveraged up” portfolio currently produces a 7.6% yield. What's more, that income is distributed monthly, unlike the quarterly distributions of most preferred stocks.
Business development corporations (BDCs), financing firms that lend to middle-market companies, are another rich vein of income. BDCs are organized as partnerships, so by law they must return at least 90% of their taxable income to shareholders. Most BDCs thus have yields in the 8%-to-11% range.
Most BDCs also distribute income quarterly instead of monthly. Prospect Capital Corporation (NYSE: PSEC) is the exception; it distributes cash monthly. What's more, its distribution produces a 10.7% annualized yield – on the high end of the BDC scale.
Prospect should continue to remain a high-yield stock; it generally raises its payout every three to four months. I expect that trend to continue. Prospect's diversified investment portfolio is spread among 78 long-term investments with a fair value of $1.69 billion. I like that 56% of Prospect's loan portfolio is in a first-lien position; that means Prospect owns a high claim on its debtors' assets should the business go south (though that rarely occurs). That suggests to me that the 10.7% yield is safe.
Here's a final consideration. These three high-yield investments alone produce a diverse portfolio. PowerShares is a debt investment; Nuveen, a debt-equity investment; and Prospect, an equity investment. With these three investments, income investors not only get a portfolio of high-yield monthly income distributors, they get a diversified source of monthly income distributors.