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My Favorite Corner of the Market

As you probably know, my beat is income. And in my newsletter, Peak Income, I specialize in finding cash-generating investments that are a little off the beaten path.

Well, one of my favorite high-yield fishing ponds – closed-end funds (“CEFs”) – is looking attractive again, and I’ve been aggressively recommending them to my readers over the past two months.

So, today I’m going to tell you why I like closed-end funds and why they look particularly juicy today.

Let’s start with the basics. What is a CEF?

CEFs are a type of mutual fund that trades on the New York Stock Exchange, and they work a little differently than traditional mutual funds and ETFs.

In a traditional open-ended mutual fund, you (or the brokerage house you use) send money to the mutual fund manager. The manager then takes your cash and uses it to buy stocks, bonds and other investments. When you decide to sell and move on, the manager sells off a portion of the portfolio and sends you the proceeds. There is always money sloshing in and out of the fund.

Closed-end funds are different. They have an initial public offering (IPO) like a stock, and after that point the number of shares is fixed. Barring a secondary offering or a share buyback or tender (both of which are rare), new money does not enter or leave the fund. If an investor wants to buy or sell, they do so on the stock exchange.

From my description, CEFs look a lot like their cousins, ETFs. Both trade intraday on the stock exchange.

But there is one critical difference…

For example, if the ETF shares are worth less than the underlying stock portfolio, the big boys can buy up ETF shares, break them open, sell the underlying stocks they hold, and walk away with a risk-free profit. Not bad work if you can get it!

CEFs don’t have this mechanism in place. This means you regularly get situations where the price of the fund shares is vastly different than the value of the portfolio it owns.

And this is when I get interested. It doesn’t happen every day, but once in a while you can pick up a dollar’s worth of high-quality stocks and bonds for just 80 or 90 cents.

If you’re a patient value investor like me, you can buy the shares and wait for them to return to something closer to fair value… all while collecting dividends along the way.

Three Ways to Profit

Closed-end funds have three components to their returns.

The first is the easiest to understand: the dividend yield.

CEFs are popular among retirees and other income investors because they tend to throw off a lot of cash. It’s not uncommon to see tax-free municipal bond funds yielding over 5%, and taxable bond, preferred stock or dividend-paying stock funds can often sport yields over 8%.

In a world in which the 10-year Treasury note still yields less than 3%, that’s a solid income return.

But that’s just the start. CEFs are actively managed, and the fund managers also try to grow the net asset value over time. When the value of the stocks, bonds or other assets the CEF owns rises in value, the price of the fund generally follows.

And finally, there’s my favorite component: the change in the premium or discount to net asset value.

As I just mentioned, you regularly get situations where the price of a CEF varies wildly from the value of its underlying stock or bond holdings. As a general rule, I never buy a CEF trading at a premium to its net asset value. Philosophically, I have a real problem paying $1.05 for something worth a dollar.

But when the discounts get wide, I get interested. Let’s say a given CEF typically trades at a discount to NAV of about 3% to 5% but because of a short-term market panic, that discount widens to 15%. All else equal, buying the fund at that discount and waiting for it to return to a more normal level can add an additional 10% to 12% to your return. And that’s on top of the dividend yield and any improvement in the value of the portfolio itself.

When you time these right, it’s not hard to pocket total returns of 20% to 30% in a year.

Not bad!

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Stocks Buffett Wishes He Could Buy

John Del Vecchio is a cheapskate after my own heart.

While he doesn’t mind spending a little cash on the things he enjoys (I won’t tell you how much he and his wife spent on their last vacation), he’s about as hard nosed and tightfisted as it gets when it comes to his investments.

He’s also one of the few truly independent minds I’ve seen in this business. In an industry dominated by herding and groupthink, John is unafraid of taking unpopular or contrary positions, which you’ve probably picked up on in his writing here in The Rich Investor.

Maybe it’s his two decades of experience as a short seller… or maybe it’s because he grew up in upstate New York and has a chip on his shoulder from never seeing the sun. Or maybe it’s a little of both. But I can tell you that John is as independent as they come.

And as an investor, he’s a stone-cold killer that doesn’t blink.

At any rate, John and I were swapping investment ideas at the company Christmas party a few months ago, and I was telling him about some new developments in my trading service Peak Profits, which focuses on small- and mid-cap value and momentum stocks.

Well, that’s about as animated as I’ve ever seen John get (remember, he’s from upstate New York). John told me he was working on a little project of his own that focused on small-cap stocks and, specifically, small-cap stocks priced under $10 per share.

