by Lawrence Meyers | October 24, 2013 1:57 pm
Let us all praise Ben Bernanke for flooding the bond market with gazillions of dollars. In doing so, he creates artificial demand for bonds, which drives prices up and yields down.
That means tons of money has flowed out of the bond market (because yields stink) and into the stock market, sending stocks soaring as all that money finds a home. On the negative side, bond yields now stink. If you were a fixed income investor, you’ve had to look elsewhere for yield.
Fortunately, there are some very secure investments that pay far more in interest than boring bonds ever did. They may lack the full faith and credit of the U.S. government, but these days that seems like a dicey proposition anyway.
Here are five such investments that deliver solid and safe yields:
Permian Basin Royalty Trust (PBT) is a royalty trust, meaning it pools together royalty rights for various energy-producing properties. I prefer trusts that are widely diversified. In this case, Permian holds a 75% net overriding royalty interest in six properties in Crane County, Texas; and a 95% net overriding royalty interest in fields spread across 33 other counties in Texas. In total, we’re talking 400 oil wells, 30 gas wells, and 500 injection wells. That’s plenty diversified. Yeehaw for its 8.3% yield!
The Sabine Royalty Trust (SBR) is diversified from a geographical perspective, with interests spreading across both producing and undeveloped gas properties in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas. It essentially operates as a holding company into which all the royalties get deposited and all the money gets distributed to shareholders via its 9.2% yield.
It’s no coincidence I have another energy play here, because energy is plentiful and always consumed. Linn Energy (LINE) is an indie oil and gas player, and spread over the many states across the country. Proven reserves are 4,796 billion cubic feet of oil and natural gas, and it operates a whopping 15,804 wells. It also is unique in that it hedges 100% of its production vs. some 71% among other MLPs. The stock pays a solid 11.2% dividend and may merge with Berry Petroleum (BRY) to solidify its balance sheet.
Business development companies like Hercules Technology Growth Capital (HTGC) invest money into middle-market companies that are experiencing fast growth. Often, these investments take the form of mezzanine debt paying interest in the teens, and some warrants. Hercules likes to focus more on senior secured revolvers and term loans to refinance existing debt, and will even take second-liens. It has more attractive upside with its investments than other BDCs because it focuses on tech, energy tech, healthcare, life sciences and business services — all of which can fetch higher multiples upon exit. It pays out a sturdy 7.3% dividend.
Finally, we have a long-time holding of my own portfolio, Ashford Hospitality Trust Preferred D Shares (AHT), which is an 8.45% issuance trading right about par. With hotel preferred stock, you have a great opportunity for safe yields. Your preferred stock is paid dividends before common shareholders receive theirs. During the financial crisis, when every other hotel stock was getting destroyed and cutting both common and preferred dividends, Ashford maintained its preferred payouts. It is the hotel REIT with the highest insider ownership, and has a solid balance sheet that survived the worst of times.
Lawrence Meyers owns shares of AHT pref. D.
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