Ned Piplovic highlights three investment vehicles that offer monthly dividend payments. The income e...
Detective's Clues for Finding Income
08/28/2013 10:00 am EST
Harry Domash, editor of Dividend Detective, highlights some favorite opportunities for income investors, from health care plays to closed-end funds that pay monthly dividends.
Steve Halpern: We're here today with Harry Domash, leading income investing expert and editor of the Dividend Detective. How are you doing Harry?
Harry Domash: I'm fine Steven, thanks for having me.
Steve Halpern: Great. First, could you give us an overview of the Dividend Detective?
Harry Domash: Well, Dividend Detective is a Web site. It includes a lot of free information. For instance, it has a list of the 800 highest paying dividend stocks.
It has a list of high dividend ETFs, has a list of almost 400 monthly dividend payers, has a list of all master limited partnerships, a list of all real estate investment trusts, a list of all business development companies, so there's a lot of information available for free there, of interest to income investors.
Then we have the premium part, which has buy-sell recommendations on 19 different categories of stocks, including preferred stocks, and closed-end funds, and banks, and energy partnerships, and real estate investment trusts, and so on.
Every important category of dividend stocks, we maintain an analyzed portfolio with our picks and buy-and-sell recommendations.
Then we have a bunch of tools for people who want to be their own dividend detectives and we have a list of ex-dividends, stocks going ex-dividends, a list of special dividends being declared, a list of 50 highest paying dividend stocks, 25 highest yielding monthly payers, just all sorts of information.
Then we have the Dividend Detective highlights, which we mail out monthly, which is a summary of what's on our site, and all the recommendations, and stuff like that.
Steve Halpern: Let's talk a little about dividend investing. We've been in a relatively low interest rate environment for the past several years. How has that impacted your investing approach?
Harry Domash: Well, it's more impacted the companies that we invest in, because it's been, well, we see it as low interest for an environment. It's been a very easy money environment for corporations.
When we were coming out of 2008, and even before then, we were always looking, giving highest priority to low-debt companies, but with the feds support, money has been so easy to come by for any corporation that's decently managed.
You know you're always going to find some that screw it up, but basically any decently managed company can either borrow money—all the money they want—or sell stock and raise money that way, so it's allowed us to look at companies that we might have shunned before—say, less than investment-grade quality companies, because we know they can raise as much money as they want, so that's been the main change that it caused for us.
Steve Halpern: There's been a lot of talk about Fed tapering lately and rising interest rates. Do you expect an increase in rates and how would this impact your strategy?
Harry Domash: Yeah, rates have already gone up and they probably will go up modestly, moderately in the future. I don't expect rates to get up to double-digit numbers, or any really high numbers, but because the interest rates are a reflection of the economy, when the economy gets strong, interest rates go up, but the economy is not, at this point in time, that strong.
It's improving, but it's sort of stops and starts and things like that, so I don't expect interest rates to shoot up or anything like that, but we could expect some more modest increases.
Well, I gave a presentation at the Money Show in San Francisco, Saturday, where I displayed some charts that showed what happened when interest rates rose in the past for different categories of companies, and the only category in our world that was really affected adversely was the Real Estate Investment Trusts that invest in home mortgages, and those have suffered.
As interest rates went up, the share prices went down, and also their dividends went down, so that's a category that is affected. On the other hand, Real Estate Investment Trusts that own property, which is most of them, did well.
That's because, as I said, when interest rates go up, it means the economy is strong and so those companies prospered, because whatever business they were in, shopping centers, or office buildings, or whatever, were doing well.
The other sector that I looked at was utilities, and that was really surprising because most gurus say that a higher interest rate environment is bad for utility stocks, but if you look historically at the share prices, you'll find that utility stocks do just fine in a higher interest rate environment, and also, their dividends tend to go up also, so it's really only the mortgage REITs that are going to be affected, that I can see.
Of course you have like the general manufacturing and services companies that seem to do really well because, again, the economy's strong, so again it's just the mortgage REITs that would be adversely affected in my view.
Steve Halpern: Now, as you mentioned, you monitor a number of different portfolios in different areas, and for different risk tolerances, and one of your portfolios is designed for growth and income investors, and that's up a pretty remarkable 29% this year. I notice that, in that, you're holding stocks in the healthcare sector. In fact, one is H&Q Life Sciences and another position is Johnson & Johnson. Are you still favorably inclined to the health sector?
