My portfolio has plenty of the first two categories. We have a handful of above-average utilities and energy stocks. But we have only one health care play. If you look at other income-focused portfolios, you’ll find a number of health care real estate trusts and pharmaceutical makers.

Now, we’re not unaware that changing demographics in this country and rapidly growing health care costs have made this a powerful sector. But the numbers are all wrong.

On the real estate side, there are still a number of issues concerning what the property should cost. So smart investors have to remain picky when it comes to hospital and retirement home REITs.

But when it comes to pharmaceuticals, we’re dealing with a whole other set of problems.

We have been covering the ongoing “patent cliff” in name-brand drugs for years now. Some $49 billion in annual pharmaceutical sales are at risk of losing their exclusivity.

And for a drug maker, that’s your most important asset…exclusive rights to make and sell your drugs.

This isn’t some far-off problem. Last year, industry leader Pfizer lost exclusive rights to Lipitor. That drug brings in — or, more accurately, brought in — more than $4.5 billion in annual revenues. That’s a sizable chunk of change.

Others have faced similar challenges. Eli Lilly lost exclusivity to Zyprexa — $1.9 billion in yearly sales. GlaxoSmithKline lost Advair — $4.7 billion in U.S. sales. The list goes on and on. There are also plenty of big drug patent expirations on the horizon. In fact, the majority of these problems are yet to come for most major companies.

Now that we are further along on this patent cliff, other potential plays are popping up. There is one company we recently released to our Lifetime Income Report subscribers…

Up until now, we’ve been a bit cautious to get into it, however. Its long and successful history didn’t give it a pass on this patent cliff problem. It was very much in trouble.

However, through all of this, the company still managed to generate $11.4 billion free cash flow and increase its earnings per share for the 28th year. It has been able to do that in face of some of the stiffest economic environments in history and its expiring patent issues.

And, it has ensured continued growth through their proactive portfolio transformations.

What really strikes us about this company’s approach is how, despite its long legacy, it refuses to be a dinosaur. Its current goal is to realize half of its health care revenue from products developed in the last five years. Considering the backward-looking industry it finds itself in, that’s great foresight…

Sincerely,

Jim Nelson
for The Penny Sleuth

A Crack at One of the Fastest-Growing Sectors in the Market was originally featured in the Penny Sleuth.

Remember, this is before the company that will soon have the largest Internet IPO in history dropped the “The” from its name.

For one small investment firm, that’s exactly what happened.

Before anyone outside of a handful of university students even knew much about Facebook, a company called Accel Partners dropped $12.2 million on it.

On Feb. 1 of this year, after months of anticipation, Facebook finally announced its plans to go public. For Accel, that’s the equivalent of striking gold.

Even after selling 17% of its stake last year, Accel’s Facebook bet is still worth as much as $11.4 billion, according to Bloomberg. That’s a 934-fold return!

This makes for a great story if you’re the gambling type. But for every Facebook, there are plenty of losers.

Venture capital is a tough business. It takes an incredible amount of luck. That’s something Bahrain-based Arcapita didn’t have recently.

The private equity and venture capital-focused investment firm filed for bankruptcy two weeks ago after defaulting on a $1.1 billion loan.

This is just one of hundreds of stories about failed venture capital companies. And the vast majority of them have one aspect in common: They bet big on startups by buying equity stakes in risky industries.

Today, we’re going to show you how to be a venture capitalist without the risk.

Sure, you won’t be cashing out $11.4 billion on the next highflying tech IPO. But you won’t go the way of Arcapita, either.

I’ve pointed out before that small-to-medium-sized companies can raise money in only one of two ways: Sell shares or take on debt. But in today’s unique investment landscape, finding that funding is incredibly hard.

Raising money in the equity markets is always tough. And if you are dealing with a privately owned company, this becomes even more difficult.

Fewer and fewer private equity firms are willing to finance companies in exchange for ownership stakes. The numbers just don’t work out anymore.

Facebook is a rare exception. Most private companies don’t have the hype required to have a successful IPO. Fewer still have the ability to find backers pre-IPO…when they need it the most.

