One of the benefits of quantitative easing was that as bond yields cratered, it required me to hunt down other yield opportunities for both myself and for readers.
Not that I particularly enjoyed having to look elsewhere — but hey, it’s what you do for yield.
Still, the hunt has led me to some interesting discoveries, some of which involved creative or specialty lending firms, real estate investment trust hybrids, and closed-end funds I usually don’t look at.
None of those asset classes are your regular rank-and-file stocks, but then, neither are their dividend yields. So, let’s take a look at three of these high-yielding stocks, and the wrinkles that make them tick.
High-Yield Stocks: BlackRock Municipal Income Trust II (BLE)
BLE Dividend Yield: 7%
BlackRock Municipal Income Trust II (BLE) is the first of our high-yield stocks, and — wouldn’t you know it? — it’s not really even so much a stock as it is a closed-end fund.
A closed-end fund essentially is just a fund that initially raises capital via an initial public offering with a fixed number of shares, purchased as stock. However, rather than a share representing one particular company, it actually represents interest in an actively managed securities portfolio. So it’s a bit like a mutual fund, but trades like a stock, rather than just settling on a price at the end of each business day.
This particular BlackRock closed-end fund invests at least 80% in investment-grade municipal bonds, with the other 20% permitted to be allocated towards lower-grade munis that are “judged to be of comparable quality by BlackRock.” So you’re relying on the managers of BLE stock to truly find market inefficiencies in those lower-rated munis, and not just trying to goose the yield of the fund.
A few other details:
- 35% of the bonds are rated AA or higher and 94.5% have maturities greater than 4 years.
- 21.8% are tax-backed, 19% are transportation-related, 15% health-related, 14% are corporate-backed, and 13% are utility-related.
- The top three states represented in the portfolio are Texas, Illinois and California at 13.8%, 10.8% and 10.4%, respectively.
I would consider BLE stock a somewhat risky choice, but not as crazy risky a full-on junk bond portfolio. It’s well-diversified, trades at $14 and certainly is a high-yield qualifier at roughly 7% annually.
High-Yield Stocks: Franklin Street Properties (FSP)
FSP Dividend Yield: 6.1%
Franklin Street Properties (FSP) belongs to another set of high-yield stocks — real estate investment trusts (or just REITs, for brevity’s sake).
Franklin Street invests in “institutional-quality” office properties with concentrations in Atlanta, Dallas, Denver, Houston and Minneapolis. FSP chooses central business district properties, as well as “urban infill” — a fancy name for repurposing real estate that didn’t have any purpose.
A better way of putting it: Franklin Street is aimed at urban renewal. Still, I like a company that tackles a niche like this. There’s risk here, however. If these urban renewals fail, then the company is stuck owning properties with few or no tenants.
But, broadening things a little bit: FSP also has operations involving property acquisitions and dispositions, leasing, development and asset management.
This high-yield stock trades at $12.33 and generates a 6.1% yield.
High-Yield Stocks: American Capital Senior Floating (ACSF)
ACSF Dividend Yield: 5.4%
Our last of the high-yield stocks is American Capital Senior Floating (ACSF). No, ACSF isn’t a retirement boating community — it’s a business development company. Get ready to yawn.
A business development company, or BDC, are publicly traded vehicles that, like closed-end funds, raise money via a public offering, then invest in various middle-market or early-stage companies. Like REITs, they must spin out 90% of net income to shareholders.
American Capital Senior Floating is different from many BDCs in that 20% to 30% of their investments are in the equity portions of collateralized debt obligations. Rather than take a position as the senior lienholder in an investment, it takes on an equity stake. Other lenders have higher claims on principal and interest, and therefore ACSF is granted a higher effective yield, somewhere in the 15% range.
ACSF stock is relatively new to the markets, so a clear dividend yield hasn’t been established yet. However, based on the ignition payout of 18 cents per share, the running dividend yield is about 5.4%.
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As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.