"After reviewing financial statements and data on dozens of closed-end funds, we identified MFS Intermediate Income Trust (NYSE: MIN) as one of my top picks," says income expert Carla Pasternak.
In her High Yield Investing, she explains, "You won't find many closed-end funds with a better mix of high-quality bonds than MIN's AA+ rated portfolio." Here's her look at this fund that offers an estimated 9.8% yield.
"MFS Intermediate Income Trust holds U.S. and foreign developed government bonds; it offers a discounted share price and a steady income stream powered by healthy earnings from portfolio assets.
"And like other bond funds, it can be affected by rising interest rates, but its diverse portfolios should help steady returns.
"You won't find many closed-end funds with a better mix of high-quality bonds than MIN's AA+ rated portfolio. The fund invests in AAA-rated U.S. Treasuries and agency bonds, foreign debt of developed countries, and high-grade corporate bonds.
"Management insulates the portfolio assets from currency volatility by holding them in U.S. dollars. A low duration of 4.4 years limits sensitivity to changing interest rates. The fund also may trade derivatives and use leverage to boost returns.
"After introducing a managed distribution policy in January 2008, the monthly dividend has doubled to a current $0.0498 per share. That equates to $0.60 a share annually, giving MIN a hefty yield of almost 10% of today's share price ($0.60/$6.15).
"The distribution policy calls for the fund to make distributions at a fixed rate of up to 8.5% of the fund's average monthly net asset value each year. An annual management fee of 0.75% of the portfolio assets takes a small bite out of the income available for distribution.
"In 2007, almost all of the distribution came from earnings and was taxable at the ordinary income rate. However, with the introduction of the managed distribution plan this year, the tax breakdown could vary.
"The fund offers a dividend reinvestment plan that reinvests all distributions or only long-term capital gains at the shareholder's option.
"Over the past year, the fund has delivered returns of over +10%, ranking in the top 1% of its category of taxable bond funds. Its managed distribution policy, along with its well-positioned holdings of outperforming U.S. Treasuries and foreign government bonds, contributed to its strong results.
"The policy of holding assets in U.S. dollars keeps the fund from benefiting from the dollar's decline. However, it also makes for more stable returns, which aren't buffeted by currency volatility.
"In an effort to provide a competitive yield, last October management widened the fund's mandate to allow investments in higher-yielding, but still investment-grade bonds that may not be actively traded on the public exchanges. This change slightly reduced the portfolio's average credit rating from AAA to AA+.
"Going forward, the fund's focus on high-grade U.S. and foreign government bonds should continue to yield above-average returns as investors seek safe havens amid volatile global markets.
"Over the long-term (5-plus years), we would expect the fund to provide steady average returns of about +6% annually, just as it has for the past decade. Despite their solid returns, the fund shares are still selling at a discount of -9.7%, in line with their 10-year average.
"MIN offers a generous monthly income stream and steady returns amid volatile markets. It's appropriate for more conservative investors looking for high single-digit returns over the long term."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
Closing Bell: Stock bulls and dollar death (DDRX,GMCR, PEET, SBUX, EBAY, CI, TECD)
So long peak oil, here comes peak uranium
Black Friday expected to be strong, no promises for Christmas
Reader Comments (Page 1 of 1)
8-06-2008 @ 2:18PM
Steve Selengut said...
Good News For Income Investors
Looking for good news in today's markets is like searching for the proverbial needle in a haystack. Needless to say, practically all investment grade equities and nearly all closed end funds that specialize in providing regular recurring monthly income have been reduced in market value by this prolonged correction. The quake has spread in all directions from its financial epicenter, and the mounting doom and gloom has taken its toll on even the most rational investment decision makers. Try to keep in mind that the purpose of income investing is the income that your portfolio produces not an increase in the securities' market values---
So here's the good news (and for anyone with a 40% or higher income asset allocation, or an income portfolio being used for living expenses), it really is very good news. Base income levels, from the beginning of the stock market correction in June '07 until mid-July '08, have barely changed at all. In fact, they have probably risen in properly asset allocated portfolios. I have examined the regular recurring monthly income distributed by 56 taxable income CEFs and 61 tax-free income CEFs, and the conclusions are pretty remarkable.
In spite of the fact that the vast majority of my favorite monthly income producers are lower in market value than I would like, the amount of income they are distributing to shareholders has not moved lower meaningfully--- even though the Federal Reserve has reduced interest rates by approximately 60% during the past twelve months. Here are the numbers: (1) 48% of the taxable-income CEFs are distributing precisely the same amount per share as they did a year ago. Fourteen issues have increased their payouts and fifteen have reduced them.
The net result is a decrease of just fourteen cents (2.5% of the total monthly payout). The average current yield on the portfolio, as of mid July '07, is 9.86% without considering any capital gains distributions. Additionally, the group is selling at market prices that reflect an average discount of nearly 11% from NAV. Is that special or what? The bonds, preferred stocks, government securities are priced 11% below their current market values.
(2) The numbers are similar with regard to the 61 tax-free income CEFs: 46% have not altered their payout over the past twelve months; eighteen have reduced their payout slightly, and 15 have increased the monthly dole. The net difference for the group over the past year is less than one cent, or a percentage change of two-tenths of one percent. Remarkable. This group is selling at an average discount from NAV of 9.1% and has a current tax-free yield of 5.51%.
(3) Of 117 individual issues, about half have produced stable income. The others have accounted for a total payout reduction of less than 15 cents--- a measly 1.7%. Why is this amount of little consequence? Two reasons really.
First of all, a properly asset-allocated income portfolio does not disburse all of the base income it receives, so there is income available to reinvest in more shares of income producing securities. This process assures a growing cash flow to calm your fear of rising prices. The other reason is a bit more hypothetical. The Fed has lowered rates significantly, a process that normally produces higher prices for income securities. Eventually, those lower interest rates (even if global pressures convince politicians to take back some of the reductions) should produce higher prices (i.e., profit taking opportunities) in these securities.
Admittedly, even if your asset allocation has been fine tuned for years, lower portfolio market values in this area make stock market valuation shrinkage feel even worse. But the value of stable cash flow becomes painfully clear for investors who misguidedly depend on capital gains for their spending money. Properly asset allocated portfolios contain enough base income generators to pay the bills. The purpose of capital gains is to produce proportionately more base income generators.
The purpose of this email is simply to bring some needed sunlight into an investment environment that is far gloomier than I think it needs to be. If you want the details, you'll have to request them personally.
Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"