That just leaves debt. And in today’s strange debt market, no one is banking on risky companies. While that may be changing soon with the influx in junk bond investors, we’re still a long way from where we were prior to the recession. And for the companies we’re talking about, that’s simply not an option.

And forget about bank loans. Banks just aren’t ponying up the kind of small- and medium-sized business bank loans we used to see.

One of the main reasons is the collapse of the collateralized loan obligations. CLOs are basically just a way for banks to bundle these loans and sell them to investors. Investors haven’t been buying these products since 2007. This gives banks very little incentive to take bets on smaller companies.

So there is a huge credit gap globally for small businesses. They can’t find equity investors. And no bank will give them a loan.

There is a small group of publicly traded companies that finance privately owned companies. Again, they have the choice between equity stakes or loans. Increasingly, these financers are choosing the security of collateral-backed debt to the high-risk equity option.

These lenders are technically called business development companies, or BDCs.

This niche market is already showing my readers impressive gains One of my hottest plays recently is BlackRock Kelso Capital Corp. (NASDAQ:BKCC). It specializes in providing small to mid-sized cash-flow-positive companies with financing in exchange for debt or equity. The majority of its portfolio is made up of 73% secured debt, with 16% in subordinated debt securities and 11% in equity stakes.

As you can probably imagine, this relatively hidden industry has great upside.

In fact, because of an underreported budget hike by the Obama administration, plays like this could turn today’s credit gap into humongous income.

Sincerely,

Jim Nelson
for The Penny Sleuth

The Only Way to Close the Small-Business Gap was originally featured in the Penny Sleuth.

So when I came across the one I’m going to show you today, I just had to let you know about it.

When it comes to making money in the stock market, rarely do I simply place bets. I want a little insurance for my money. I want it to pay me back on top of any extra growth I can find.

Today, I am going to let you in on my secret way to do that…

On the surface, Cenveo Inc (NYSE:CVO) looks like a bad bet. Investors have fled this seemingly small printing company. But that was simply a mistake. Smart money, as I’m about to show you, is doing things quite a bit differently.

For starters, let’s dig into what Cenveo actually does. While its small cap status may seem like it might only have a few regional operations, that’s wrong. The company is actually one of the largest nationwide printers. It even has international business.

When you receive a bill or an interest statement from your bank, you probably don’t think much about it. You pay it or file it away, and that’s the end of it. But its story is much more involved.

You see, big banks, credit card companies and even utility companies typically hire printers to send you those statements and bills. They sign large contracts with companies like Cenveo to handle that logistical side of their businesses. And when I say large, I mean it. Some of these contracts can be in the tens of millions of dollars. Cenveo handles one right now for American Express. Just imagine how many Am Ex statements go out every month.

On top of contract work, Cenveo is also a major independent printer. Think about all the junk mail you receive. The penny mailers, credit card offers, post cards telling you how much you can save by switching auto insurance. We all get those, probably hundreds of them throughout the year. Who do you think prints those? Contract printers like Cenveo… that’s who.

Finally, think about all the envelopes those mailers, statements, bills, etc. come in… and all the ones with return envelopes inside. The amount of money that goes into envelopes alone in the U.S. is in the billions. Cenveo has been squeezing its way into this incredibly lucrative field over the past few years. Now, according to the company’s CEO, one out of every four envelopes in the U.S. is made by Cenveo. That’s an enormous amount of something most of us just throw away without looking at.

Speaking of the CEO, check this out. Over the past two years, CEO Robert Burton Sr. has been purchasing shares of CVO every month. His monthly average open market purchase has been about 14,500 shares. With today’s depressed share price, he claims to be picking up about 30,000 shares each month. Having someone on the inside with that kind of faith in the company is a tremendous asset to have.

You could certainly go out and pick up shares of CVO if you want. They may eventually work out for you. But I can tell you right now, that’s not the best way to make money off this idea. Not even close…

Instead, you can use a strategy I call Income Safe IOUs to turn CVO into a bank account. Like a savings account or bank CD, you can use these Cenveo IOUs to pay you regular interest on your money. But unlike typical banks, this one comes with a massive, penny-stock-sized payout. And all of it, every dime of this return is contractually guaranteed. Good luck finding that in the stock market.

