2 Timely Income Picks

05/07/2012 10:30 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Finding solid income means turning over every rock and then making sure the quality is commensurate with the opportunity, writes Marilyn Cohen of Bond Smart Investor.

It’s always difficult going against the investment grain. That’s exactly what’s happening with our recommendation of Buckeye Partners LP (BPL), a master limited partnership.

Buckeye is an independent pipeline carrier. It carries refined petroleum products from other pipelines to which they are connected. They also own marine terminals and 5,400 miles of pipelines. This system serves 17 states located in the upper Midwest and Northeast.

Unlike most MLPs, Buckeye has been a company that analysts disliked due to management’s aggressive acquisitions. Recently, Buckeye acquired a marine terminal near New York Harbor from Chevron for $260 million. This facility is a strategic enhancement to Buckeye’s international reach.

In a sector where most MLPs are red hot and overvalued, Buckeye is not. Its strategic acquisitions, expansion plans, and good execution sustain its value. This one should pay off.

What worries investors is the distribution coverage. For 2011, the distribution was 0.91:1. It appears that coverage was too low due to Buckeye’s growing expansion costs.

But those costs look worthwhile—new assets—income producing assets that fit nicely into Buckeye’s portfolio of properties and will kick in the revenue stream management expects.

The bet is that Buckeye’s coverage ratio will improve. That’s a good bet.

For aggressive municipal bond investors, I recommend adding on or initiating a new position in the Blackrock National Closed-End Municipal Fund (MYI) we recommended last month. With 37% leverage, we are counting on short-term rates staying steady. It’s not a sure thing, but a decent bet for 2012.

As far as the long-term bond holdings go, the majority are investment grade; the portfolio is loaded with airport revenue bonds, electric revenue, and school bonds. Monthly distribution is 7.2 cents, giving you a 6% yield.

MYI presently sells at a modest -2.24% discount to the Net Asset Value. Average maturity is 19.75 years, number of holdings is around 238, and approximately 19% of the bonds are subject to AMT (alternative minimum tax). A 6% Federal tax-free yield if you are in the 35% bracket equals a 9.23% taxable equivalent yield. Tough to beat that.

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Related Reading:

A Smart Way Back into Real Estate
3 Income Strategies that Don't Work
Put Junk in the Trunk

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