How to Make Your Stocks Work for You L - Investors Alley

[Pages:9]September 2016 Vol. 3 Issue 4

How to Make Your Stocks Work for You

Last week, myself and the Investors Alley team were in San Francisco to participate in that city's MoneyShow investor conference. I made two presentations covering different aspects of my dividend stock investing strategies. Thank you if you were one of the subscribers who tracked me down to say

hi, and special thanks if you told me how much

The Dividend Hunter has helped you with your

investment success. I've learned a lot about myself from doing these

In This Issue

presentations including that I enjoy public speaking, but what really brings me joy has been

Golar LNG Partners (GMLP)...........................3

discovering that my strategies and focus on building a higher-yield, sustainable dividend stream are still new ideas to many investors. The

My Portfolio Management Tecqniques.......4 Main Street Capital (MAIN)..........................5

financial news media and much of the Wall Street advisory crowd remains focused on share prices and trying to predict in which direction they will

Portfolio Update..............................................7 Current Portfolio Standings...........................8

move next. I remain convinced that investing in stocks to generate a stable and growing income

Closed Positions ..............................................9

stream will work better and produce superior

long-term results for most investors.

With GDP growth stuck at 2% per year or lower, I think that it will be difficult over the foreseeable future for the stock market to get close to the historical 9% to 10% average annual return for the overall market. I think broad stock market ETF investors will be fortunate if they average 5% per year for the next five to 10 years. The financial analysts won't tell you this, but if the 10-year Treasury note is yielding 1.6% as it currently is, over the next 10 years, a portfolio or fund of government bonds will end up with an average annual return that closely matches that 1.6% yield. Those returns will not grant you a prosperous retirement.

Bond prices will change up or down with changing interest rates, providing the opportunity for capital gains or losses in the shorter term, but the math says that over a longer investment horizon, bond investors will earn the yield they start with. While I hope I am wrong and that investors who go with a balanced portfolio of stock and bond ETFs do much better, it appears that average annual returns with the typical ETF strategy will more likely generate low single-digit (3% to 4%) average annual returns. When you look at these potential returns, The Dividend Hunter average yield of about 7.5% looks very good.

So far in 2016, the new stocks that I have added to The Dividend Hunter recommendations list have leaned to more conservative companies. These stocks have lower yields but rock-solid financials and the ability to support their current dividends and grow them in the future. These are the recommended

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stocks like Easterly Government Properties Inc. (NYSE: DEA), Lamar Advertising Co, (Nasdaq: LAMR), and MGM Growth Properties LLC (NYSE: MGP). These are very good dividend stocks, and they will perform well over time. However, with the market at all-time highs, yields are well below where they were earlier in the year. I want to add another higher yield stock to the list, and I think I have found a good one this month. As always, I appreciate all the email feedback from you subscribers, and don't be afraid to send me your questions. What I hear from subscribers is that The Dividend Hunter is the best stock market newsletter in its price category, and I intend to do everything I can to keep that reputation and improve it. If you're following the Monthly Dividend Paycheck Calendar be sure to get the August update; just CLICK HERE to get a copy.

Land, Fly or Die, Tim Plaehn Editor The Dividend Hunter

P.S. Returns in my 30 Day Dividends service have been on a tear recently. The last six trades I closed out gave subscribers returns of 48%, 54%, 14%, 17%, 11%and 22% respectively! And, since launching 30 Day Dividends in June of 2014, my subscribers have closed out an amazing 75% of our trades with positive total returns... even during one of the most volatile markets in five years. There are still a few open slots remaining for subscribers of The Dividend Hunter to receive the instant 50% discount right now. If you want to start compounding your dividend income with regular trades, I invite you to click the link below. Click here for more information on compounding your dividend income.

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Golar: A Wise Addition to Your Dividend Portfolio

Golar LNG Partners LP (Nasdaq: GMLP) is an energy infrastructure company that 16 months ago was priced to yield less than 8%. Now, GMLP units are priced to yield over 12%. This company has growth potential and should be valued to yield in the single digits. To save

The sponsor gets the benefit of realizing a higher value for the fully leased asset compared to the price it paid. The MLP acquires an asset that will generate immediate free cash flow that can support or be used to increase the dividend rate.

you from reading to the end (although you should) here are the two main points about Golar LNG Partners:

My research shows that the current GMLP distribution is secure. More on that later.

