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The Quest For a 6% Yield

  • September 20, 2007

A subscriber wrote to me a couple of weeks ago asking my thoughts on Macquarie Infrastructure Co. Trust (MIC) as a potential dividend opportunity. Just days before I received this email, I was personally looking for a fund or REIT that invests in parking lots (especially in San Francisco) and was not very successful in my search. MIC caught my interest not only because it invests in parking structures but because it is the oldest and largest fund of Australia’s Macquarie Bank. A recent article in Fortune magazine titled Would you buy a bridge from this man? by Bethany McLean discusses Macquarie Bank and its infrastructure funds like MIC in great detail.

If the hedge fund manager in the article, Jim Chanos, is to be believed, some of their funds are set up like Ponzi schemes. I would personally stay away from MIC if there is even an iota of truth in that allegation. I can see why MIC caught this subscriber’s fancy as it pays a 6% dividend yield and has appreciated almost 40% over the last year. In a period of market volatility and pullbacks like the 366 point drop in the Dow we experienced on Friday, stocks and funds with high yields are indeed attractive. As an alternative to MIC, given below are a few potential investments that yield roughly 6%,

  1. If you are looking for high dividend payers check out Suburban Propane (SPH), a stock I last mentioned in May 2006 when it was sporting an 8.3% dividend yield. The company not only pays a 6.2% dividend yield but  with 33% gains over the last year, its returns have almost been on par with MIC. I found Suburban Propane by running a screen in 2005 that also brought up other InsideArbitrage picks like Ambassadors Group (EPAX) and  Marcus (MCS). For a great place to start looking for other Suburban Propanes, check out this simple screen that brings up more than 20 stocks that yield at least 6%, with profit margins of at least 10%, Price/Sales of less than 5 and a PEG ratio of below 1.5.
  2. Financial stocks have taken a hard hit in recent months and even the large diversified banks like Citigroup (C), Bank of America (BAC) and Barclays (BCS) are sporting high dividend yields of 4.9%, 5.2% and 6.0% respectively. With most of these banks marking their mortgage portfolios to market, increasing loan reserves and taking large one time earnings hits, it may be a good time to move them to the top of your watchlist while the blood flows in the financial streets. I plan to hold off a little longer before I touch the financials.
  3. A third alternative would be the closed-end fund First Israel Fund (ISL) as mentioned by Gary of ETF Expert is his blog post Israel (ISL): Reducing Risk, Discovering the Rewards. ISL currently yields 5.8% and trades at a 2.69% premium to net asset value or NAV.
  4. While I still refuse to touch most REITs, rising apartment rents are going to be favorable for apartment REITS like AvalonBay Communities (AVB), Essex Property Trust (ESS), Colonial Property Trust (CLP) and Apartment Investment and Management Co (AIV), also known as AIMCO. AvalonBay and Essex have relatively low yields of 3% and 3.2% respectively while Colonial and AIMCO have much higher yields of 7.8% and 5.4% respectively. AvalonBay is an outstanding property management company and I have been watching this REIT since early 2006 but the low yield has kept me on the sidelines. For additional information about apartment REITs, check out this article.
  5. Canadian energy trusts like Penn West Energy Trust (PWE) and Pengrowth Energy Trust (PGH) were hit hard in the fourth quarter of 2006 when the Canadian government decided to start taxing the income of existing trusts in 2011 and increasing the dividend tax paid by institutional and foreign investors. Despite the high price of oil and gas, these trusts have not yet recovered and currently yield a very attractive 12.6% and 14.3% respectively. If you are not familiar with Canadian energy trusts or the risks associated with investing in them, check out this excellent introduction and this Forbes article.
  6. If you are not worried about illiquid investing opportunities (you should be unless you have large cash reserves and a highly diversified large portfolio) and love to support organic independent farmers, check out Organic Valley’s preferred stock yielding 6%. I was introduced to Organic Valley at a local organic grocer in Oregon a few years ago and while during some research on the company I was surprised to learn that in the early 90s, Organic Valley used to supply milk to Horizon Organic, currently a division of Dean Foods (DF).

Each of these investments are subject to their own unique risks and as most income investors are aware, sometimes it is best to stay away from stocks with very high yields as it can be a sign of trouble.

If you are aware of any infrastructure companies or funds that invest in parking structures and specifically in parking lots in San Francisco, please leave a comment on this blog or drop me an email. I would be happy to return the favor by elaborating on why I am interested in San Francisco parking lots.

P.S: The new stock contest is off to a great start and ironically almost everyone is beating me (literally) at my own game.

Voluntary Disclosure: Other than Marcus (MCS), I do not own any of the stocks or funds mentioned in this blog entry.