A fragile U.S. economic recovery, an unpredictable growth slowdown in China, a European recession and potential collapse of several sovereign debt instruments made for a shaky backdrop in most quarters of the market — except dividend payers. From bonds to business development companies (BDCs) to master limited partnerships (MLPs), if there was a percentage sign on the balance sheet, it was hot news.
The high level of inherent global financial risk meant money was flowing into “safe” investments like Treasury bills, notes and bonds, with the other big funnel of capital being investment-grade corporate bonds. Following the crash of the mortgage markets and the spike in European sovereign debt yields, hundreds of millions of investors opted to sit out “risk on” investing this past year and let the grand experiment of quantitative easing work its way through the U.S., Chinese and European economies.
But for investors seeking more than the paltry 1.25% to 3% yields of these ultra-safe fixed-income investments, 2012 offered outsized returns for high-paying assets like real estate investment trusts (REITs), BDCs that lend to small to midsize businesses and nitrogen-based fertilizer MLPs. Within these asset classes, investors were able to garner 8% to 12% yields and capital gains of 10% to 60%, depending on the specific asset.
REITs Rallied Post-Obama
There are obvious perceptions of winners and losers from a second term for President Obama, the most obvious being healthcare and the certainty of the Affordable Care Act’s implementation. Medical Facilities (PINK:MFCSF) is a healthcare REIT that returned a 38% total return for my Cash Machine subscribers this year. That’s the kind of return hedge funds would kill for, and it was as simple as owning outpatient healthcare.
Medical Facilities has a unique business model: It’s headquartered in Toronto, but it conducts 100% of its operations in the lower 48 U.S. states. MFCSF provides cash flow from businesses to investors by issuing income participating securities (IPSs), which represent a direct interest in a dividend-paying common share and interest-paying subordinated note.
MFCSF is structured with a contract outpatient surgery center business model, where an expanding amount of current and future spending is being targeted. So, it stands to benefit nicely from this trend, and its 7.9% payoff simply can’t be matched by any other stock or REIT in the industry.
BDCs for Small Business Growth
While private businesses with annual revenues under $50 million found capital formation near impossible at their commercial banks, the BDCs like Triangle Capital (NYSE:TCAP) filled that vital role like a cavalry coming to the rescue.
TCAP is a unique finance company that combines the benefits of a BDC with the sizzle of a venture capital firm. The firm typically invests between $5 million and $25 million per transaction in companies having annual revenues between $10 million and $200 million and an EBITDA between $3 million and $20 million. It can also co-invest.
TCAP shares rang up a 2012 return of 35%+ for investors who sought to capitalize on this area this year, and it maintained a high yield of 8.6%.
Nitrogen Fertilizer MLPs Benefited From the Drought
MLPs are already the best-performing sector of all in the past decade and will continue to lead going into 2013. MLPs pay tax-free income, act as an excellent hedge against inflation and because they’re commodity based, are best to own when risk of currency devaluation is high.
And with this year’s drought, what could better characterize the year for yield than nitrogen-based fertilizer MLPs?
Cash Machine recommended Rentech Nitrogen Partners () on May 23, 2012, and it has since delivered a total return of over 75%. Following the stellar run-up, shares of RNF continue to pay an 8.75% current yield with record planting for corn planned for 2013 following the 2012 drought. The secular bull market for corn-based products worldwide remains a core long-term investment theme.
The Bottom Line for 2012
The big takeaway from the year in yield for 2012 is that despite the media hype about how income investors have been left out in the cold, there are stealth bull markets for certain high-yield income assets that rose above the fray and posted huge financial rewards. Income investors who were willing to put on their thinking caps and not be fearful of all the disruptive headline noise came out smelling like a rose in 2012.
And the great news is that when it comes to strategic high-yield investing, this is the case every year.
Bryan Perry is editor of Cash Machine, a newsletter focused on dividends and income investing. As of this writing, he did not own a position in any of the aforementioned securities.