These are two very different things. “Small cap” refers to market capitalization, or the value of all the company’s shares. There is no “official” definition for what constitutes a small cap, but we’re generally talking about companies valued at around $300 million to $2 billion.

But importantly, this had nothing to do with the price per share. A small-cap stock can just as easily have a share price of $5, $50, or $500. It’s not the price of the stock that is relevant but rather the value of the entire company.

Both small-cap stocks and low-priced stocks are good fishing ponds for investors and for essentially the same reason: You’re buying companies that other investors either can’t or won’t touch. It gets back to what I said about John being independent. He’s willing and able to go where others won’t.

I’ll start with low-priced stocks.

These are simply off limits to most large investors. Most institutional investors such as insurance companies, pension funds, endowments and even a lot of mutual funds are forbidden in their mandates from buying stocks priced under $5, as these are considered penny stocks.

But, as a practical matter, most also avoid stocks priced under $10 per share. Smaller shares tend to get whipped around more, and institutional investors don’t want the headache.

Of course, the same institutional investors that wouldn’t touch a stock at $9 per share might suddenly get interested once it trades at $12. So focusing on these lower priced stocks allows you to get in before the big boys.

The story is similar with small-cap stocks. If you run a multi-billion-dollar mutual fund or endowment, you can’t build a meaningful position in a small-cap stock without distorting the market.

We’ll use my hometown as an example. The City of Dallas employee pension plan has about $3.6 billion in assets, making it relatively small as an institutional investor. A 1% allocation would amount to $36 million. You can’t simply go out and buy $36 million of a small-cap stock. That might represent fully 10% of the total shares outstanding.

At that point, you’re no longer a passive investor. You’re likely the largest shareholder and need representation on the board of directors. And even if you somehow managed to get invested without moving the share price higher and managed to avoid the complications of being the effective owner of the company, good luck ever getting out. You couldn’t sell without tanking the share price.

Now, if a small institutional investor like the City of Dallas has this problem, imagine a large institution with hundreds of billions under management. Investing in anything but a mega-cap stock is next to impossible.

Warren Buffett bemoans this fact regularly. The Oracle’s holding company, Berkshire Hathaway, is worth $500 billion, most of which is in publicly-traded stocks. At that size, the investments realistically open to Buffett are limited.

Buffett has repeatedly said that, were he still running a $100 million fund, he could make his investors 50% per year. But at Berkshire’s size, he’s lucky if he beats the S&P 500 by a point or two.

This is the beauty of John’s new project. John’s buying stocks that are off the radar of the big boys. Or, as I like to think of it, buying stocks they’d like to buy but can’t.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Highest Yield Left in the Market

If you’re looking for income these days, your options are a little limited. The S&P 500 yields less than 2%, which is bordering on pitiful, and government bonds aren’t much better.

REITs, as a sector, are reasonably high yielders at 3.9%. But in order to get the yields I like to see, you really have to cherry pick. You’re not paying many bills with a 3.9% payout.

Corporate bonds?

Meh. Investment grade bonds yield 4.4%, and “high-yield” junk bonds yield only slightly better at 5.2%. Sure, that’s better than Treasury yields. But hardly worth the risk. At the first whiff of an economic slowdown, junk bond default rates tend to jump.

Preferred stock still sports a respectable yield, which is why I added exposure last month in my income service Peak Income, as do emerging market bonds for those with the stomach for the volatility.

But frankly, there’s only one asset class right now that sports what I would consider to be a truly impressive yield, and that is oil and gas master limited partnerships (MLPs). The Alerian MLP index, which you can think of as “the S&P 500 of MLPs,” yields over 8%.

[Click to Enlarge]

I know of no other sector where those kinds of yields are possible without taking substantially more risk. (Business development companies, or BDCs, offer comparable or higher yields, but I consider them a little riskier at this stage of the business cycle.)

cheap canadian sildenafil citrate Too Good to Be True?

Call me a cynic, but when I see yields that high compared to virtually everything else, I want to know why. There has to be a catch, right?

Well, there is and there isn’t.

Yields are high in part due to rising payouts over the past few years. But the far bigger reason is the total collapse in MLP share prices since late 2014. After years of gains, the sector hit a rough patch when the price of crude oil started to fall, and before the dust settled the Alerian MLP index has dropped by about 60%.

The story on MLPs had always been that they were largely immune to energy price swings. MLPs own energy infrastructure, such as pipelines, and most of their revenues come from fixed fees.