Harry Domash: Yeah, in fact, H&Q Life Sciences, ticker (HQL), is actually a closed-end fund, but it invests entirely in biotech and pharmaceutical companies, and if you look around the world, the investing stocks right now—besides the social media stocks—that's really the one area that has had a lot of recent growth and we expect that to continue.
I think the closed-end fund, and we'll get into that maybe a little bit later, but closed-end funds are a good way to cover it, when you're talking about a sector like that.
Johnson & Johnson is an interesting case, because, as you know, Johnson & Johnson is a big company that invests, and that owns a lot of different companies itself in the medical field.
You know, it owns hundreds of operating companies and it's primarily in the pharmaceuticals, and medical devices, and in consumer products, but Johnson & Johnson was a mismanaged company for a while and they were really underperforming their peers.
In fact, some of their factories were closed, their pharmaceutical production factories were forcibly closed by the government because they didn't meet standards, but they were taken over by a new CEO a few years ago, two or three years ago, and now things are improving, so Johnson & Johnson is kind of coming from down and out to being a leading company again.
They've got a lot of products, cancer-type products, and things on the pipeline and it just seems like things are going very well so we have hopes that Johnson & Johnson has reported the last two quarters are the first ones that have really been decent, they really showed growth, and then we expect that to accelerate so we're pretty hot on Johnson & Johnson now.
Steve Halpern: One particularly interesting portfolio that you maintain that I haven't seen anywhere else is based on closed-end funds that pay monthly dividends—so that's really a unique focus of yours. Can you tell us a little about that portfolio?
Harry Domash: Well, it turns out that in dividend investing world, at least our subscribers, a lot of them prefer securities that pay monthly. They like to get the monthly checks—you don't get checks anymore; it's actually a deposit in your account—but anyway, they like to see the monthly income.
So, a lot of our investors live off of that, so what we try to do is construct a diversified portfolio of monthly payers.
Closed-end funds are my favorite type of funds, a closed-end fund is something like a regular mutual fund, an open-end fund, except with a regular mutual fund, when you buy shares they take the cash and use that to, they give you shares and they take the cash and invest that.
And when you sell shares they have to pay you the money back and they have to sell stocks to raise the cash to pay you.
With closed-end funds, it doesn't work that way. They sell a certain amount of stocks with the shares at the IPO and then that's it, they don't sell any more shares.
So when you buy and sell, you buy and sell them on the open market, just like stocks, so that gives the closed-end fund managers more flexibility because they don't have to worry about investors selling shares when the stock market's down and buying when it's up.
Anyway, we have, in our portfolio, we have some...what you would call junk bond or high-yield bond funds, which, in this environment, are not risky at all, because for the reasons I said before, high-yield are below investment-grade companies and can raise cash pretty easily as long as they're well run.
Then we have other funds that invest in just government securities or in AAA rated funds or bonds.
For instance, AllianceBernstein Income, ticker (ACG), has about 70% of its holdings rated AAA, which is the highest rating you can get. We have some that invest in global real estate.
We have some invested in utility, preferreds, and common. We have some invested in emerging market debt. We try to cover the whole spectrum of investing. When you're looking at monthly payers, you're usually getting bond funds as opposed to stock funds.
Steven Halpern: Now among those closed-end funds is there a name or two that stands out that people should be looking at?
Harry Domash: Well, one that's really good for us has been Reaves Utility Income. It holds primarily US utility and telecom stocks and it's been a pretty good dividend raiser. The ticker is (UTG), paying about a 6.1% yield now and it's a good serial dividend increaser so it's a very good one.
If you're worried about rising interest rates then Invesco Dynamic Credit Opportunities, ticker (VTA), invests in below investment-grade floating rate bank loans. In other words, these are called senior loans.
They're bank loans that adjust their payouts based on prevailing interest rates, so if interest rates go up, these loans will pay higher dividends, so this is a good hedge if you are concerned about rising interest rates.
Another one that's really performed, and it's paying a 6.9% yield right now, Guggenheim Strategic Opportunities, ticker (GOF), that's actually Claymore Guggenheim, holds corporate and government backed, that it's mostly investment-grade and it's paying a 10.1% yield right now, which is pretty high. Those are three that I could recommend right now.
Steven Halpern: Well, we really appreciate you joining us today and sharing your expertise. Thank you.
Harry Domash: You're welcome.
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