You see, 100% of this investment is guaranteed by law. You don’t ever have to buy or sell a single share of CVO. And best of all, your income checks are scheduled years in advance. You’ll know exactly how much you’ll get paid, when you’ll get paid.

I told a select group of readers about this opportunity a little over a month and a half ago. Here’s what they have already had the chance to lock in:

That’s a 50% return that’s guaranteed by law. But look at the annual income that also comes with this play. That’s $39.38 every six months, or 10.6% every year. The average savings account pays just 1% right now.

I want to give you the chance to get into this opportunity too. But there are more than 300,000 people that read Penny Sleuth. Obviously, I can’t share it with that many people.

But I might be able to still help you. Be sure to keep a close eye on your inbox tomorrow where you will have the opportunity to get the details of this play…

Sincerely,

Jim Nelson
for The Penny Sleuth

Turn This Tiny Junk Mailer Into a 50% Return was originally featured in the Penny Sleuth.

In fact, from my perspective, this housing market could be the best place to store your wealth in the coming four or five years.

Obviously, this is a turning of tides for us. In December 2009, I showed you the following chart:

As you can see, we were sitting right in the eye of the apparent housing storm that was brewing. Here we are — nearly a year and a half later. What exactly did happen to these rate resets?

Well, we were both right and wrong. Over the past year, when we were supposed to start seeing large increases in option ARM defaults, we did. But not to the degree this chart suggested. In many cases, banks and homeowners worked out a payment schedule. Add in record-low interest rates, which kept the resets from being overburdening and you get a softer increase.

Clearly, we’re still facing an uphill battle. But as you can see in the updated version of the chart, the mountain isn’t as high of a climb:

Surely, option ARM resets will be a source of trouble for both banks and homeowners in the coming year. But with the performance thus far, calling for a double dip (at least the size of one we previously predicted) would make us sound like the “The end is nigh” guy in Times Square.

There are many reasons the mountain of resets has smoothed out since 2009. First, many of these mortgages have already defaulted. With home values falling as fast and far as they have, many homeowners were extremely underwater on their loans. So they walked.

Renegotiated loans also caused the softening of the reset wave. With low interest rates, homeowners could work out more favorable long-term payment options.

Still, there could certainly be a second housing crisis. There are more vacant homes on the market than at nearly any other time in history:

The continued high unemployment rate is still having the largest effect on the housing market. And that doesn’t look like it’ll change anytime soon. But the worst of the job cuts are over. Most companies have already had their largest layoffs. That’s what sent the housing market into a tailspin the first time, but it’s highly unlikely that they can do that again.

The last argument we have for reversing our double-dip prediction is the economics of homeownership. It is now less of a bet on home prices as it was during the housing bubble. It is now just more economical to buy a house.

With the massive crash in home prices over the last several years and remarkably low mortgage rates, more people can actually afford a mortgage now than ever. Take a look at this chart:

According to the National Association of Realtors’ Housing Affordability Index — an industry-standard — more people can afford to buy a house with today’s average income levels, current housing prices and mortgage rates than at any other time in the index’s 40-year history.

Prior to this recent recession, the index had never traveled above 160 — which translates into an average national medium family income of 160% of the mortgage-qualifying rate for a median-priced home. Today, that number is 192.

The number we are watching the closest is new housing starts, which is looking worse every month. In the most recent release, new housing starts dropped a whopping 22%.

Obviously, this is a wildly unpredictable and volatile statistic. But it was surely enough to scare many investors.

Housing starts should flat line for the rest of this year. But in the coming years, we expect it to start increasing again.

So while all of this adds up to no more than flat sales for the housing industry in the short term, we do expect it to boost housing stocks’ top line in the long term. And there are plenty of ways for investors to add housing exposure to their portfolios at bargain prices right now…

Sincerely,
Jim Nelson
Penny Sleuth

April 26, 2011

Editor’s Note: If you’re seeking housing exposure, don’t even think about buying real estate investment trusts (better known as REITs) — they just don’t represent real estate the way investors think they do. Instead, the most direct long-term opportunities come from small-cap homebuilders like Beazer Homes (NYSE: BZH), a stock that we suggested had 48% near-term upside back in July of last year. Since the day that article ran, shares have rallied 38% — and there’s still considerable room to run longer-term.

