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Cabot Investors Conference 2014 www.cabot.net
Prospecting for High Dividend Yields
Chloe Lutts JensenChief Analyst, Cabot Dividend
[email protected]@ChloeAtCabot
Cabot Investors Conference 2014 www.cabot.net
S&P Yield vs. 10-yr Bond Yield
Cabot Investors Conference 2014 www.cabot.net
10-yr Treasury Yields
YTD
Cabot Investors Conference 2014 www.cabot.net
Average Yields
*financial preferreds
Cabot Investors Conference 2014 www.cabot.net
• REITs (Real Estate Investment Trusts)
• MLPs (Master Limited Partnerships)
• CEFs (Closed-End Funds)
Cabot Investors Conference 2014 www.cabot.net
Average Yields
*financial preferreds
Cabot Investors Conference 2014 www.cabot.net
Real Estate Investment Trusts
• Equity REITs own property, Mortgage REITs own mortgages
• Exempt from taxation at trust level• Must pay 90% of income to
investors
Cabot Investors Conference 2014 www.cabot.net
Real Estate Investment Trusts
Cabot Investors Conference 2014 www.cabot.net
Real Estate Investment Trusts• Tax Consequences–Distributions are mostly Ordinary
Income (70% on average)–May also include Qualified Dividend
Income, Long-Term Capital Gains and Return of Capital
Cabot Investors Conference 2014 www.cabot.net
Analyzing REITs• Funds from Operations (FFO)• Distribution History– Long and Stable History, No Cuts– Dividend Growth Rate
• Valuation– Price/FFO– Net Asset Value
• Debt
Cabot Investors Conference 2014 www.cabot.net
Realty Income Corp. (O)•5% Yield•Dividends Since 1994•Consecutive Increases: 16 years•Dividend 10 year CAGR: 6%• FFO Growing and Covers Dividend:
•Debt/Equity = 0.87 (2013)– 10-yr average is 1.05/Industry Average is 1.8
Cabot Investors Conference 2014 www.cabot.net
Average Yields
*financial preferreds
Cabot Investors Conference 2014 www.cabot.net
Master Limited Partnerships• Publicly-Traded Limited Partnership• Pass-Through Entity Free From
Taxation at the Corporate Level• Must be in Natural Resources,
Commodities or Real Estate
Cabot Investors Conference 2014 www.cabot.net
Analyzing MLPs• Distributable Cash Flow (DCF)
• DCF = EBITDA - interest - capital spending• Only subtracts cash costs• More informative than EPS
• Distribution Coverage Ratio•Coverage Ratio = DCF / distribution• Will be close to 100%
Cabot Investors Conference 2014 www.cabot.net
2013 Q3
2013 Q4
2014 Q1
2014 Q2
DCF $330.00 $429.00 $411.00 $367.00
Dist. $333.00 $328.43 $328.00 $244.00
DCR 1.00 x 1.31 x 1.25 x 1.5 x
2013 Q3
2013 Q4
2014 Q1
2014 Q2
DCF $132.30 $145.50 $190.30 $194.50
Dist. $206.80 $213.00 $214.50 $224.70
DCR 0.64 x 0.68 x 0.89 x 0.87 x
Cabot Investors Conference 2014 www.cabot.net
Master Limited Partnerships• Stable and Rising Distributable Cash
Flow• Coverage Ratio Above 1 x• Distribution Growth• Minimal Commodity Price Exposure• Fee-Based Income• Manageable Incentive Distribution Rights
Cabot Investors Conference 2014 www.cabot.net
Master Limited PartnershipsTaxation
•10% - 20% of Distribution = Income•80% - 90% = Return of Capital•Taxes on RoC are Deferred•Income Tax Due At Sale•Cost Basis is “reset” if the Original Unitholder Dies •Can Incur UBTI in an IRA
Cabot Investors Conference 2014 www.cabot.net
Delek Logistics Partners (DKL)• 5.2% yield• Traditional Mid-stream
MLP• Distribution up 27% since
Nov. 2012 IPO– Targeting 15% annual
distribution growth• Currently in third tier of
IDR schedule– Currently 75/25 LP/GP,
switches to 50/50 at $0.56
2013 Q3
2013 Q4
2014 Q1
2014 Q2
DCF $12.9 mil
$13.3 mil
$15.9 mil
$24.0 mil
Dist. $9.9 mil 10.3 mil 10.2 mil 10.5 milDCR 1.30 x 1.30 x 1.52 x 2.29 x
Cabot Investors Conference 2014 www.cabot.net
Cabot Investors Conference 2014 www.cabot.net
Closed End Funds (CEFs)• Limited Number of Shares• Often Income-Focused• Trade at a Market-Determined Price• Can Have a Discount or Premium– Price may Not Always Return to NAV– NAV Can Change– Compare to Historic Discount or Premium
Cabot Investors Conference 2014 www.cabot.net
Analyzing CEFs• Where do Distributions Come from?– Is the Source Reliable or Variable?– How are they Classified?–Managed Distributions
• Does it use Leverage?• What’s the Discount or Premium?
Cabot Investors Conference 2014 www.cabot.net
AllianzGI NFJ Dividend, Interest & Premium Strategy Fund (NFJ)• 78% Equity, 20% Convertible Bonds• Covered Calls on 90% of equities• 10% yield• 2.2% discount, 3-yr average discount of 4.6%• Most consistent distributions in the category• In 2013 distributions were 68% RoC
Cabot Investors Conference 2014 www.cabot.net
Special Opportunities Fund (SPE)
• Invests in other Discounted CEFs• Leverage is 23% of Assets• Currently Trading at a 7.5% Discount • Distributions are Mostly Income and
Long-Term Capital Gains• 1.8% Expense Ratio
Cabot Investors Conference 2014 www.cabot.net
Resources• MLPdata.com• CEFconnect.com