Immediate Income Investor’S Basic Guide To Investing
- Income investors can be broken down into 2 groups: Dividend Growth Investors and Immediate Income Investors
- This article will provide basic information for “Immediate Income Investors”.
- I am also providing several examples of high yield investments that may interest Immediate Income Investors
Immediate Income Investors prefer to invest in companies that provide higher yields and income than is found in dividend growth stocks. While they are reaching for higher yields, that doesn’t mean they must take unreasonable risks. The goal should always be to invest in reasonably safe companies that can provide a reliable and sustainable distribution. It may mean doing additional research, but the time and effort can be well worth it.
Key Metrics for Immediate Income Investors
- Chasing Yield: I often hear analysts say to never chase yields; however, I always search for and invest with yield as being one of the most important metrics I use. Everyone should determine on a yield or yield range to focus on. It must be realistic. I personally try to buy only securities that can provide at least a 6% yield. It used to be 7% or more, but as interest rates have dropped, so too have yields.
- Dividends: I look for companies with stable or slow growth dividends. However, with some of the high-risk stocks found in MLP / Midstream, there are many stocks with an excellent history of increasing dividends on a regular basis.
- Earnings: Earnings is another key component; however, if we are not looking for increasing dividends, it is also not important to see increasing earnings to support those dividends. Stable or slow growth is fine.
- Payout: Besides getting a nice yield, the payout ratio is normally the most important metric I use in determining my level of interest in a high yield stock. The company must be generating enough income and/or cash flow to ay the dividend. That means that the payout ratio must be under 1 (100%). Anything over that means that the dividend is more than the income or cash flow used to pay the dividend. That is not sustainable and eventually, the dividend will need to be reduced. There are several different payout ratios that can be used with common stocks: “dividend payout” measures the dividend to earnings, “dividend to operating cash flow” measures the dividend to operating cash flow, and “dividend to free cash flow”.
For those that invest in preferred stocks, it is important to pay attention to the payout ratio for the common stock and also for the preferred stock. Remember that the company cannot stop or delay the preferred dividend unless the common stock dividend has been cut to 0. So always be aware of earnings and cash flow to insure the payout ratios are good for both.
- Debt: Debt is also very important, but probably the hardest to determine what the ratio should be. The traditional view is that debt-to-equity should be under 1; however, debt is used for growth and having a higher level of debt is somewhat normal for many companies and many industry groups. One thing I like to do is to compare the debt ratios to the other companies within the industry. Anything above the average should definitely be researched. It is important to remember that during times of economic growth most companies can handle their debt, but during times of economic slowdown where revenues and earnings are reduced, those high debts can become a huge issue and could cause a real problem for companies that are not prepared.
What about Preferred stocks & ETD securities?
Preferred stocks & ETD are different than the common stock. Here are a few things to consider:
- They are safer than common because if the company was liquidated, they would be paid before the common.
- They are fixed income securities. That means that the distribution can not be changed.
- The distribution cannot be stopped or delayed unless the common stock dividend has been cut to 0.
- Cumulative preferred stock dividends can be delayed, but any dividends not paid must accumulate and paid back to investors.
- Many preferred stocks and ETD securities have yields higher than the common stock.
Where can Immediate Income Investors find potential investments
Although high yield investments can be found in all asset classes, here are several asset classes that many immediate income investors look at:
- Preferred Stocks & ETD securities. These are securities that provide fixed income that are safer than their common stock parent and can provide higher yields than the common stock.
- MLP / Midstream companies. The markets consider these to be a high-risk asset class, yet many of the stocks in this class have excellent records of earnings, dividend increases and low payout ratios. One example is EPD. They have increased their distribution every year for 22 years and still offer a yield greater than 6%. In addition to EPD, there are 23 companies in this class that have increased their dividends every year for 5 or more years. .
- Equity REITs. There are many equity REITs that provide higher yields than is generally found in the marketplace. This is true even though REITs have provided total returns above the S&P 500 for the last 25 years. As a pass-through entity, REITs are required to pay out 90% of their taxable income and many pay out 100%..
- Commercial and Mortgage REITs. These are companies that provide financing and other services for residential and commercial mortgages and then receive income from the interest earned on these investments. The market has classified them as high risk, but like all investments; the more you know, the more you realize there are some real gems to be found. As a pass-through entity, REITs are required to pay out 90% of their taxable income and many pay out 100%..
- Business Development companies (BDC). A business development company (BDC) is an organization that invests in small- and medium-sized companies as well as distressed companies. Because BDCs are regulated investment companies (RICs), they must distribute over 90% of their profits to shareholders. .
What are the risks to investing in high yield investments?
Here is what Investopedia says about the risks of investing in high dividend stocks: “The main risks of high dividend stocks are an inability to make dividend payments and interest rate risk. High dividend stocks can be exceptional opportunities for savvy investors who are able to earn juicy yields on their investments while they wait for the price to appreciate. However, it is important to conduct proper due diligence to ensure that dividend payments will be made”. I would agree with that statement except for the part that said “while they wait for the price to appreciate”. While appreciation is always welcome, it is not the reason why I invest in Immediate income securities.
Interest rate risk is the risk that security prices will drop if interest rates increase so that other investments provide better opportunities. When that happens, investors sell and prices drop. Generally, all dividend stocks are sensitive to interest rates, but fixed income investments are particularly sensitive. However, keep in mind that many Immediate Income Investors are not concerned with market prices. The main concern is the stability of the dividend itself. As long as the dividend is stable or growing, the investor is happy. Any dividends received can be used to invest in other investments that provide good opportunities.