[Independence Note: As with every company we mention here in the Penny Sleuth, neither the author nor any of the Sleuth’s other editorial staff have a financial position in Beazer Homes. Because of that, we’re completely independent, and able to provide you with unbiased analysis — try holding other penny stock newsletters up to that same standard.]

Why It’s Time to Buy a Home — or This Home Stock… was originally featured in the Penny Sleuth.

It’s because of this that we’ve been able to lock in gains of 32%, 46% and even 104% in the past two years — and that doesn’t even count the massive gains currently open in LIR’s portfolio.

This month, I may have found the largest Wall Street mistake in my career…

Of course, finding investor errors is the nature of contrarian thinking. If we were following mainstream lines of thought, we would never find undervalued plays. And I’d certainly never find the kinds of yields my readers have been able to lock in.

Contrarian investors, at least good ones, don’t find just out-of-favor stocks. They find hated ones. And despite one of the best years in this one industry’s history, investors have washed their hands of it.

The industry leader is down more than 50% since it came under fire. (My favorite stock in the industry has also seen its share price halved. But its dividend grew 33% in the last quarter — and a massive 166% since the start of the recession.)

The best part, we’re able to lock in a solid yield on this industry for the first time in its history…Thank you, Wall Street!

Before I get into the specifics, let’s dive right into this industry…and investors’ repugnance of it.

The Down-and-Out Industry We Can’t Help But Love

Here’s how bad things look for this industry — or at least how the mainstream media have framed the argument against it.

The Senate HELP Committee brought in top players to berate them. A Government Accountability Office report found fraud across the board. And the industry’s independent regulators may even lose their jobs over a scandal. In fact, if events continue to unfold in this fashion, these businesses will lose the majority of their funding — which comes from Washington.

These threats and issues have even caused one CEO to recently say, “Most of [the decline] is based on the fact [that] you have important public policy commentators…as well as significant media who have questioned the efficacy of [our business].”

The industry, as you may have guessed by now, is for-profit education. Those may just be three of the ugliest words in Washington.

As I noted, the industry first came under fire in early August when the GAO report on abuses and fraud was leaked to the press. Shares of every for-profit education company collapsed.

The HELP Committee immediately called a hearing on for-profit schools. From there, arguments for changing how universities are accredited started popping up. Chairman Tom Harkin and Sen. Al Franken laid into the executive director at an accreditation agency. They even dragged in a former admissions representative from a for-profit to give the gory behind-the-scenes details.

When the smoke cleared, nothing was changed. But the damage was done. Harkin is still the committee’s chairman. And this story could still have an unhappy ending for the likes of Kaplan University and University of Phoenix.

But just as everyone is turned against the industry, there are still some golden eggs to be found.

***Editor’s Note: More specifically, there are a number of small-cap for-profit education stocks that could have upside from this point. One of the small education stocks to watch is National American Univ. Holdings (NASDAQ: NAUH), a $328 million college operator that pays out a 1.54% dividend yield.***

Sincerely,
Jim Nelson
Penny Sleuth

March 3, 2011

A Reason to Buy the Most Hated Industry on the Market was originally featured in the Penny Sleuth.

Junk bonds have been out of control for the past several months. In just the first three quarters of this year, high-yield bond sales outpaced all of 2009 by 25%.

Since yields in the junk bond landscape are now at record lows, investors are now chasing equity yields with just as much fury. Take a look at IncrediMail Ltd (NASDAQ: MAIL), the income industry darling of the past two years. MAIL paid a grand total of $1.78 per share in dividends since July 2009. Meanwhile, its share price is sitting at just $6.49. Using this year’s numbers, that’s a 13.6% dividend yield — an unheard of number in today’s environment.

But that too had to come to an end. Just this month, MAIL’s board decided it was better for the company to conserve cash and put that money back into this growth play’s future. Meaning, no more dividends for its income-hungry shareholders.

