by Bryan Perry | January 20, 2012 11:54 am
In shaping a high-yield portfolio to gain maximum results, I like to use what I call a “cut and build” strategy. This means I trim positions that have rallied up to levels where the yields on those holdings are substantially lower than is worth taking further risk. Simultaneously, I rotate into undiscovered or unappreciated high-yield assets that will attract new fund flows, thereby pushing those stock prices higher.
This dynamic aspect of managing high-yield assets means money never sits still in high yield.
Earlier in the month, we’ve seen a rotation by market participants into more economically sensitive sectors. The S&P decoupled from bad European headlines and is now focused on the stronger-than-expected U.S. economic reports. Even with the euro trading at a 16-month low against the dollar (almost hit a 17-month low), U.S. multinationals are steaming higher. They’re the easiest and most trusted way to play the emerging markets, as well as the nascent domestic economic recovery.
Along those lines, I opted to exit positions in Chilean asset manager A.F.P. Providia (NYSE:PVD[1]) and Terra Nitrogen (NYSE:TNH[2]) after both traded up to levels that I deemed to have stiff resistance in relation to the dividend yields they were paying out. Essentially, it’s my “cut and build” strategy at work.
In doing so, I booked profits of 44% and 18%, respectively. By staying agile and culling positions that have rallied, I can stay ahead of the S&P and the competition in the high-yield sector. And after adding Mesabi Trust[3] (NYSE:MSB[4]), my total holdings number 33 — with plenty of room to add further positions in the weeks ahead.
My goal is to own no more that 40 positions at any given time, with no more than 3% of invested capital in any one position. I’m also aiming to own a portfolio between aggressive and conservative high-yield assets that carries a blended composite yield of 10%.
Having taken a highly conservative approach in mid-2011, given the risk of European-induced financial contagion, I was willing to live with less income and more stable principal. I did that through the purchase of utilities, consumer staples and tax-free municipal bonds in lieu of other sectors that were enduring higher levels of volatility.
In retrospect, that proved to be the right decision because I was able to accumulate steady gains while receiving consistent dividends. And those positions will continue to reward me going forward.
But now that the market has taken some focus off Europe, it’s time to raise the blended yield to my stated 10% target. And adding Mesabi Trust and its 14.4% projected yield is a strong start.
In the energy sector, there are two very different trends. Although the price of West Texas Intermediate crude oil is holding firmly above $100 per barrel, the price of natural gas is breaking down to multiyear lows, now trading below $3 per mcf. Cheap natural gas is a boon to the Cheniere Energy Partners’ (NYSE:CQP[5]) export business and to the manufacturing of nitrogen fertilizer, so we’re definitely in the sweet spot with this commodity.
As for oil, I’m on the hunt for another double-digit domestic crude play that will complement my big winners in SandRidge Mississippian Trust[6] (NYSE:SDT[7]), SandRidge Permian Trust (NYSE:PER[8]), Cushing MLP Total Return Fund (NYSE:SRV[9]), SeaDrill (NYSE:SDRL[10]) and the UBS E-TRACS 2X Leveraged Long Alerian MLP Infrastructure ETN (NYSE:MLPL[11]).
In crafting my portfolios, I’ve started to lean more toward economically leveraged assets. The following continue to be the major themes for me in 2012:
Even though I have room for another five to seven holdings, there’s no need to chase yield for the sake of yield itself. Remember that a lot of stocks that pay more than 10% are able to do so because the underlying asset price is getting creamed. Chasing yields in stocks and ETFs with busted charts is foolish, and I constantly see one promotion after another touting big yields that look tempting on the surface, but actually have rapidly deteriorating fundamentals.
I’m committed to investing in companies whose business or underlying assets that generate income are fundamentally sound. That way, I’m confident that my cash flow will not be radically interrupted when market volatility wreaks havoc on day-to-day valuations.
Sometimes, less is more in the way of portfolio composition, and having some cash set aside for pouncing on select opportunities is usually the smart way to manage a dynamic portfolio. I’m very content with what I own, and I’m also content with reserving some powder for new opportunities — some of which I’m on the verge of issuing as new recommendations.
Dividend Stocks[12]
Source URL: https://investorplace.com/2012/01/build-your-high-yield-portfolio-with-energy-stocks-pvd-tnh-msb-cqp-sdt/
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