Golar LNG reports tax information on a Form 1099. This means you can own the units in any type of account, including IRA's.

As the sponsor and owner of the MLP general partner rights, when GMLP increases its dividend rate, about half of the increase goes right back to GLNG. Golar LNG also owns 29% of GMLP limited partner units. This means that GLNG is by far the most highly motivated player when it comes to sustaining and growing the GMLP distribution rate.

Business Overview

Future Prospects

Golar LNG Partners owns and operates full or partial ownership in a fleet of six liquid natural gas (LNG) Floating Storage and Regasification Units (FSRU) and four LNG Carrier ships. The FSRUs and carriers are leased on long-term contracts to counterparties such as Petrobras, the Kingdom of Jordan, the BG Group, and ENI. The current average remaining lease term is about five years. The company went public with an April 2011 IPO, and currently carries a $1.2 billion market cap.

GMLP was spun-off by Golar LNG Limited (Nasdaq: GLNG), which has a $2 billion market value and operates the same types of LNG infrastructure assets. GLNG and GMLP have the classic general partner/sponsor and controlled publicly traded MLP arrangement. As the sponsor, GLNG acquires new assets, markets them, and completes the leasing process. To support the MLP, in this case GMLP, all or fractional ownership of a fully leased asset is sold to the MLP. This is called a "drop down" in publicly traded partnership jargon. The asset transfer is priced so that the MLP is assured that the new revenue stream will generate increased free cash flow per share.

As of the 2016 second quarter, the spot charter price market for LNG carrier ships was very low. This could affect GLNG which has three of its four carriers reaching the end of their current leases at the end of 2017. The lease payments from these ships currently account for 17% of total ongoing revenue. However, Golar management has stated that they believe lease rates will turn up significantly by the end of next year. Between now and 2018, enough new LNG production facilities will come on line to increase LNG shipping demand by 50% to 60%. The number of new carriers on order will be well short of the capacity needed to transport the new production. Any ships that would be ordered now would not be ready until after 2018. These timing factors mean that GMLP should be renewing those three leases just as demand for LNG transport is exploding.

GMLP has recently completed a drop down acquisition of another FSRU from Golar LNG. The new asset will boost the GMLP distributable cash flow by $24 million or 12% on an annual basis. The purchase closed at the end of the 2016 second quarter, so the added cash flow will start to show up in the third quarter results.

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Investment Considerations

In its first three years as a public company, GMLP increased its quarterly distribution on a regular basis. Recently, the payout has not been increased. The rate has been level since the first quarter of 2015. Golar, like many energy infrastructure companies decided to retain more free cash flow as the market worked through the recent bear market in energy commodity prices. The current distribution is well covered, with annual distributable cash flow that is 1.24 times the distributions being paid. The recent FSRU acquisition will boost that coverage.

At some point, possibly after the three LNG carriers are signed to new leases, I expect GMLP to again start to grow its distribution rate. In the meantime, we get a yield over 12%. The unit value would increase with a distribution increase, or we could see value gains as the market sees stability in the global LNG market. The current distribution rate is secure.

Finally, I will repeat that GMLP files U.S. taxes as a corporation and issues Forms 1099 to investors. This

makes this high-yield MLP appropriate for any type of investment account.

Recommendation: Buy/Accumulate GMLP up to $20

Portfolio Management Tecqniques

I want to share a few tips on how I actually manage a dividend-focused stock portfolio. I repeat it a lot, but with the stock portfolios I manage, my focus is very much about building a growing dividend stream. It produces a mindset that pushes you to make different investment decisions that will lead to better results over the long-term. Here are some tactics/techniques that I use.

I maintain a certain cash balance. This is money I would use to buy dividend stocks if the market drops a lot. The cash balance was much larger at the start of 2015, but

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the energy sector bear market and two significant stock market corrections over the last year have allowed me to put a lot of that money to work at share prices that now generate very attractive dividend payments. For regular additional investments, I do know that my portfolios will generate significant cash dividends each quarter, which will replenish my cash balance so I can buy more shares.