That seems to be the story almost everywhere you look. But we pinpointed one area that it’s not the case…

When most investors think about dividends, they are talking about companies like Altria Group Inc (NYSE: MO) and Procter & Gamble (NYSE: PG). One typically pays 6-plus percent yields, and the other has been paying out shareholder distributions since 1891. But most are forgetting where some of the best dividends have come from over the last several decades: the U.K.

According to Barclays, GBP£100 invested in the U.K. stock market at the end of the Second World War would be worth GBP£5,721 today. But if you factor in reinvested dividends throughout that time period, that 100 quid would be GBP£92,460 today. And now may be the best time of all to get in on British dividends.

The Turnaround Story of 2010

Not only did the U.K. face a recession equal – or nearly equal – to its American brethren, it was dealing with a debt problem that seemed nearly impossible to combat. In the height of the recession, The Economist writes:

Britain’s public finances, however, are on some measures the worst of any rich country. It is likely to have a bigger deficit in 2010, as a percentage of GDP, than even the likes of Italy.

All seemed hopeless… that is, until election season. Unlike U.S. politics, the U.K. political calendar is relatively short. The month-long campaign produced the first coalition government since 1945. While it may sound like a bad idea bringing liberals and conservatives together to battle out an austerity plan to keep their government solvent during such a horrible economic environment, the outcome might surprise you.

Prime Minister David Cameron and his Deputy Prime Minister Nick Clegg have been able to adopt policy after policy that alienates people on both sides, yet not to the degree most expected. Their mild, yet powerful reforms have generally eased debt tensions for Britain… or at least business uncertainty in the old empire.

According to a Capita Registrars study this past month, U.K. businesses are making a full recovery… or at least their dividends are beginning to. As you can see in the graph below, the most recent quarter, which ended the past September, was the first period of positive dividend growth since the start of 2009. And these numbers even factor in the massive BP dividend cut suffered this year.

This trend is expected to continue. Most expect 2011 to blow 2010 away as far as income distributions are concerned.

All this worked out to create a remarkable investment opportunity for the near term. You see, when you combine British dividend policy with a more comfortable investment landscape, you get a few plays that seemed unreasonable just six months ago look great today.

That’s not to say that you should put your life savings into the British Pound. Sometimes, even bad, long-term pictures create short- and medium-term opportunities. For now, we can’t think of many better places than Britain for income.

Two Sets of British Dividends to Consider

Take a gander at Aviva Plc (NYSE: AV). Aviva is in the least-favored industry in the world: insurance and fund management. However, the company was able to return to profitability quickly after the 2008 crash. It is now estimating that it will have profitable growth in both life and general insurance sales throughout the rest of 2010 and all of 2011.

But what makes Aviva attractive to income investors is its 5.8% dividend. More importantly, the company continues to grow that payment each year. And seeing how this stock was only recently listed in the U.S., the opportunity is ripe for the risk taker.

Another U.K. payer that caught our eye was Rexam Plc (Pink Sheets: REXMY), which is listed on the prestigious tier of the Pink OTC Market’s quotation system, OTCQX International Premier. Rexam is a packaging giant. It makes everything from prescription bottles to soft drink cans. This, as you can imagine, is a big-money business. It’s been good enough to allow Rexam to pay a solid 3.6% yield over the past year. Going forward, we expect that number to grow.

[Editor’s Note: Because of Rexam’s size and its Pink Sheet listing, be careful entering and exiting this play. As always, use limit orders.]

Sincerely,
Jim Nelson
Penny Sleuth

November 18, 2010

Two British Income Plays That’ll Make You Drool was originally featured in the Penny Sleuth.

My defense portfolio includes MO, PM and VGR. No matter how bad the economy gets, smokers will not stop smoking — in fact, they will smoke more. Also, Europeans and Asians are still smoking like crazy and don’t have the restrictions we have about public smoking. — L.Q.

Agreed. That’s why we’ve been long British American Tobacco in the past — a stock my readers cashed out for a 46% gain.

All three this reader mentions, Altria, Philip Morris Intl. and Vector Group, are interesting, high-yielding tobacco plays. And we couldn’t agree more that now is the time to look into these types of opportunities.

But I have one specific problem with two of these companies. I worry, as this reader does, about the future of the American tobacco industry. Increased restrictions and anti-smoking campaigns have started to take a toll on companies like Altria and Vector, which both sell primarily to U.S. consumers.