The problem came down to leverage. Like much of the rest of corporate America, MLPs took advantage of the low interest rates of the past decade to absolutely gorge themselves on cheap debt. And their business model was dependent on it.

MLPs paid out substantially all of their cash flow from operations as distributions to investors. That meant that when they needed capital to expand their businesses, they had to get it from the capital markets via new debt or equity sales.

That model worked fine so long as stock prices were high and bond yields low. But when crude oil prices started tumbling in late 2014, MLPs had a big problem. Even if their business models were only minimally dependent on energy prices, they had no margin of safety.

When share prices started falling, it became harder to sell shares to raise capital, and raising more via debt wasn’t an option because they were already overleveraged.

So, the MLPs raised cash the only way they could: by slashing their distributions.

It’s a case of once bitten twice shy. Investors that saw their payouts slashed back in 2015 and 2016 and lived through a 60% share-price collapse have been reluctant to come back to the sector.

But their timidity is our opportunity. After years of debt reduction and a focus on financing growth projects with retained profits like normal companies, MLPs as a group are in the best financial shape in recent memory. If we have another energy-price rout, they’re in a much better position to ride it out.

2019 should be a good year for MLPs and the other income investments I recommend in Peak Income. I just added two MLPs the model portfolio last week, one that yields close to 10% and another 8%.

A “sweet spot” for income investments tends to be moderate economic growth, benign inflation and a 10-year Treasury yield under the psychologically important level of 3%.

The Fed’s recent reversal of course shows that they’re worried about growth starting to cool, which usually means inflation expectations tend to cool with it. And the 10-year Treasury is hovering around 2.7%.

So, it’s looking good in income land.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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How to Save for Retirement AND Spend on Your Kids

I saw a headline recently that caught my attention:

“Raising Children Increases Risk of a Retirement Shortfall”

Gee, ya think?

Why not tell me that the sky is blue while you’re at it, or that eating at McDonald’s on a daily basis is bad for my health.

Some things are so patently obvious that they don’t really need to be said. Yet Boston College’s Center for Retirement Research decided to prove empirically what we all instinctively know: Raising kids is expensive, and every dollar spent on child rearing is a dollar not available to be allocated to other things, such as your 401k plan.

I openly weep when I see my credit card bill every month.

It cost me more than $2,000 to send my two sons to ski school for four days earlier this month. I’m embarrassed to put into print what it cost me to take the family to Disney World. And the grocery bills… You would think I was feeding a marauding army.

It’s all worth it, of course. But meeting my retirement goals and raising my kids sometimes requires some financial gymnastics.

If you’re like me – in the prime of your career and playing the balancing act of supporting a family while also saving for retirement – I have a few suggestions, which I first shared with my Peak Income subscribers several weeks ago, to help you.

trusted canadian online pharmacies 1. Pay Yourself First

I know this advice is so overused it’s almost cliché, but hear me out.

When the shekels are tight and you’re choosing between funding your retirement account or bankrolling some new request/demand from your kids (Disney trip…sigh…), it’s not selfish to choose to fund your retirement account first.

Think about it. If you’re not prepared for retirement, you’re going to end up being a financial burden to your kids decades from now. You might even have to move in with them.

That’s depressing, and no one wants that. It’s better to skip that expensive family vacation or the umpteenth round of private soccer lessons this year, top up the retirement account, and save yourself and your kids the eventual humiliation of having to move in together.

2. Don’t Be Penny Wise and Pound Foolish

Financial writer David Bach made a career out of telling people to skip their daily trip to Starbucks and invest the savings in an index fund.

Well, that’s not bad advice, I guess. But how many cappuccinos would you have to skip in order to really make a difference?

Your far bigger expenses are your home and your vehicles.

So, rather than skimp on those little luxuries like the occasional trip to Starbucks, try to avoid buying more house than you need. Yes, the urge to keep up with the Joneses can be hard to suppress. But if you can save several hundred dollars per month by living in a more modest home or driving a more modest car, it will go a long way towards helping you meet other expenses.

As recently as the 1960s, it was perfectly normal for a middle-class family of six to live in a, 1,500-square-foot house. Your family of four doesn’t really need 3,500 square feet with two living rooms and vaulted ceilings.

If you’re already in a home that was probably a little too expensive for you, selling it and downsizing may or may not make sense. But at the bare minimum, resist the urge to splurge on a $50,000 kitchen remodeling. It’s rarely worth the money.