My rough goal is to own about equal dollar amounts of each stock. However, when I add a new stock I start with a relatively small investment amount. With my luck, a stock almost always goes down when I buy some, so I am always ready to add more shares if that happens. I then plan to build up a position by adding a few more share after each ex-dividend date. This way I know my dividends from that stock will grow quarter after quarter.

When I open a brokerage account, I first look to see what stocks are down. These are the ones I will consider buying more shares. Adding shares on the cheap boosts my average yield and overall dividend cash flow.

If I get a quick and significant run up in a stock's value, I will take some profits and reinvest that cash into a stock with a higher dividend yield. For example, a stock which you paid $20,000 for the shares has quickly gone up 30% and is worth $26,000. I would sell $6,000 worth of that stock and put the money into one of my stocks that may be down a bit, or at least has a higher current yield.

recovery, but it is a much smaller number of shares than when they were paying a bigger dividend.

Use a notebook or spreadsheet to track your quarterly dividend earnings. If you are doing this right, you should see those real cash earnings grow steadily. If not, reread this newsletter section and send me some questions.

Main Street Capital: A Strong Dividend Investment

I first recommended Main Street Capital Corporation (NYSE: MAIN) in July 2014, in the second monthly Dividend Hunter issue. This business development company has been a tremendous stock for income focused investors. Since that first recommendation, the monthly dividend paid by MAIN has been increased four times, and four special dividends have been declared. It is time to re-review this best in class business development company (BDC).

Legally, a BDC is a closed-end investment company, similar to closed-end mutual funds (CEF). The difference is that a CEF owns stock shares and bonds, while a BDC makes direct investments into its client companies. A BDC will have up to hundreds of outstanding investments to spread the risk across many small companies. The client companies of a BDC will be corporations that are too small or too new to be able to issue stock or bonds into the publicly traded markets.

When a company reduces its dividends, as Kinder Morgan Inc. (NYSE: KMI) did last year, I don't immediately sell all my shares. I wait and find out what the company's plans are to save or recover its business. In the case of Kinder Morgan, the company decided to retain cash flow for internal investments. That doesn't help my dividend stream, but at least I know there are future growth prospects. However, I still would sell (and

As a risk control factor, BDCs are limited to no more than one times its equity in leverage. This means that if a BDC has $500 million of equity raised from selling shares, it can borrow another $500 million. The company can then make $1 billion of loans or equity investments.

Main Street Capital Stands Apart

did) a portion of my KMI shares and reinvest that cash into some of my high-yield holdings to recover some of the lost dividend. Retaining a small position in the stock gives the opportunity to profit from the eventual

Our BDC portfolio selection, Main Street Capital Corp., is really quite different from the rest of the BDC crowd. Since its 2007 IPO, MAIN has doubled the total return

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the BDC index. Here is a list of some of the reasons why

than the typical BDC client, and have annual revenues

this company stands apart from its peers in the

between $10 and $150 million. There are over 175,000

industry:

companies in this revenue bracket in the U.S., and MAIN

MAIN is internally managed with insiders owning over 2.8 million shares. Co-founder, Chairman, and CEO Vince Foster is the single largest individual shareholder.

Main Street is the most conservatively managed BDC in the industry and holds an investment grade BBB credit rating. Investment grade is rare

has 74 lower middle market clients with loans and equity investments worth about $860 million. Seventy percent of the investments are loans with an average yield of 12.4%. The 30% equity position gives an average 35% ownership of the client companies. The equity stakes are what have allowed the MAIN net asset value (NAV) to increase by almost 60% since the 2007 IPO.

among the BDC crowd and allows Main Street to borrow at a much lower cost of capital compared to most other BDCs.

Operating, admin, and management costs are 1.4% of assets compared to 3.4% for the average BDC and 2.7% for commercial banks.

Net debt is just 0.61 times company equity, well below the 1.0 times maximum set by law.