Philip Morris Intl., on the other hand, is in a great position for coming years. It is the world’s largest publicly traded cigarette manufacturer — with operations in Eastern Europe, Africa, Asia and Latin America. The industry giant just raised its dividend yet again — to 64 cents per share, or a 4.5% yield. It’s seeing volume explode, especially in its Asia segment — up 35% by volume in the most recent quarter.

That said, I still don’t think that’s the best way to play the tobacco industry…

PM is big. We’re talking $102 billion big. And while I normally like large, established companies, I want the absolute best opportunities in each industry we follow. PM’s product portfolio consists of some of the most well known brands worldwide — everything from Marlboro to Chesterfield. But premium brands aren’t as popular in emerging markets as value brands. PM’s lower-cost brands don’t make up enough of its revenue to make us feel comfortable. Imperial Tobacco (PINK: ITYBY), however, is the giant in the value market.

Our U.K.-based tobacco giant controls a whopping 46% of the value brand market and 35% of the economy brand sales in the U.K. Similar results are found across each geographic area — including far-off emerging economies like Saudi Arabia and Taiwan.

The best part of Imperial’s business plan is its focus on fine-cut tobacco, or loose tobacco. With pre-rolled cigarette prices skyrocketing, it’s much more economical to roll your own. This is a trend that continues to gain traction around the world.

In the U.K., 5 million smokers roll their own smokes. That number doubled in the last 16 years, as almost every other tobacco figure has started to fall off. And in emerging countries like Indonesia, the number of roll-your-own (RYO) cigarette smokers is just starting to take off. Just because more people are coming into the middle class doesn’t mean they want to spend all their new money on top brands.

So instead of investing in the top brands in the world today, a more sustainable approach is to go after the value and RYO markets, which are flourishing. No one does that better than Imperial.

We expect to hold this play for years to come. As reader L.Q. pointed out, “No matter how bad the economy gets, smokers will not stop smoking — in fact, they will smoke more.”

All of that said, I’m not recommending that my readers pick up shares at current prices. As of today’s open, we’re already up double-digits on the stock (not even counting the company’s dividend payouts), and I’d be remiss in suggesting that new investors buy in at a double-digit disadvantage to my readers.

That said, I’m about to recommend a new play to my Lifetime Income Report readers – as well as one special government-backed Scandinavian Income investment that could put thousands of dollars in your pocket each month. To learn more about these income opportunities, check out the Lifetime Income Report website…

Sincerely,
Jim Nelson
Penny Sleuth

October 5, 2010

How We’re Profiting from This International Tobacco Giant… was originally featured in the Penny Sleuth.

Over the past year, the search for yields has been alarming for growth investors. In a market with finite investment capital, finding the next trend is important. And since volatility and uncertainty rule the day, the flight to safer investments has been prominent.

The first place most threatened investors go is treasuries. Since we’re also seeing record low Fed note rates, they are looking elsewhere… specifically, corporate bonds.

There’s been such a flood of new bond investors, we’re seeing some of the lowest yields in recent history (more money in bonds causes prices to skyrocket and yields to plummet). Since the 2007 peak, the Dow Jones Corporate Bond Index — which measures a basket of 96 investment grade laddered bonds — has significantly outperformed stocks.

This has pushed yields down in the bond sphere, which should soon bring an exodus from bonds. Now the time has come for equities.

In just the last month, stocks have outperformed bonds nearly 8 to 1. But of course, the stocks investors are choosing are dividend payers. That’s where they can continue to collect income, limit their downside and position themselves for a longer period of economic uncertainty… just in case.

But we noted that this is important to penny investors. And it is. You see, some of the best opportunities are left in the penny stock universe.

In my Lifetime Income Report, readers have taken advantage of high payers like Hatteras Financial Corp (NYSE: HTS), which pays a 15% yield, and CPFL Energia (NYSE: CPL), which pays us 13.6% on our initial investment. But you’ll note these aren’t penny stocks. We have, however, recently discovered more and more in this field. And we think this is a trend that’ll continue.

We’re already seeing large caps move upwards. And eventually, they too will become overbought. That’s where penny income stocks will come in.

