5 favorites for value and yield
These securities are all attractive for long-term investors building an income portfolio.
The most frequent question I receive from new investors is "How do I get started" on building an income-focused portfolio.
Here's a look at some of our favorite stocks from among the 25 that are featured in our model portfolio. They offer high-yield income and value at their prevailing prices.
McDonald's was the first investment in our High Yield Wealth portfolio. I still like McDonald's to this day, not the least for its formidable brand.
Strong brands impart a deep economic moat and strong customer loyalty, which produces consistent revenue and earnings growth. And most important to income investors, it fosters consistent dividends, which have been raised every year since 1976. This makes McDonald's a premier dividend-growth company.
I still see McDonald's stock as a value play. It's trading at a reasonable 16 multiple to expected 2013 EPS of $6.00. Plus it yields a market-beating 3%. And remember that as the dividend payout climbs, so too climbs the yield and the share price.
StoneMor Partners (STON)
StoneMor Partners is the second largest cemetery owner in the United States with 276 cemeteries. It also operates 92 funeral homes.
The firm offers an exceptional opportunity to invest in an unstoppable trend -- the U.S. population is expanding and the number of deaths each year is increasing. Total deaths in the United States are expected to rise annually to 3.2 million in 2030 from 2.6 million in 2010.
StoneMor, organized as an MLP, should remain a rich source of cash for investors going forward. Its distribution is safe and easily covered by cash flow.
The units have typically traded between 12 to 14 times its annual distribution. Currently, the units are trading at only 11 times the $2.36 annual distribution. I'm confident the distribution will be raised at least 3% in 2013 -- the average annual increase rate over the past five years.
Nuveen Quality Preferred Income Fund II (JPS)
Nuveen Quality Preferred Income Fund II, a high-yield fixed-income alternative, is a closed-end fund that invests at least 80% of its managed assets in preferred securities, and up to 20% of its net assets in debt securities.
By investing mostly in a diverse portfolio of preferred stocks, which offer a fixed payout similar to a bond, and using modest amounts of leverage, Nuveen is able to generate a yield close to 7%. In addition, Nuveen distributes its payments monthly.
The fund just continues to quietly distribute high-yield income. Its shares are value priced, trading at a 3% discount to net asset value. In short, Nuveen is a safe high-yield fixed-income investment -- a rarity in a market starved for safe high-yield income.
Prospect Capital Corp. (PSEC)
I really like Prospect Capital, the business development company. BDCs are similar to banks -- they earn a spread on their cost of funds and the interested earned on loans.
At the end of 2012, Prospect's weighted average interest rate cost was 6.8% and the weighted average interest rate earned was 18.3%. That's an 11.5% spread -- two to three times most traditional commercial banks.
Prospect's business is straightforward: It lends to middle-market privately held companies. These companies generate revenue between $20 and $200 million annually and operate in basic nuts-and-bolts sectors.Its portfolio is spread among 106 long-term investments with a market value of $3.04 billion.
Prospect has been a lending machine over the past year; the market value of its portfolio increased 50% alone over the second half of 2012.
Over the years, Prospect has continually raised its distribution. Today, it pays $0.1101 per share each month, resulting in an 11.9% yield. The good news for investors is that they can establish positions in Prospect at a price lower than my initial June recommendation.
Gladstone Commercial (GOOD)
Gladstone Commercial, a commercial real estate investment trust (REIT), has paid 100 consecutive monthly cash distributions on its common stock and yields close to 8%.
I don't expect the streak to be broken anytime soon. Management expertly guides Gladstone's real estate portfolio, which is composed of 77 commercial, industrial and retail properties covering 21 states. These properties are 98.8% occupied, with all tenants being current on their payments.
Among equity REITs like Gladstone, the average price-to-FFO (funds from operations) multiple is around 15.4. Gladstone's multiple is around 11.5. I attribute the discount to Gladstone's small size and lack of institutional following.
In short, Gladstone is a valued-priced, risk-averse REIT that is a model of dependable high-yield income. It also offers the potential for substantial price appreciation should the economy finally resume historical growth rates in 2013.
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