The equity investments are really what set MAIN apart from most other BDCs. The rules under which these companies operate prevent them from setting aside loan loss reserves. Because a BDC makes higher risk loans, there will be loan losses. These losses have a direct negative effect on a BDC's book or net asset value. That is why most BDCs struggle to maintain their book values compared to the growing value built by

The share price is about 1.5 times the book or NAV value.

MAIN uses a two tier approach to its portfolio. This

Main Street Capital. Core Income Holding Investment

unique strategy allows Main Street to generate a high level of interest income and also capital gains from

The lower middle market client and middle market client mix provides a combination of net interest

equity investments. In the middle market, MAIN

income to support MAIN's very excellent history of

provides debt financing to companies with stable

dividend payments. The result has been a BDC that has

finances and low risk of default.

generated both regular dividend growth for investors

Currently, Main Street has 81 middle market clients with an average loan amount of $8.0 million. The loans total over $610 million or about 40% of MAIN's total portfolio. Middle market loans are floating rate and

and special dividends to pay out capital gains. As an additional bonus, MAIN pays monthly dividends, smoothing out the cash flow into your brokerage account.

match with MAIN's floating rate debt facility.

In August 2016, the monthly dividend was increased a

The average 8.4% yield on this group of loans is 5.5% higher than Main Street's debt used to fund the loans to clients. The 5.5% interest margin is almost pure cash flow that can be used to help pay dividends on MAIN's stock shares.

second time this year by 1/2 cent to $0.185. This dividend rate is 5.7% higher than a year ago. At $34.35 per share, MAIN currently yields 6.5%. Also, the company has been paying a special dividend twice a year to pay out some of the profits from the lower middle market equity investments.

In the lower middle market, the company takes equity stakes along with providing debt financing. The equity provides a significant boost to the total returns generated. Lower middle market companies are smaller

Over the last year, the two payments have totaled $0.55 per share, bringing the total yield to almost 8%. MAIN generates a significant cash flow cushion to cover

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the dividends to be paid. This is a very important factor for us when considering which stocks to add to the portfolio.

As of the 2016 second quarter, the distributable cash run rate was $2.34 per share. This is interest income only, no capital gains, and provides 1.05 times coverage for the monthly dividend. The high share price to book value ratio (about 1.5 times) for Main Street allows the company to sell shares and generate an immediate positive result for investors. This capital can then be put to work to generate a growing cash flow stream to support future dividend increases.

Recommendation: MAIN should be a core holding for any income focused investor. Establish an initial position and be ready to add shares during market corrections such as we experienced in the early weeks of 2016.

Position: Long MAIN

Portfolio Update

I am recommending two position changes this month, moving these stocks out of the Buy/Accumulate list based on recent dividend announcements.

I recommend that shares of Ventas, Inc. (NYSE: VTR) be sold to lock in your gains. This stock has produced a 35% total return since I recommended it a year ago. Ventas just announced its next dividend which is unchanged for the fifth consecutive quarter. The company did say the dividend will be increased next quarter, but the FFO per share growth rate for this year points to a lower than average increase. I think the stock is over-priced with the yield down to 4.0%. I recommend that you sell VTR and reinvest the proceeds into a higher-yielding Dividend Hunter recommended stock.

I am moving the RBC Yorkville MLP Distribution Growth Leaders ETN (NYSE: YGRO) to the hold list. The fund just announced a $0.1487 per share dividend to be paid on September 6. The two dividends declared so far this year are less than those paid for the second half of last year. I think the YGRO strategy and fund are a good fit for certain applications, but it does not fit with my criteria for a Dividend Hunter recommended stock.

Since the energy infrastructure sector is on a slow recovery, YGRO will stay on the hold list to recover some of the losses since I first recommended this ETN in August 2015. Dividend Hunter recommendation InfraCap MLP ETF (NYSE: AMZA) is a better, higheryielding alternative to get MLP energy infrastructure investment exposure.

Main Street Capital Corporation (NYSE: MAIN) announced a one-half cent increase in its monthly dividend, to $0.185 per share. The first payment of the new higher rate will be in October.

Recent recommended stock addition, Lamar Advertising Co (Nasdaq: LAMR) announced a one cent increase in its quarterly dividend to $0.76 per share.