Now, we aren’t predicting a massive rally anytime soon. But certain income-paying penny plays should move higher in coming months. Just this week, we’re already starting to see some early moves.

Take a look at China Nepstar Chain Drugstore (NYSE: NPD). This is a $390 million, sub-$4 stock that saw an 18% jump on Monday morning. Why? Because of its large 9% dividend yield. Investors are also expecting another special dividend payment… last year was a 24% single payout.

If that’s not enticing enough, take a look at IncrediMail LTD (NASDAQ: MAIL), a $57 million Israeli software and search engine operator. Since mid July, MAIL is up more than 43%. Why? Because investors are excited about its whopping 15% dividend yield.

While it’s true that finding safe income payers in the penny stock universe can be difficult, the rewards — as always — are much higher.

So, just because a penny stock pays a dividend, doesn’t mean you should avoid it. On the contrary; now’s the best time to start looking into it.

Sincerely,
Jim Nelson
Penny Sleuth

September 28, 2010

P.S.: There’s a lot more to picking out a good dividend stock than just looking for the biggest yield. I’m showing my readers some of the most enticing dividend plays out there – all while avoiding pitfalls in these plays. Visit the Lifetime Income Report website to learn more…

Why Yields Are Important… Especially for Penny Stocks was originally featured in the Penny Sleuth.

As an investor, it’s absolutely essential to make sure that you’ve got the best information at your fingertips – after all, bad data or poor assumptions can completely invalidate your investment analysis (think “garbage in, garbage out” when it comes to investment research). That’s why knowing which data sources to trust is such an important part of the investment process. Today I have a word about online dividend information.

As the editor of Lifetime Income Report, a dividend-focused investment advisory, I’ve received many emails and calls from readers concerned about differences in the listed dividends they find on various websites. Regardless of your income portfolio, I think this is an issue worth clarifying…

Oftentimes, a website like Google Finance or Yahoo Finance has the wrong dividend amounts listed for a stock in my readers’ portfolios… and more often than not, it’s one of our foreign plays. This happens because of currency conversion, share-to-unit conversion and tax issues.

If a company announces a dividend that won’t be paid for several months, the exchange rates will change continuously until the dividend is actually sent to shareholders. In that time, these currency changes will alter the amount that dividend is worth. Most quoting services don’t account for these price movements. So when a company goes ex-dividend, they’ll just use whatever number they have to adjust the trailing price.

And if you’re dealing with companies registered in tax-heavy countries, then you should be aware that the taxes might also be taken out of the listed dividend price. Of course, it’s impossible to know what everyone’s individual financial condition is. Instead, we try to focus on the gross dividend amount on the date it is paid.

There doesn’t seem to be any specific rhyme or reason behind many quoting services’ dividend information. It seems to change with every company you look up and every individual payment. One of the best ways to find accurate information on a foreign dividend is to look at whatever its depositary bank uses (BNY Mellon, Citibank Shareholder Services, etc….).

The only thing less reliable than a quoting service’s listed dividend is its listed yield. Take Zecco.com for instance. This is one of the fastest-growing discount brokerages in the world and one of our favorites.

Yet when you take a look at one of our foreign stock income plays on Zecco’s site, it derives its dividend yield from the last payment ($0.75) and multiplies that by two (the number of payments per year). So as far as Zecco is concerned, the company’s dividend yield is 2.7% (75 cents x 2 payments / current share price). But in reality, the 75 cent payment was only an interim payment. If you use the trailing 12 months’ worth of payments, you’d use $1.72 + $0.75. Using the right numbers would give you a yield of 4.4%. That makes a huge difference. That’s nearly a full $1 off your total return, based on an improper computer calculation.

Of course, in the above example, you’d have still received the right dividend, even if you used Zecco. The payment comes from the company and is simply added to your account. It doesn’t, however, affect Zecco’s quoting service, which is separate.

This is why you’ll see some differences when you read about dividend-paying companies, then look up the stocks on your broker’s site (or any other quoting service, for that matter).

