Kiplinger Today


Put Cash in Your Pocket

Turmoil in financial markets offers opportunities if you need more investment income. When stock, corporate-bond or mortgage-debt prices fall, yields escalate. Property-owning real estate investment trusts, for example, lost 21% between early February and mid August, and their average yield rose from 3.3% to 4.4%. Energy royalty trusts and business-development companies have also had it rough lately -- but their yields have not.

Market discomfort masks the fact that a global boom is feeding the growth of corporate profits, rents, real estate values and energy prices. So businesses should continue to generate impressive payouts, and that leads to solid yields, which are the past 12 months' cash distributions divided by a security's price. Current returns of 7% to 10% are within reach, and you can get these yields without taking extraordinarily high risks. One high-yielding investment with heightened risks, however, is corporate junk bonds. Trading volume of low-rated corporate debt dried up over the summer, and this isn't a market in which you should be prospecting right now. Instead, check out these ideas.

Closed-end funds

More than 100 closed-end funds yield 8% or better. Closed-ends issue a fixed number of shares, which then trade just like stocks. The market value of the stocks is rarely the same as the value of the fund's assets, or net asset value per share. Most closed-ends can deliver such juicy yields by borrowing money at short-term interest rates to buy additional higher-yielding securities. But this is tricky stuff and can be dangerous if short-term rates climb more quickly than long-term rates. Moreover, shares of high-yielding closed-ends often sell at a premium to their underlying assets. That, too, adds risk.

You can limit the danger, however, by looking for closed-ends that are well diversified, trade at a discount to NAV and earn enough to cover their dividends. A sound choice is Eaton Vance Senior Floating-Rate Trust (symbol EFR). The fund, which employs leverage to the tune of nearly 40% of its assets, invests in loans that banks make to junk-rated companies. Most of the loans are secured senior debt, which means that in a pinch, the banks get paid before holders of bonds or other subordinated debt. And because the loans are of the floating-rate variety, interest rates reset frequently -- typically every six months or so. That insulates the fund from rising interest rates and gives it more income to distribute when rates are heading up. As of mid August, the fund traded at about $16.50, representing a 6% discount to NAV, and yielded 9.5%.


Lenders to business

More than any other high-yield category, business-development companies feel the conflict between strong business growth and the sort of investor jitteriness that threw the bond market into a tizzy over the summer. BDCs lend to -- and sometimes take equity positions in -- private companies of middling quality at high interest rates. Like a REIT, a BDC must distribute substantially all of its net income as dividends. Most BDC stocks fell about 15% between June and mid August. The number of delinquencies, although low, is edging up -- but hardly enough to imperil generous dividends that result in yields greater than 10%.

Older BDCs, such as Allied Capital and American Capital Strategies, have a lot of experience judging credit risk. They reject more than 90% of the would-be borrowers who approach them. Allied (ALD) has raised its dividends 6% over the past year, and at $30, it yields 8.8%. American Capital (ACAS) has boosted its payout ten straight quarters and 11% over the past year. At $40, it yields 9.1%.

As its name suggests, Technology Investment Capital (TICC) focuses on tech firms. Specifically, it provides loans to 25 small-to-midsize tech companies at interest rates averaging 12%. Its chief executive, Jonathan Cohen, formerly managed Royce Technology Value fund, and did it well. He started Technology Investment Capital in 2003 and took it public in 2004. At $13, the stock yields 11.3%. At that price, the stock trades for about 6% less than the value of TIC's assets, which makes it cheaper (at least by this measurement) than most other BDCs. Consider that compensation for the extra risk of its single-sector focus.

Snappy shippers

Someday, the oceans will be awash with tankers and freighters, and cargo rates will plunge. But that won't happen this year -- or the next. "We'll have tight capacity through the rest of '07 and '08," says Omar Nokta, a shipping analyst at Dahlman Rose & Co., an investment-banking firm.

Today, shipping is a global growth industry with the reliable cash flow of a public utility. To meet strong demand, companies are buying more ships or acquiring privately held fleets. But the secret of this previously obscure corner of the stock market is out. A year ago, we recommended bulk commodity carrier Genco (GNK) and containership line Seaspan (SSW). Since then, their shares have soared 145% and 44%, respectively, dropping yields to about 5%.

Better choices for yields today are Double Hull Tankers (DHT), which is headquartered in the Channel Islands, and New York City-based Eagle Bulk Shipping (EGLE). Double Hull, at $15, yields 10.1%, while Eagle, at $24, yields 8.0%. Shares of Eagle rose 15% one day in July, after the company announced plans to boost its fleet from 23 ships to 49 in seven years.


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