With a whopping 16 holdings, the size of your Dividend Pro portfolio is once again getting too big for its britches.
Frankly, it’s tough for me to push out any of your positions from the portfolio, as I think they all have solid potential.
Nevertheless, this week, let’s say goodbye to PowerShares Emerging Mkts Sovereign Debt (PCY). Why you may ask? After all, the position is up over 14% on the year, and has offered equity-like returns, without the volatility.
My only rationale is that PCY has gone up so much that it is now yielding 4.75%. And in constructing your Dividend Pro portfolio, I like to recommend positions that generate at least 5% — but preferably above 10%. That said, you should know that I still have PCY as a core holding in my own client portfolios at my firm Global Guru Capital.
In addition, I am recommending that you buy the January $35 call option (RNF130119C00035000) on Rentech Nitrogen Partners, L.P. (RNF). I held off on recommending an option on RNF a couple of weeks ago, because I felt the stock had gone too far, too fast. But with RNF now pulling back and due for bounce, this is good time to place a potentially highly profitable option bet.
Now let’s turn to a review of your current Dividend Pro portfolio.
Your biggest thematic bets today are in the area of U.S. mortgage real estate investment trusts (REITs) and business development companies (BDCs).
You’ve invested in the first of these themes both through individual mortgage REITs like American Capital Agency Corp. (AGNC) and Two Harbors Investment Corp. (TWO), as well as through exchange-traded funds (ETFs) like iShares FTSE NAREIT Mortgage REIT (REM). With all three of these positions boasting double-digit percentage yields, these are the highest-income producing and highest-risk positions in your Dividend Pro portfolio. These positions have pulled back in the past few weeks, as the market digests the impact of QE3. Nevertheless, I see these positions continuing to generate high yields in the month’s ahead.
An even more popular theme is the area of BDCs like Prospect Capital Corporation (PSEC), Apollo Investment (AINV) and Fifth Street Finance Corp. (FSC), which focus on lending to companies at high rates of interest where banks would not do so otherwise. The first two of these also pay you a monthly income stream. You also have a leveraged bet on a basket of such stocks through the UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL).
Recently, I’ve added positions in two other high yielding industries: fertilizers — CVR Partners, LP (UAN) and Rentech Nitrogen Partners, L.P. (RNF) — and energy infrastructure — Vanguard Natural Resources (VNR) and UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL). All of these are high yielding sectoral plays with terrific upside.
Finally, you have several high-yielding “specialist” themes.
First, global blue chips through Global X SuperDividend ETF (SDIV);
Second, U.S. municipal bonds through the PIMCO Municipal Income Fund II (PML);
Third, preferred stocks through PowerShares Preferred (PGX);
Fourth, an option income generating strategy through PowerShares S&P 500 BuyWrite Portfolio (PBP).
All these offer different sources of lower, but steadier income compared to Mortgage REITs, BDCs, the energy sector and fertilizers.
The result? Your current Dividend Pro portfolio positions yield an average of just over 10%.
That’s not bad in zero interest rate environment.
Global X SuperDividend ETF (SDIV) dropped another 0.68% this past week. Companies that paid very high dividend yields (greater than 7%) are often unfairly overlooked by investment professionals. That spells opportunity for this core holding. Although SDIV’s 12-month dividend yield is now up to 8.92%, because it is trading below its 50-day moving average (MA), SDIV is a HOLD.
Two Harbors Investment Corp. (TWO) dropped 1.84% this week. TWO has a P/E ratio of 9.2, below the average real estate industry P/E ratio of 10.1 and below the S&P 500 P/E ratio of 17.7. Shares are up 30.2% year to date. TWO is a BUY.
American Capital Agency Corp. (AGNC) dropped 5.86%, as the sector has been hit by negative commentary recently. At the same time, the big dividends keep coming. A dividend of $1.25 is payable on Oct. 26 to shareholders of record as of Sept. 21. Dropping below its 50-day MA, AGNC is now a HOLD.
Prospect Capital Corporation (PSEC) rose 0.52%. PSEC currently yields 10.6%. It has a 9.43 forward PE and goes ex-dividend on Oct. 11 and pays on Oct. 31. The company has returned a whopping 53% over the past twelve months. PSEC is a BUY.
iShares FTSE NAREIT Mortgage REIT (REM) dropped 3.37% this week. Mortgage REIT ETFs have turned in a stellar performance year-to-date as these funds have managed to outperform their broad-based Real Estate ETF counterparts in terms of volatility and dividend yield as well. Dropping below its 50-day MA, and severely oversold, REM is now a HOLD.
PIMCO Municipal Income Fund II (PML) dropped 1.52%. PML declared its normal 6.5-cent monthly dividend yield on Oct. 1. Back below its 50-day MA, PML is a HOLD.
UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL) pulled back 3.75%. BDCL went ex-dividend yesterday and will pay out a dividend of $.9169 per share on Oct. 22 for a yield of 14.13%. Trading below its 50-day MA, BDCL moves to a HOLD.
Apollo Investment (AINV) recovered 1.30% after last week’s drop. AINV paid out a dividend of 20 cents on Oct. 4. Yielding 10%, but still trading below its 50-day MA, AINV is a HOLD.
Omega Healthcare Investors Inc. (OHI) ended the week 0.91% higher. On its face, Omega yields 7.3%. But with 64% of its yield not subject to taxes, its yield kick above 8% compared to a fully taxable dividend. With the stock still below its 50-day MA, OHI remains a HOLD.
PowerShares Preferred (PGX) rose 0.40%. Last week, PGX attracted approximate $37.9 million dollar inflow — a 1.9% increase week over week in outstanding units. Yielding over 6.4%, this monthly income payer is a BUY.
Fifth Street Finance Corp. (FSC) ended the week flat. FSC has a 9.52 forward PE. It goes ex-dividend today, Oct. 11 and pays out on Oct. 31. The company has returned 33% over the past twelve months. FSC remains a BUY.
Vanguard Natural Resources (VNR) jumped 1.62%, hitting a new 52 week high. Its monthly dividend of $0.20 will be payable on Oct. 15 — a yield of approximately 0.70% per month. VNR is a BUY.
CVR Partners, LP (UAN) bounced back 5.24% this past week. The company will release its third quarter 2012 earnings on Monday, Nov. 5, after the close of New York Stock Exchange trading. Back above its 50-day MA, UAN is a BUY.
PowerShares S&P 500 BuyWrite Portfolio (PBP) fell 0.86%. The buy-write, or covered call, strategy utilizes call options on a position to generate high income from option premiums. An investor sells a call option above the current price of a security. If the price of the security is below the option upon the expiry date, the investor would pocket the difference. That helps generate a 10%+ annual yield. Trading below its 50-day MA and is now a HOLD.
Rentech Nitrogen Partners, L.P. (RNF) dropped 2.73%. RNF is now severely oversold, and I expect it bounce strongly as the market regains its footing. The company will now announce earnings on Nov. 8. Still trading above its 50-day MA, and yielding a whopping 13.20%, RNF remains a BUY.
UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) dropped 3.66% its first week in the portfolio. This is a volatile, leveraged holding that bets on the high yielding energy sector. Yielding well-above 10%, MLPL remains a BUY.