High Yield Bonds for High Monthly Income

Nicholas Vardy

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

Markets were largely flat over the Hurricane Sandy shortened trading week. The S&P 500 gained 0.23% and the Dow Jones rose 0.08%. Thus far, the impact of the hurricane on the financial market appears minimal.

This week’s Dividend Pro recommendation offers you another source of high monthly income through yet another asset class.

Peritus High Yield ETF (HYLD) is the only actively managed exchange-traded fund (ETF) that targets the “high yield” or junk segment of the fixed income universe.

HYLD invests in a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations (such as bonds, debentures, notes and commercial paper) and loans.

Here’s why I think this new income stream is a worthy addition to your current Dividend Pro portfolio.

First, this ETF is actively managed. Most fixed income investors continue to use ratings as their primary investment tool. In contrast, Peritus focuses the fundamentals of the businesses as measured by true cash flow. It then looks to buy credit at prices that provide a “margin of safety.” In that sense, Peritus views credit as a “yes” or “no” decision, rather than just a matter of blindly following ratings. That’s where index products such as iShares iBoxx $ High Yield Corporate Bd (HYG) and SPDR Barclays Capital High Yield Bond (JNK) fall short, owning everything irrespective of price or credit quality.

Second, HYLD seeks high current income with a secondary goal of capital appreciation. You see that in its superior yield of 7.69%. That compares with HYG, which yields 6.86%, or JNK, which yields 6.94%.

Finally, HYLD pays out its income on a monthly basis. So if you like the sound of the cash register ringing each month, then HYLD is a terrific choice. And its monthly income does not even include its prospects for capital appreciation. HYLD has already returned 11.81% this year — far above the S&P 500, which yields a mere 1.98%.

The bottom line? The high yield bond space has been a solid investment in recent years. Yet passive, market capitalization-weighted “junk bond” ETFs has not been the best way to profit from this. The Peritus High Yield ETF (HYLD) offers a superior investment strategy that sets it apart from competitors.

So buy the Peritus High Yield ETF (HYLD) at market today, and place your stop at $48.60. There are no options on this one.

Portfolio Update

Global X SuperDividend ETF (SDIV) fell 0.6% last week. The fund is heavily invested in REITs which make up 21% of the portfolio. Other top sectors are telecommunications (18%), financials (18%), and consumer discretionary (11%). Still trading below its 50-day moving average (MA), SDIV is a HOLD.

Two Harbors Investment Corp. (TWO) was steady, dropping 0.25% this past week. TWO is gaining new followers as QE3 threatens to gobble up the majority of agency Mortgage Backed Securities and TWO’s business model has another leg to stand on. TWO remains a BUY.

American Capital Agency Corp. (AGNC) bounced 1.69%. On Monday, Oct. 29, AGNC reported Q3 income of $1.3 billion, or $3.98 per share, and net book value of $32.49 per share. On a per share basis, this is an increase to book value of $3.08 per share, from the last reported book value of $29.41 at the end of Q2. AGNC’s estimated taxable earnings per share (EPS) for Q3 was $1.36, a $0.26 decline from Q2. Currently, nine analysts rate AGNC a buy, no analysts rate it a sell, and six rate it a hold. You received your dividend of $1.25 a share on Oct. 26. Trading below its 50-day MA, AGNC remains a HOLD.

Prospect Capital Corporation (PSEC) rose 0.25%. PSEC yields 10.33% annually and has a market cap of $2.08 billion. It will pay a monthly dividend of $0.1016 on Nov. 22, and its monthly yield will be 0.85%. PSEC is a BUY.

iShares FTSE NAREIT Mortgage REIT (REM) jumped 1.37%. REM follows an index that measures the performance of the residential and commercial real estate, mortgage finance, and savings associations sectors of the U.S. equity market, and allows investors to get exposure to both the front and back end of real estate. With a yield of 11.88% and a year-to-date return of 26.06%, investors will be hard-pressed to find a better deal. Still below its 50-day MA, REM remains a HOLD.

PIMCO Municipal Income Fund II (PML) dropped back 0.75%. PML’s top five state positions are California, New York, Texas, Illinois and Arizona. PML is a BUY.

UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL) recovered 2.57%. This is a leveraged bet on a hot sector, boasting a massive double-digit percentage yield. Trading back above its 50-day MA, BDCL moves to a BUY.

Apollo Investment (AINV) regained last week’s losses, rising 1.79%. The company will report its second quarter results on Nov. 8. Yielding 10.2%, but still trading below its 50-day MA, AINV is a HOLD.

Omega Healthcare Investors Inc. (OHI) tumbled 3.41%. OHI reported that its funds from operations grew 27% in the third quarter, increasing to $56.7 million, or $0.52 per share, from $44.5 million, or $0.43 per share. Rental income rose 14% to $78.2 million. A dividend of $0.44 per share is payable Nov. 15 to common stockholders of record as of the close of business on Oct. 31. With the stock trading below its 50-day MA, OHI is back to a HOLD.

PowerShares Preferred (PGX) was steady, rising 0.27%. In the PGX portfolio, 64% of holdings have an S&P investment grade rating of BBB or better and 48% have a Moody’s investment grade rating of Baa or better. Yielding over 6.4%, this monthly income payer is a BUY.

Fifth Street Finance Corp. (FSC) shot up 3.12%. FSC is currently trading at $11 per share and yields over 10%. FSC goes ex-dividend on Nov. 13 and will pay a dividend of $0.0958 on Nov. 30. The company has returned 23.4% over the past twelve months. The company will announce earnings on Nov. 28. FSC is back to a BUY.

Vanguard Natural Resources (VNR) dropped slightly by 0.23%, after hitting yet another new 52-week high. The company is reporting earnings today. The average estimate for revenue is $100.3 million. The average EPS estimate is $0.39. You will receive a $0.20 per unit dividend on Nov. 14, if you are unit holders of record on Nov. 1. VNR is a BUY.

CVR Partners, LP (UAN) steadied, lost 0.11% this past week. The company declared a cash distribution of 49.6 cents per common unit for the third quarter of 2012, to be paid Nov. 14, to unit holders of record on Nov. 7. Trading above its 50-day MA, UAN is a BUY.

PowerShares S&P 500 BuyWrite Portfolio (PBP) rose 0.39%. With a 10.28% yield, but slipping below its 50-day MA, PBP is now a HOLD.

Rentech Nitrogen Partners, L.P. (RNF) was the star of the Dividend Pro portfolio for the week, rocketing 5.52%. The company declared a cash distribution of $0.85 per common unit for the third quarter of 2012. The distribution is payable on Nov. 14 to holders of record as of Nov. 7. With the highest yield in the sector, RNF remains a BUY.

UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) tumbled another 2.26% this past week. Back below its 50-day moving average, MLPL is now a HOLD.

Annaly Capital Management (NLY) rose 1.51% as the Mortgage REIT sector began to recover. The company’s strengths include its revenue growth, reasonable valuation levels and good cash flow from operations. NLY remains a HOLD.

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