LAMR goes ex-dividend on September 14 and the payment will hit your brokerage account on September 30. LAMR yields 4.9%.

Ventas Inc. will now be found in the `Closed Positions' section of the portfolio, and RBC Yorkville will now be found in the `Hold' section of the portfolio.

If you haven't yet, read my report on K-1 reporting stocks and the tax implications of owning these stocks: Guide to Investing in K-1 and IRS Form 1099 Reporting Stocks

If you have any questions about the stocks in the portfolio or anything we covered in this month's issue feel free to write to me directly. My personal email address is tim.plaehn@.

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Current Portfolio: Buy / Accumulate

Stock

Golar LNG Partners (GMLP) MGM Growth Properties LLC (MGP) Communications Sales & Leasing (CSAL) Lamar Advertising Co. (LAMR) Chatham Lodging Trust (CLDT) Easterly Government Properties (DEA) VTTI Energy Partners LP (VTTI) Jernigan Capital (JCAP) Reaves Utility Income Fund (UTG) Aircastle Limited (AYR) Hercules Tech. Growth Capital (HTGC) InfraCap MLP ETF (AMZA) Blackstone Mortgage Trust (BXMT) Stag Industrial (STAG) EPR Properties (EPR) New Residential Investment (NRZ)** Main Street Capital (MAIN) Starwood Property Trust (STWD) Ship Finance International (SFL) Macquarie Infras. Company (MIC)

Entry Date

09/01/16 07/01/16 05/31/16 04/29/16 03/31/16 03/01/16 01/04/16 12/01/15 11/02/15 09/30/15 04/30/15 03/31/15 01/31/15 12/31/14 10/30/14 07/30/14 06/27/14 05/30/14 05/30/14 05/30/14

Entry Recent

Div.

Price Price Status Earned

$19.29 $19.29 Buy $0.0000 $26.43 $25.25 Buy $0.0000 $24.98 $31.33 Buy $0.6000 $62.04 $62.98 Buy $0.7500 $20.62 $20.30 Buy $0.4400 $17.50 $19.55 Buy $0.4500 $20.71 $18.85 Buy $0.9328 $15.37 $16.10 Buy $1.0500 $29.95 $30.22 Buy $1.5125 $20.61 $21.68 Buy $0.96000 $13.90 $13.69 Buy $1.8600 $21.51 $11.43 Buy $3.0900 $41.05 $29.70 Buy $3.5200 $24.50 $24.69 Buy $2.1756 $55.64 $78.44 Buy $6.9200 $12.16 $14.28 Buy $2.9400 $32.51 $34.28 Buy $5.6600 $24.39 $22.90 Buy $3.8400 $18.52 $14.84 Buy $3.9700 $61.48 $80.99 Buy $8.6100

Current Yield

11.9% 5.4% 7.7% 4.9% 6.4% 4.7% 6.7% 8.6% 6.0% 4.4% 9.1%

18.0% 8.3% 5.6% 4.9%

12.8% 6.5% 8.4%

11.9% 6.2%

Cash Return

0.00% 0.00% 2.40% 1.21% 2.13% 2.57% 4.50% 6.83% 5.05% 4.66% 13.38% 14.37% 12.05% 8.88% 12.44% 24.18% 17.41% 15.74% 21.44% 14.00%

Current Portfolio: Hold

MLP Distribution Growth Leaders (YGRO) 07/30/15 $14.60 $10.70 Hold $0.6783

6.3%

Williams Companies (WMB) Lexington Realty Trust (LXP) Kinder Morgan (KMI)

05/29/15 $51.10 $28.15 Hold $3.3500 03/02/15 $10.78 $10.73 Hold $1.0200 01/31/15 $29.20 $21.61 Hold $1.7300

12.0% 6.3% 1.2%

Arc Logistics Partners (ARCX)

07/30/14 $25.10 $14.64 Hold $4.2550

7.0%

Recent price is determined bythe last "Ask" price at the closing of the market on the day before publication; most recent update 09/01/16

4.65% 6.56% 9.46% 4.21% 16.95%

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