Examples of Immediate Income Investments
Everyone has their ideas on what constitutes high yield or Immediate Income investments that would be worthy of an investment. For me, I prefer to invest in companies with yields above 6% that have reasonable/good metrics and nothing to pose problems in future. Here are several stocks to consider. Remember that even if you love a stock that you see in these lists, you should continue to do your own due diligence by digging deeper. Consider reviewing at least the last 1 or 2 financial statements, annual SEC 10-K and looking for any recent articles that may be available on Seeking Alpha or the new Articles Program on each I Prefer Income Program.
Preferred stocks / ETD securities
Please note that the parent company is on the top gray row and the preferred and ETD are directly under it. The parent and child have their own information, the financial metrics are on the parent and the preferreds are rated by Moody’s and S&P. There are 14 cumulative preferred stocks and 1 ETD security. Most have future call dates, several have fix to floating rates. Both parent and child have their own prices and yields and that the child issues also have Y-T-C yields. Those can be very important and very significant if the price of the security is below the call price.
Yields: All preferred stocks and ETD have yields ranging from 6.8% to 9.1% and Y-T-C reaches up to 10.9 with CDR-C.
Dividend Diamonds: There are 3 parent companies who have increased their common stock dividend by 5 or more years in a row. TDS has a super record of increasing dividends 45 years in a row!
Earnings: The 5 Year and 5 Quarter earnings is based on GAAP earnings. Since all but 1 report Non-GAAP earnings (see Type Payout), you will have to go to the IPI program and click on the yellow earnings cell to see what the Non-GAAP historical record is. But you can be assured that it is better than the GAAP record.
Payout: All but 1 have payout ratios under 1 and all report excellent preferred dividend payout ratios except for TDS. Their issue is an ETD, which is a baby bond and they issue interest instead of a dividend.
Debt: Debt to equity are fair for most. GLP reports the highest ratio of 3.2.
Tax: 4 issues are tax qualified and all issue 1099.
Disclosure: I own all issues listed.
Note that out of 153 REITs listed in the IPI database, 11 are listed in the above table. There are 17 industry categories and this table has stocks from 6 industries.
Yields: Yields range from 6.2 to 13.7%
Dividends: :Most of the companies report a positive 3-year dividend growth. GOOD reports 0, which means no growth. PK reports na, or not enough history. 6 of the 11 are designated as Dividend Diamonds. That means that they have increased their dividends every year by the number in the cell. SKT has the best record with 26 years in a row.
Earnings: : Please note that the 5 year and 5 quarter earnings are based on GAAP earnings. Since all report Non-GAAP earnings (FFO or AFFO), it will be necessary to go to the IPI database to obtain the historical record.
Payout: : All dividend payout and Dividend to OCF are well below 1, which means that they are earning enough to pay for the dividend.
Debt: : Debt ratios ae mixed. BPR and IRM report high debt-to-equity numbers. TCO has negative ratio because they have negative equity. That does not sound good, but it has shown improvement over the years.
Price / Non-GAAP Earnings:: Note that we use this metric instead of Price / Earnings.
Tax: :All issue 1099
Disclosure: :I own PLYM, CXW, GEO, SKT
MLP / MIDSTREAM:
There is no secret that the energy industry, including MLP’s that are involved with producing and transporting energy have been facing headwinds for years. The result is that yields are high and may offer some very good opportunities. To see just how the current situation is affecting the industry compare the yield with the 10 Year Median Yield. Every company in this list shows forward yield to be substantially higher than the 10-year median yield. I have selected 6 companies with high yields and relatively good metrics. Note that 5 of the 6 are midstream companies and KNOP is a shipping company that transports oil from offshore to shore.
Yields: Yields range from 6.7% to 11.6%
Dividends: 5 of the 6 have excellent 1 and 3-year dividend growth records. KNOP reports 0, which means that their dividend has been steady over the 3-year period. 3 Yr earnings growth is mixed, but 3 Yr EBITDA growth is relatively positive for 4 of 6.. One of the most important metrics is that 5 of the 6 companies are designated as dividend diamonds because they have increased their dividend every year for 5 or more years in a row. MMP has increased it 19 and EPD has the best with 22 years in a row.
Payout: 3 different payout ratios are provided to determine if the companies have enough earnings and/or cash flow to pay the dividend. The result is that all companies have excellent dividend payout and dividend to operating cash flow ratios. Dividend to FCF is mixed; however, 3 of the 6 report excellent results.
Debt: 4 of the 6 are generally favorable.
Price to Non-GAAP earnings: As expected, this important metric is low (good).
Tax: All companies issue K-1 except that KNOP issues a 1099.
Disclosure: I own stocks in all companies
This article has provided basic information about investing for immediate income. Immediate Income Investors prefer to invest in companies that provide higher yields and income than is found in DGI stocks. While immediate income investors reach for higher yields, that doesn’t mean they must take unreasonable risks. The goal should always be to invest in reasonably safe companies that can provide a reliable and sustainable distributions. That may mean digging deeper, but the time and effort can be well worth it to meet your personal income requirements.
I ended the article by presenting 3 tables of high yield securities that I consider to be good examples of securities that Immediate Income Investors could be interested in for their own portfolios. They are not recommendations, but if any are found to be of interest, then it is always wise to do further research to verify they meet your investment requirements.
Thanks for reading,