3. Quality Time With Your Kids Doesn’t Have to Be Expensive

I’m as guilty as anyone about trying to buy my kids’ affections. It’s normal. Few things are more gratifying that seeing your kids happy, and it’s so temping to just dump money on them.
But this doesn’t mean you need to constantly shower them with expensive gifts, vacation or experiences. You don’t have to take them to the Super Bowl. Simply sitting on the couch with them and watching it is good enough.

Or better, go outside and actually toss a football with them. It costs you nothing, and it will be far more rewarding for both you and the kids.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Make Presidents Day Worth It

I’m not one to complain about a holiday. A day off is a day off, and it’s healthy.

Though I have to say, Presidents Day isn’t one of my favorites.

To start, it’s in February and it’s usually too cold to do a holiday-type thing like firing up the grill. Football season is over, and there’s generally not much to watch on TV. And I don’t know about you, but I’m still worn out from Christmas with the extended family.

So, it usually ends up being a day to binge watch Netflix and get caught up on paperwork and not much else.

But beyond that… Presidents Day?

Before it was rechristened “Presidents Day” we used to celebrate George Washington’s birthday, and I was good with that. Every country needs iconic heroes as part of its founding story, and Washington is our guy.

He was our victorious general in the War of Independence, the only man to be unanimously elected by the Electoral College, and he set the precedent for limited executive power by retiring after two terms.

But do we really need a holiday to celebrate the lives of the other 44 sons of b*tches that have held the post?

There are so many worthwhile Americans whose lives we could celebrate. Generals, pioneers, explorers, astronauts, scientists, entrepreneurs, inventors, writers… even athletes or musicians. Any of these would be more worthy of a public holiday than the parasitic blowhards that have come and gone from the White House.

But I digress.

One nice aspect of Presidents Day is that it gives us a breather early in the year to think about our financial goals. We’re a month and a half into 2019, but we still have more than 10 months of the year left to go.

So, if your work, like the market, is closed today, here’s a to-do list of some smart financial moves you can make at home.

Revisit your 401k and IRA beneficiary form

I know this sounds about as exciting as watching paint dry, but this is important and you can knock it out in five minutes.

Most people don’t know this, but your IRA and 401k beneficiary forms are generally more important than your will and testament. Apart from perhaps your home equity, it’s likely that your retirement accounts are the most valuable thing you own. And the beneficiary designations you made when you opened the accounts take precedent over your will.

Let me explain. Let’s say you’ve been at your current job for 10 years and that you were married when you started the job. But two years in, life intervened. You got divorced and then found yourself remarried again a few years later but you forgot to update your 401k beneficiary form.

If you were to get hit by a bus today, your ex-spouse would inherit your 401k, regardless of what your will and testament says, leaving your new spouse with nothing. And there’s not a thing they could do about it. The law is very clear that the beneficiary forms associated with the retirement plan trump whatever your will says.

So… take a few minutes today to make sure your beneficiary designations are in good order. Your heirs will thank you.

Revisit your contribution levels

You didn’t think you were going to escape a financial planning article from me without my customary nagging to save more, did you?

As you might know, the 401k contribution limits were raised this year from $18,500 to $19,000 or from $24,500 to $25,000 if you’re 50 or older.

Really try to hit those numbers, or at least get as close as you reasonably can even if it means pushing yourself and forgoing a few small luxuries. Every dollar you stuff in the 401k is a dollar that is safe from the tax man, potentially for decades.

I eat my own cooking here. I maxed out my 401k last year, and I’m on pace to contribute the full $19,000 by September of this year.

Make this a priority. You’ll never miss whatever it was you were going to fritter your money away on.

Turn off your phone

I’m a workaholic, which, if I am to be honest, is no less unhealthy than any other addiction.

But I make a real effort to carve out time to spend with my kids and just be present, undistracted by work, the stock market or whatever else was on my mind that day.

For me, this usually means getting home around 5:30 p.m., spending a good two or three hours talking, playing and just generally being around my kids. Once they go to bed, I usually work for a few more hours before calling it a night. But the important thing is that the phone and computer get turned off during family time.

So, be respectful to your family and turn off your phone when you’re around them. No, don’t just turn the volume down. Turn it off, and preferably put it in another room. Remove the temptation to compulsively look at it.

Let’s be honest, whatever you were doing on your phone probably wasn’t important. But your family relationships are.

This Presidents Day is going to be a little different for my family. My oldest son is playing in a competitive international soccer tournament in Orlando. Win or lose, it should be a fantastic experience for him. But naturally, it’s a lot more fun to win, so wish him luck!

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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