‘Double Your Dividends’ in a Zero Interest Rate World

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

A year ago, income investing was all the rage.

With the Fed’s zero interest rate policy (“ZIRP”) punishing savers with its low interest rates, retirees depending on their accumulated savings had grown increasingly frustrated trying to eke out income from their investments.

So, it’s no surprise that many piled into a bevy of investments that promised high single-digit, or even double-digit, percentage income.

And for a while, high-income investing seemed like manna from heaven.

Investors were collecting high income on investments in sectors that had perfected the art of minting money, month after month, quarter after quarter.

Income Investing: The Bottom Drops Out

That all changed on May 22 of this year, when Fed Chairman Ben Bernanke introduced the word “tapering” into the global financial lexicon.

The mere hint of tapering by the Fed — that one day it might take financial markets off the financial life support that is quantitative easing — caused the bottom to drop out of virtually all “safe” income investments.

Investors suddenly found that even if a diversified portfolio of U.S. Real Estate Income Trusts (REITs) boasted a double-digit headline yield, that mattered little if the principal dropped by 20%, thanks to the threat of rising interest rates.

No wonder many income investors threw in the towel in frustration.

Yet, for all the hand wringing about how the Fed’s eventual tapering pulled the rug out from under income investing, 2013 may turn out to be a solid year for income investors after all.

Double-Digit Percentage Income Investment Gains in 2013

With many retail investors abandoning income investing in droves, you may be surprised to learn that there are a handful of income-generating investments that — through a combination of income and capital gains — have generated impressive gains this year.

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On the one hand, many income investments have rebounded strongly since the summer.

And on the other hand, the cash register of steady income continued to ring every month or every quarter.

In a program of diversified income-generating investments that I manage for my clients at my firm Global Guru Capital, four such investments have generated double-digit percentage gains so far in 2013.

And with chunky monthly and quarterly dividend payments due on each of these before the end of the year, the final numbers for 2013 are likely to look even better.

With that, here are the year’s top three income investments:

1. JPMorgan Alerian MLP Index ETN (AMJ) — 22.87% Gain

The exchange-traded fund (ETF) replicates the Alerian MLP Index, which tracks the performance of publicly traded midstream energy Master Limited Partnerships (“MLPs”).

The majority of MLPs currently operate in the energy infrastructure industry, owning assets such as pipelines that transport crude oil, natural gas and other refined petroleum products. Because they generate fee-based revenues, their revenue and profits are not directly tied to changes in commodity prices.

AMJ pays a variable quarterly coupon linked to the cash distributions paid on the MLPs in the index and currently yields 4.77%. It charges an annual fee of 0.85%.

AMJ has risen 18.59% so far this year. With dividends, AMJ has generated a total return of 22.87% year to date.

2. Global X SuperDividend ETF (SDIV) — 15.21% Gain

The ETF tracks the Solactive Global SuperDividend Index, which tracks the performance of 100 equally weighted companies that rank among the highest-dividend-yielding equity securities in the world.

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Now, remember that “Global” doesn’t mean international. SDIV has about one-third of its investments in U.S. stocks. The remainder is invested in high-yielding companies in Europe, Australia, Asia, Canada and Latin America.

In terms of sectors, it’s no surprise that SDIV focuses on the “big four” of dividend investing — real estate, financial services, telecommunication and utilities.

SDIV yields an impressive 7.87%, pays dividends monthly and charges a fee of 0.58% annually.

SDIV has risen 9.00% so far this year, and, with dividends, it has generated a total return of 15.21% year to date.

3. UBS ETRACS Wells Fargo Business Development Company ETN (BDCS) — 12.98% Gain

The ETF tracks the Wells Fargo Business Development Company index. The index is designed to mirror the performance of all Business Development Companies (BDCs) that are listed on the New York Stock Exchange or NASDAQ.

The BDC business model is to lend to small and mid-sized companies at high-yield equivalent rates while also at times taking equity stakes in such companies.

Based on a market cap weighted index, this ETN is highly concentrated with its top four holdings — American Capital Ltd. (ACAS), Ares Capital Corp. (ARCC), Prospect Capital Corp (PSEC) and Apollo Investment Corp (AINV) accounting for 39.08% of its investments.

BDCS yields 7.10% and pays out dividends quarterly. It charges an annual fee of 0.85%.

BDCS has risen 4.93% so far this year and, with dividends, it has generated a total return of 12.68% year to date.

Read my e-letter from last week about activist investor Carl Icahn. I also invite you to comment about my column in the space provided below.

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