At present, our model portfolio does not hold any high-yield pure plays in healthcare. So, I wanted ...
Time to Take Partial Profits on MLPs?
12/20/2012 8:30 am EST
Many MLPs have become favorites of momentum investors, and income expert Roger Conrad reminds investors that it is always OK to take partial profits on big gainers.
Roger, you're our favorite income expert among several phenomenal income experts. Explain to us the five areas that you're specializing in to create income for investors today.
Well, you know the first time I spoke out here was 1989 actually at this conference. Then I had Utility Forecaster. So that's the first newsletter I have. It focused on a wide range of income investments. It sort of has taken off from there.
Canadian Edge we've had around for about ten years. It focuses on Canada obviously. Very good income opportunities there. A lot of the former income trusts have maintained very generous dividend-paying policies; many of them pay monthly. You also have the benefit of a very nice currency there as well. So that's another letter.
Also, for Australia-which has very similar investment characteristics to Canada-we have a letter called Australian Edge. It's pretty much set up the same way as Canadian Edge. We look for dividend-paying companies primarily that are growing their business. We're taking advantage of a pretty nice currency situation there. Australia is very tied to the economies of Asia in particular, so there's a lot of growth there for developing its resources well.
MLP Profits is another letter. Master Limited Partnerships I think are very interesting right now. You know, I don't know what's going to happen in 2013 regarding dividend taxes. I know a number of politicians want to bring them down even or at least keep them at a low rate, but I'm thinking probably they're going to go up in 2013 and beyond.
Master Limited Partnerships though offer a really nice way to shelter income, because many of them pay dividends from return of capital. So you don't pay a tax on that. The year received, it just comes off your cost basis, and then at the end of the road it's a capital gain. Very nice tax advantage.
There also again, good companies, big dividends growing those dividends over time. There is a lot of need for pipelines and other kinds of infrastructure. That's what we're looking for. It's boring, but it's very, very nice duration.
Well, it's not very boring. Actually, it's modest of you to say that. Traditionally it's been boring, but in recent years the Master Limited Partnerships have put out many of them...not just a couple of off the beaten path ones, but many of them that have been at this conference and that you've written about and recommended have put up returns that remind me of the late 1900s in technology stocks.
They really have gone up very significantly to the point where I'm wondering of the best of the advances have already been seen, and yet they're still putting out very high current returns. What concerns you about income investing in general as we go forward from this juncture with so much advance behind us?
Well, I think that's a really good point. We have seen a lot of demand for dividend-paying stocks-in particular, things that are safe. That's part and parcel of the kind of market we've had.
There's some permanence to it in that we don't have these pensions anymore for most people. People have to take their investments, whatever kitty they've saved, through retirement, and hopefully do something with it, maybe even live off of the return. So dividend-paying stocks are meeting that need.
I think some of that is going to be permanent. On the other hand, we've something of a momentum type of investing take over in some of these areas.
You mention how a lot of these MLPs have generated huge returns that you'd expect maybe the tech stocks of the 90s on those. Maybe that's overstating it a little bit.|pagebreak|
Certainly 25% to 30% in a year.
Well, people have poured into them and driven the prices up. They've almost been willing to pay any price for the ones that are on the favorites list. Conversely, though, there are a number of other companies that for one reason or another has kind of run afoul of investors, or people have perceived some sort of risk there.
One of the things about this market is the more a stock goes up, the more the general perception seems to be that it's safe. The more a stock goes down, the more perception is that it's very, very risky. It's the opposite of value investing, which I think is really the only way to go about this.
It has created some pretty interesting opportunities. We have on the one hand a lot of these stocks I'm talking about in all these universes-whether we're talking about Australian stocks, Canadian stocks, MLPs-that have very, very high valuations. People have just bid them up, their favorites.
We've owned many of them. We've done quite well with them. Our advice for these things now, though, is first of all, don't buy. Maybe if you want to buy, try using a buy limit order that's only going to get you into a certain price. But maybe even think about taking some profits if you do have big gains. Don't sell the whole thing, but maybe sell a little bit of some of these things.
On the other hand, all these stocks that have been crushed down, some of them are going to fall apart. There are going to be problems with some of them, but by and large that's where the value lies in this market. If you get one of these beaten-down stocks-and you can see them by the very high yields that they have in many cases-and they turn things around and people start losing their fear of them, you're going to get a nice capital gain as well as dividends.
So a mix of those two approaches is pretty much what we're advocating right now, and what I'll advocate in various speeches as well as my publications.
Do you use stop losses?
I've found that those are really not that helpful. I mean a hard stop-loss. I mean I think there's so much volatility in the market right now that it's almost a self-fulfilling prophecy that you're going to get stopped out.
What a lot of people don't realize about stops is that they don't guarantee you're out at a certain price. A buy limit order will guarantee you will get in at a certain price, but a stop order is just a sell sitting there. So if enough of them get executed at once-and we have seen that many times with stocks where everybody is using a trailing stop, for example, from the high price, maybe 15% below-you hit that level, there's so many sellers coming in the stock in question just goes through the floor.
We saw actually Enterprise Products Partners (EPD), probably the most solid, probably the blue chip of the MLP space, very big, very steady, very, very reliable cash flow. It's very, very reliable dividend growth going forward. On one day last year, it opened around $40 and actually closed around $40, but intraday hit a low below $25.
You know, sometimes it's hard to see what exactly causes that, but a lot of sellers at once will drive a stock down. So I think people that use stops, you have to be prepared for that to happen. I'm not saying just hold on through anything, and I think sometimes these companies do fall apart.
It gets kind of technical there, trying to sort out what point something is worth selling. You know, I'm trying to get better at that. I've been guilty of holding onto things far too long in the past. I think that's by and large a better approach.
Look at what the company is doing. In particular, how is that dividend? Is that dividend safe, or is it more than likely going to go? If you get one of these cheap stocks or these stocks with big yield and they hold the distribution, they loosen that fear level, you're going to get a pretty nice gain.
If something happens though-you know, I look at a lot at management guidance-if they've violated that or if they cut the dividend, that would be like the biggest warning sign. We probably want to get out of those types of companies, but again not using a hard stop; just using our heads and making a judgment.
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