Here at Agora Financial, the way we calculate our dividends and yields is based on actual SEC and company information. For foreign stocks like these, we convert the announced dividend into U.S. dollars. We also make sure we have the right number of shares per unit conversion rate, since most ADRs represent more or less than one ordinary share. We also make sure the trailing dividends are used correctly. .

Of course, we’d love to see online quoting services put in the due diligence and find the correct dividend amounts and yields. But in the age of quick information, we’re always going to see mistakes like these.

While all of this can be frustrating, it’s still important. Information is king. We’re constantly digging deep into company filings to find you everything you need to make an informed investment decision. But most other sites don’t. So when you are looking up a dividend online, be aware that it might not be 100% accurate.

Sincerely,
Jim Nelson
Penny Sleuth

August 31, 2010

Beware of Online Dividend Information was originally featured in the Penny Sleuth.

The two income payers I’m talking about are Public Storage Inc. 6.625% Cumulative Preferred Stock, Series M (NYSE: PSA-M) and Westar Energy 6.1% First Mortgage Bonds (NYSE: WRS).

Fixed income is a type of investment used as protection. It is riskier than CDs at your local bank, but far less risky than regular stocks. Of course, without the proper insight, you can find yourself in equally troublesome situations.

For instance, say you wanted to buy bonds on a seemingly stable company like Tribune Co. For decades, this has been one of the largest players in the media world. The owner of the L.A. Times and Chicago Tribune, Tribune Co. grew revenues to over $5 billion as recently as 2002. Unfortunately, this media empire completely collapsed as the entire newspaper industry fell on its face…leading to the eventual bankruptcy of Tribune Co., leaving its bondholders without a penny.

General Motors was another giant once upon a time. And anyone that bought its bonds just 10 years ago would have looked like a conservative investor. GM, of course, unraveled in the most recent recession, and only an enormous government takeover gave its bondholders a fraction of their initial investment back.

So to say bonds are always safe would be inaccurate. There are plenty of losses in the bond market. And today, that’s even more of a possibility.

I’ve noted several before that there are risks facing the stock market and overall economy. Even a small portion of these risks could play a major role in the bond market, which, in turn, would affect preferred stocks.

But in my opinion, both PSA-M and WRS are among the upper echelon of debt investments. I believe that we have little to worry about with them. Each one is investment grade, which may not be as meaningful as it once was with all three ratings agencies under fire these days. Nonetheless, a credit rating is still the most important statistic for fixed-income investors.

PSA-M and WRS are also plays on incredibly lucrative industries. PSA-M is a debt instrument on storage facility giant, Public Storage. WRS is a play on Westar Energy, a $2.5 billion utility company.

Both of these underlying companies increased dividends on their own ordinary stocks in the past several months. The only time we’d have something to worry about is when these two companies announced a significantly poor outlook or reduced their dividends.

Both plays have done quite well for us since we bought them last year. We’ve held PSA-M since May of last year. In the past 15 months, the preferred shares have increased in value from $19.72 to around $25 today. We’ve also quietly collected more than $2 in dividend payments.

WRS has been almost as beneficial for us. We are sitting on a nice 4.5% capital gain over the last 11 months and another $1.52 in interest distributions.

Both are seeing double-digit gains right now and I expect this to hold up no matter what the market does from here.

Investors typically pull out of their riskiest plays during bear markets. Those would include smaller companies and certain foreign investments. The last place a smart investor takes money from is his fixed investment portfolio.

Both of our debt investments are above our buy-up-to prices. So at this point in time, I don’t recommend you buy more shares/bonds. But if you happen already hold them, don’t sell anytime soon.

That said, there are income plays that are worth getting into right now – many in the preferred share and bond categories… The key to finding the best plays is deep due diligence. If you’re interested in expanding – or starting – your fixed income portfolio, consider logging onto a major ratings site like Morningstar.com; the company offers readily accessible debt ratings and bond data.

In the next few weeks, I’m going to continue looking into these types of ideas to protect your wealth during this turbulent market. It’s important to diversify your income portfolio between growth and safety. These kinds of plays make up the backbone of your income holdings.

Sincerely,
Jim Nelson
Penny Sleuth

August 26, 2010

Fix Your Downside with Debt Instruments was originally featured in the Penny Sleuth.