Nothing But the Best for Mom
Here at Income Millionaire we aim to please. Some readers have asked for a list of best buys shorter than the 29 recommendations currently in the portfolio.
So, I could make one: put some picks in this inner circle and leave some off, after debating whether this stock’s reliability should rate higher or lower than that fund’s upside, in all the conceivable permutations. Except that the market’s open today, and all the prices will change. And then change again the next day. I could issue an updated ranking of my favorite buys every day. But that would take away from the harder work of making the portfolio on the whole as sound and as rewarding as possible over the long haul.
Fortunately, I can offer something more definitive and factual than a pecking order. As it happens, my parents recently sold their longtime Northeast home in favor of full-time retirement in sunny Florida. And they asked me to invest some of the proceeds for them in an income portfolio, to supplement their retirement accounts.
Since I’d recently launched the Income Millionaire portfolio, all I had to do was decide which of those recommendations were immediately deserving of my parents’ money.
I’m going to talk about each purchase, and give its weight within my parents’ new portfolio. Just keep in mind that this entire portfolio represents less than 20% of their investment assets including other retirement accounts.
And while I won’t be day-trading their account, I’m also not committing to issuing an alert any time I buy or sell anything for my parents. I will, however, let you know any time an unusual opportunity presents itself to scoop up a current recommendation or a new one. And the same goes for IM portfolio sell calls.
The first thing I bought for my parents was Energy Transfer Equity (ETE), which will not surprise regular readers of MLP Profits. I allocated 14% of the portfolio to it on May 31, mostly with the idea of eventually selling some of the even larger ETE stake in my mom’s tax-deferred account. The unit price has since declined 2.7%, amid broad weakness in oil prices and energy equities. A distribution currently yielding almost 7% is certainly attractive, but the real prize here is ETE’s upside exposure to higher oil prices and, possibly, a lucrative merger with the affiliated Energy Transfer Partners (ETP).
A little perspective here goes a long way. Sure the year-to-date chart looks awful, since ETE hit its 2017 low Thursday:
But the one-year time-frame is more encouraging:
And if you tell me how terrible the last three years have been…
… I’ll suggest you consider the past decade:
The bottom line with ETE and other midstream portfolio recommendations is that investor sentiment is overextended to the downside, just like oil prices.
The market is overestimating the durability of current OPEC output at current prices, and underestimating the resilience of global demand, which continues to steadily increase.
Over the longer term, U.S. shale is competitive with any OPEC supplier once you factor in the spending required to preserve public order and keep the wells pumping.
The oil industry’s collective decision not to develop big new prospects over the last few years will soon translate into a faster decline rate for older fields as infill drilling takes its toll.
The Alerian MLP Index has shed more than 1% the past three weeks, amid a dearth of buyers. So this is a great time to build midstream positions.
In addition to ETE, I allocated 11% of the portfolio to Williams (WMB) on June 2. That’s on top of Mom’s significant additional exposure to WMB via near-term call options. The current yield is 4%, modest by current midstream standards. But Williams controls a unique and highly attractive strategic asset in its Transco East Coast gas distribution system, and remains a strong takeout candidate. This position is up a little over 2% since June 2.
Another 11% of the house cash went into Enterprise Products Partners (EPD). In terms of operations and cash flow EPD is once again the best performing large MLP, as so often in the past. Its well-covered current 6.1% yield will be the gift that keeps on giving once oil prices recover and sentiment perks up.
A further 11% went into the iShares MSCI Brazil Small-Cap ETF (EWZS), along with 10% for WisdomTree Europe Small-Cap Dividend (DFE) and 9% for the Japan Smaller-Cap Fund (JOF). I love the notion of an aggregate 3% yield from hundreds of smaller-cap stocks on three continents. The bet here is that the economies of Western Europe, Japan and Brazil will outperform expectations over the next year or two. If they do so, small-caps should do particularly well. And if not, well, this is not exactly a crowded trade just yet, and JOF is still trading at an 11% discount to net asset value.
In the aggregate, those three small-cap foreign fund plays and the trio of midstream energy bets accounted for 65% of the portfolio. Another 10% went into Gaming & Leisure Properties (GLPI), a unique Real Estate Investment Trust deriving its income primarily from property leases to regional casino operators in the Midwest and the South, with full ownership of operations at a couple of the properties thrown in.
The current annualized yield is at 6.8%, and while there’s been a lot of casino construction on the coasts the competition doesn’t look as fierce in red-state regional markets. GLPI’s leases are split almost evenly between Penn National Gaming (PENN) and Pinnacle Entertainment (PNK), and it’s further encouraging that PENN trades at an all-time high. PNK has historically done worse with much more volatility, but is nevertheless up 40% year-to-date.
Regional markets held up much better than, say, Las Vegas during the Great Recession, and the casino operators must pay GLPI before they can even service their debts.
GLPI’s first-quarter results topped management’s guidance, led by the company-owned Baton Rouge operation, which posted revenue growth of 9% year-over-year.
Another 9% went into Blackstone Group (BX), far and away the leading private-equity firm and alternative asset manager. Organized as an MLP, Blackstone pays a variable distribution targeting 85% of long-term profits. The current yield based on the last four quarterly distributions is an annualized 6.3%.
And while there’s no guarantee the next year will prove similarly fruitful the current bull market will be a big help on that score, as Blackstone liquidates more funds with big capital gains and reaps the resulting incentive fees.
The stock is up 50% from the lows of Halloween and seems to have recently broken out of a two-year consolidation pattern, helped by Saudi Arabia’s recent commitment of $20 billion for a U.S. infrastructure fund.
But Blackstone hardly needs the Saudi money. It’s already managing $368 billion for leading global institutions that have beaten a path to Blackstone’s door based on results. The firm’s private equity funds have delivered a 19% average annualized return over 30 years.
Slide from my Investing Daily Wealth Summit presentation in April
Seven percent of my parents’ new income account went into New Residential Investment (NRZ). It’s a mortgage REIT but an unusual one, investing primarily in mortgage servicing rights. MSRs are a claim on a tiny sliver of the anticipated mortgage payments retained by the loan originator, which can in turn subcontract the payments collection and processing and sell the so-called “excess” MSR to an investor like a bank or NRZ.
Since NRZ currently yields 11.8% it obviously poses plenty of risk, starting with its reliance on short-term financing an continuing to the fact that MSRs are a wasting asset with an expiration date that can be hastened by mortgage refinancing.
Still, some of the most obvious threats, like the possibility of a Democratic presidential administration slashing the required MSRs, have receded. And earnings results have been solid of late.
The final 9% remains in cash, awaiting the right opportunity. I should also note that I recently bought Western Digital (WDC) and Seagate (STX), discussed here last week, for another parental retirement account.
So, not Best Buys exactly, but stocks I’ve bought for my parents over the last two weeks, which seems more honest. And if I find another income investment worth buying right away you’ll be the first to know.