07-03-2014, 01:42 PM
(07-03-2014, 11:54 AM)ronn38 Wrote: Could those of you with interest, give us some links to HYLG materials; i.e. articles, sample portfolio's, etc. It much nicer to have someone tell you the best sources to examine, rather than sorting them yourself at the novice level.
Good start to a new section, huh ;-)
Thanks,
Ronn
I have identified and invested in several categories of HYLG stocks. I can help with links to SA articles about them. I can also give you some words of guidance based on my experience.
HY stocks are not buy-and-forget. They are buy-and-frequently-monitor. You will not find any consumer staples or utilities here.
HY stocks require as much if not more due diligence than MY or LY stocks. If you enjoy learning about a subject in depth, this could be the place for you. My personal experience is that diving into these stocks has been a good intellectual replacement for what I did before I retired, which was software engineering. Use it or lose it, and I use it every day.
HY stocks require a tolerance for much greater standard deviation than you will see with MY or LY stocks. If you see large changes in price as opportunities, this is a place for you. If large price changes give you that queasy feeling, stay away.
When you own a HY stock, you need to have different expectations for growth than you would for a MY or LY stock. Some of these are best thought of as variable dividend payers. If you invest in these, you must be prepared to tolerate an occasional decrease in the dividend. This is especially true for mortgage REITs, BDCs, and leveraged ETNs. I expect the occasional decrease, so I set yield and yield growth goals for my entire portfolio, with enough reliable dividend growth in MY that I can reasonably expect that my yield will grow in total even when, for example, AGNC reduces its dividend.
Except for the ETNs, you can get SEC filings for all of these, and I recommend 10-Ks and 10-Qs as required reading.
Following are starred (*) HY categories that I am familiar with.
* 2x leveraged ETNs with monthly reset from UBS
If the thought of leverage or ETNs does not put you off, I suggest you start with the UBS web site: http://etracs.ubs.com/product/list
Select the 'leverage' strategy, you will get a list of all their leveraged ETNs. Download the product supplement of whichever product catches your interest, and become familiar with 'automatic acceleration', which I consider to be the only real risk with these products. UBS does have default risk, but its Morningstar credit rating is A, and if UBS defaults, we will all have much larger problems.
Seeking Alpha authors Lance Brofman and Left Banker have written a number of excellent articles. SA blogger Darren McCammon has created a portfolio with several of these ETNs and writes extensively about them. I did a back-of-the-envelope study of the various risks of these ETNs and published my study as a comment to one of Darren's blogs.
This is Darren's HY blog: http://seekingalpha.com/instablog/379412...bs-2x-etns
These are my risk analyses (I have done 2): http://seekingalpha.com/instablog/379412...t-33291633
http://seekingalpha.com/article/2237513-...t-34705863
My personal favorite is MLPL, which tracks the Alerian MLP infrastructure index, i.e. midstream. I think it has the best combination of yield and growth, and the underlying businesses are here to stay and grow.
I also own BDCL and MORL. I would like to own CEFL and DVHL, but my broker, Wells Fargo, will not allow its customers to own them. I think the only reason they are not allowed is their short history. There is nothing inherently more risky about these than BDCL or MLPL.
You may have read that leveraged ETNs are designed to lose value in the long run. This is true for those that reset daily. The UBS ETNs reset monthly. I have studied their price histories compared to the indexes they track, and I have not found any price decay due to reset. The only decay I have seen has been entirely due to the management fees, just like any ETF or mutual fund.
* Mortgage REITs
These REITs borrow at low short term rates and lend at higher long term rates, and use leverage. SA author Scott Kennedy is a CPA who does gold-standard analysis of AGNC. He also follows PSEC, a BDC.
* Business Development Companies (BDCs)
These are mostly lenders to private equity, with a small minority of their portfolios being equity, but this varies. SA author BDC Buzz provides excellent analysis for the larger BDCs, as does Scott Kennedy for PSEC.
Wells Fargo produces extensive in-depth analysis. I consider them to be the best. You may need to be a Wells Fargo brokerage customer to get their reports. I am. If you cannot get the WF research, BDC Buzz and Scott Kennedy provide between them enough for in depth due diligence, IMO.
* Upstream MLPs.
These MLPs get hydrocarbons out of the ground. They do not engage in exploration, only production, so they do not have the risk profiles of wildcatters, for instance. They are exposed to commodity price fluctuations and thus they hedge a large part of their output. Hedging limits their downside exposure, but also their upside. There are many to choose from. Those I am most familiar with are BBEP, LINE/LNCO, QRE, and VNR. You can find articles on all of these on SA. Wells Fargo produces extensive in-depth analysis.
> Midstream MLPs
These MLPs transport the hydrocarbons from the wellhead to the refiner. The business model is primarily that of a toll road. They have long term contracts with take-or-pay provisions that generate very predictable revenues. Most of these yield less than 8%, but depending on the markets, a few may from time to time rise into the HY category.
There are many of these as well. Most familiar to me are EPB, EPD, ETP, ETE, KMI, KMP/KMR, MMP, PAA. Once again, Seeking Alpha and Wells Fargo are my sources of information.
MLPL is the ETN that tracks 2x the performance of this group. I started investing in individual midstream MLPs in 2011. If I had understood MLPL as well then as I do now, I would have bought a lot less of the individual MLPs and would have substituted MLPL.