Author Topic: The need for Yield  (Read 4865 times)

Steven B

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The need for Yield
« on: May 19, 2017, 10:13:10 AM »
Yield. Yield. Yield. Everyone is searching for the elusive yield these days. Wanted to know what the board had to say about it, for instance do you believe that bonds are going to get destroyed with rising rates? What about alternative sources, say NNN REITS or online lenders such as prosper and lending club? Family members have given me their passive portfolios to manage along with the active part and they were in pretty vanilla 60/40s previously. Looking forward to hearing what y'all think.


DTEJD1997

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Re: The need for Yield
« Reply #1 on: May 19, 2017, 10:35:37 AM »
Depending on the size and composition of the portfolios you are working with...one way to get some yield is to write covered calls.  I especially like doing this on stocks that have appreciated quickly and are at/above what I think to be "fair value".  For example, you bought a stock at 31, a few quarters pass and it spikes up to 44...you think "fair value" is 40.  Write calls at 45 or 47.50.

I would think that with some monitoring and a bit of hard work, you could EASILY increase the yield on your portfolio by 1 or 2 percent a year with minimal risk.

I've done this personally with generally good results...

Pelagic

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Re: The need for Yield
« Reply #2 on: May 19, 2017, 10:58:57 AM »
I thought this was a pretty good piece that someone posted a couple months ago on BAC and WFC preferred stocks.

http://www.philosophicaleconomics.com/2017/03/a-value-opportunity-in-preferred-stocks/

GregS

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Re: The need for Yield
« Reply #3 on: May 19, 2017, 11:52:53 AM »
I believe reaching for yield is dangerous.  High yield is a red flag for risk in any asset.  Yes, experienced investors can sift through that and find real gems but we're not talking about a passive strategy or anything for amateurs.  Seth Klarman's writing in Margin of Safety on distressed debt investing vs. junk bonds is a great illustration of this.  The real rewards from high yield investing come from re-rating of risk not the yield, IMO.

It's better to adjust expectations.  Govt and IG bonds are low yielding right now but there's little way to earn more without more risk.  Mix up duration so you can shift short term money to longer term bonds if rates rise, but pretty much everyone is doing this right now which is keeping rates capped.

If you are managing things actively, I think a dividend growth portfolio is a possibility.  There are plenty of ways this can go wrong, however, like holding financial stocks into 2007-08.  Retailers, REITs today maybe.  Current yields in the best companies are pretty low but if you expect them to grow, you can be earning decent yields on your initial capital in a few years.  You still need to get the business and stock right.  This is a long term, buy and hold strategy but not a buy and forget strategy.

I don't do options but you won't blow up writing covered calls.  You just have to know what you'll do in a sharply rising market if things get called away.  Reinvestment risk in a rising market is what you need to worry about.

« Last Edit: May 19, 2017, 12:05:06 PM by GregS »

Steven B

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Re: The need for Yield
« Reply #4 on: May 23, 2017, 05:57:24 PM »
Thanks everyone for the advance. I'll try a mixture of those strategies and I'll definitely look into preferred, though I don't understand yet how those won't lose value as rates rise as well.

winjitsu

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Re: The need for Yield
« Reply #5 on: May 23, 2017, 06:32:30 PM »

Yield. Yield. Yield. Everyone is searching for the elusive yield these days. Wanted to know what the board had to say about it, for instance do you believe that bonds are going to get destroyed with rising rates? What about alternative sources, say NNN REITS or online lenders such as prosper and lending club? Family members have given me their passive portfolios to manage along with the active part and they were in pretty vanilla 60/40s previously. Looking forward to hearing what y'all think.

Agree'd the reach for yield is incredibly dangerous, but from a institutional perspective there's a real need for consistent return above 5%.  Non-profits in the US "must distribute only their minimum investment return statuatorily defined as 5%," and that target becomes their minimum required return to maintain assets. Back when rates were higher, this was easy. Now not so much...

The hope is that these investors stop buying into high-yield junk, REITs and MLPs and go back into safer government investments as rates rise. As a result, I hope these asset classes come back to earth in terms of valuation.



netnet

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Re: The need for Yield
« Reply #6 on: May 31, 2017, 03:08:31 PM »
if you are an accredited investor (or pooled your family is) you might look at private vehicles.  Specifically, some of my family is in alternative private real estate funds.  You have to be even more picky here, because of a lack liquidity, the bad ones are shall we say roach motels--once in you can't get out. 

That said the best ones have yields of 8 to 11%.  I have put elderly uncles and aunts in the ones I have liked.

DTEJD1997

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Re: The need for Yield
« Reply #7 on: May 31, 2017, 06:01:47 PM »
Hey all:

If one is looking to pick up yield, I've done VERY well with BDC's.  Of course, they are higher than they were a while back...but some of them have backed down in price (and gone up in yield).

My favorite is Pennant Park (PNNT).  They had a bit too much in the oil field and related industries and got pinched.  They had to lower asset value, take some charges, convert debt to equity and so on.  THEY ALSO LOWERED THE DIVIDEND, which was something they didn't have to do in the big financial meltdown.  They also their management fees.

After the pain, they are slowly recovering and earnings are SLOWLY going back up along with NAV.

I am going to guess that if they can continue making progress, AND the economy doesn't collapse...they might raise the dividend and start charging their "normal" fees.

If that happens, the yield would go from 9.5% to well over 10%, heck, maybe even 12% or more.  Of course, you would also get a nice little bump in capital appreciation.


rawraw

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Re: The need for Yield
« Reply #8 on: June 01, 2017, 07:19:48 AM »
My strategy has been to get exposure to higher yielding assets historically not available to retail investors. This has resulted in a portfolio of consumer loans in Lending Club and a small portfolio of real estate loans at Groundfloor. Lending Club would be my main answer to this if it wasn't so tax inefficient, so it naturally limits the opportunity outside of retirement accounts.

NoCalledStrikes

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Re: The need for Yield
« Reply #9 on: June 01, 2017, 07:37:49 AM »
Tough analysis of PNNT at https://bdcreporter.com/2017/05/pennantpark-investment-revolver-amendment-baby-bond-repayment/  It reminds me why I generally don't buy BDC's.