So in the wake of the 3PAR bidding war, which tech stocks are on the auction block as the next buyout targets?
Most high-yield income investors want an energy component within their portfolio as a long-term cornerstone against inflation. That makes perfect sense, but only if that income vehicle can stand the test of time. It does this by replenishing reserves at a rate higher than those energy assets to the marketplace at whatever the prevailing prices are.
This is the main drawback of owning domestic energy trusts.
A common method for paying dividends from funds that invest outside the U.S. is to pay special dividends composed of short-term and long-term capital gains. The dividend policies of such funds are predicated on the ability of the fund manger to pay out whatever gains can be garnered over the course of a year depending on short-term or long-term holding periods.
Closed-end funds based on China, India and other emerging markets had explosive returns from 2003 to 2007, chalking up greater than 50% returns. But a large portion of those returns were paid out in the form of huge capital gains-based dividends and are reflected in most screening software portals that suggest these funds are still paying out these gorilla-sized dividend yields.
They're not, and the data can be hugely misleading when investors are hunting for big yields through various screening tools.
All common stocks, income trusts, master limited partnerships, REITS and other pass-through entities have what is called a payout ratio. It's a number that essentially says how much of the dividend is paid out from each dollar of net income.
A company like AT&T (T) has a payout ratio of 77%, meaning that the company retains 23 cents of every dollar after dividends are paid out to put back into the business. This is a decent ratio, but something around 50% to 60% is more ideal.
Some closed-end funds pay out what is known as managed distributions as a template for their dividend policy.
What happens here is that the fund, in its attempt to draw investor attention, states that it will pay out a managed distribution that is a percentage of the net asset value (NAV) at the end of each quarter. The idea is stability of income.
Hardly! Most closed-end funds that employ a managed distribution payout policy use 8% as the percentage of NAV they peg the fund to at the end of the quarter.
This is one of those areas that should be treated like poison. When a big, fat, juicy dividend yield is composed in whole or in part by what is termed a return of capital, you want to steer clear.
When a mutual fund or entity pays out a scheduled dividend payment that hasn't been earned by profits or interest income, you can bet that a portion of that dividend will be in the form of a return of capital, which simply means you as an investor are receiving some of your money back as part of the dividend.
Two negative things happen here.
Most closed-end funds trade at a premium or discount to their net asset value (NAV) for various reasons and can offer excellent investment opportunities. Locking in a high-yield payout in a discounted fund can make for some exciting total returns.
Yet some investors buy into a popular closed-end fund that is trading at an enormous premium to its NAV. Why would anyone pay up to 25% for shares of a hot closed-end fund when they could buy that same basket of stocks or bonds from their broker at real market value? It's a bit insane.
This statement may come as a shock to most investors, but if there is a choice to buy a certain index or sector closed-end fund instead of an open-end fund, opt for the closed-end fund.
First of all, with the Dow showing triple-digit point swings on an intra-day basis, you never know when you may want to exit the fund if the market makes a dramatic move up or down. With an open-end mutual fund, you can only sell at the end of the day
In the world of high-yield securities, investors on a quest for the biggest yields are often lured into securities that either they don't understand or are simply tempted beyond their personal discipline to investigate how that yield is being supported.
If you can't identify where the "Yield Power" is that makes the king-size payouts possible, then they should avoid purchasing them.
So how do you know which ones to avoid?
When shares of Denny's Corp. (NASDAQ: DENN) are trading at half the price of a Grand Slam Breakfast, yet it was one of the companies willing to drop big bucks on a Super Bowl ad, I gotta jump in my car and get down to Denny's to see what's gone wrong.
Problem is, nothing has gone wrong. They are just as crowded as ever, especially during this recession.
They represent a full sit-down meal destination at fast-food prices. And the portions are big.
The company has totally restructured, selling off franchises and keeping all the best locations for its own portfolio -- and the results are pouring in.
On Jan. 15, the company said it expects to meet or exceed its previous guidance for full-year 2008, thanks to the success of the Franchise Growth Initiative (FGI) and other cost-saving actions that protect margins and cash flow.
With the stock trading around $1.50 per share, it's time to consider whether Denny's is some low-hanging fruit ready for the picking.
During the bull market in commodities that peaked midway through 2008, shipping companies that transfer base commodities across the oceans enjoyed phenomenal runs to all-time highs before fizzling out like a Roman candle.
Companies that carry wheat, corn, soybeans, fertilizer, cement, iron ore pellets and sugar were printing money as the day rates for shipping dry commodities soared.
The rate charged by dry bulk shipping companies to buyers of commodities abroad, as measured by the Baltic Dry Index (BDI), began 2008 at roughly $5,800 per day. The rate topped out at $11,700 midyear, and bottomed out in early December at $675 -- a 94% correction. Absolutely unbelievable!
Shares of the most widely traded stock within the dry bulk shipping sector, DryShips (NASDAQ: DRYS), traded as high as $116 in May, reflecting the fullness of the commodity rally that seemed to be irreversible based on the glowing projections of China, India, central Europe and what are now known as "Frontier Economies," like Vietnam and Indonesia.
Following that meteoric rise in shares of DRYS to $116, the stock proceeded to careen all the way down to $3 in November.
This shorting strategy defied all odds and pretty much defined the year for the stock market.
The idea of these once-in-a-class-by-themselves quasi-government entities that touch more than 85% of all mortgages in the United States going into full receivership by the government was considered foolish, almost ludicrous discussion that only invited serious sarcasm from professional Fannie and Freddie watchers.
The ultimate collapse of both stocks was devastating, not only to investors that continued to believe all the false headlines spewing from the front offices of FNM and FRE that said they were more than amply capitalized, but the whole financial sector as well.
The notion that Freddie and Fannie were too big to fail was a given, sucking in long-side investors at every 10-point interval on the way down to zero.
For those that had the fortitude to pull the trigger, shorting crude back in early July when all the perfect storm conditions for $200 per barrel oil were on the horizon ... and had the stones to stay with that trade ... made a killing.
This is one of the greatest reversals for any major market of any kind that has ever occurred. And it clearly shows how the crude oil market was being manipulated by speculators and hedge funds.
The impact was fatal for hundreds of small airlines and small- to medium-sized trucking companies, along with thousands of other companies that didn't hedge against the price explosion in energy.
The price of crude, which topped out at $147 per barrel in July 2008, crashed to $35 per barrel by Dec. 18 -- a 76% haircut -- before getting a bid that got the price back above $40 on the eye-popping headline that OPEC would slash daily production by 4.2 million barrels.
This strategy went from being a modestly successful trade through October to a hero-sized trade in the past 45 days.
The Fed funds rate, the most widely followed interest rate the banks charge each other for overnight lending, topped out in August 2006, at 5.25%.
When the Fed started easing rates thereafter, no one at the economic think tanks forecasted anything close to what we are seeing today (namely a Fed funds rate of zero to 0.25% -- a decline of a full 5% in 17 months).
The decline in rates started out so orderly and coordinated that it seemed almost too good to be true, and the Dow Jones Industrial Average hit an all-time high, topping 14,000 for the first time in July 2007.
However, the quarter-point cuts gave way to a three-quarter-point cut, or 75 basis points, on Jan. 22, 2008, signaling that the Fed was seeing a material breakdown in the credit and housing markets. Following that seemingly radical rate cut, just eight days later on Jan. 30, the Fed again slashed the Fed funds rate by another half point, or 50 basis points, to 3%.
From there Bernanke & Co. held steady for a couple months to see if any good would come of their efforts.
When evidence of further erosion in the credit markets surfaced with the impending collapse of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), Indy Mac, Bear Streans and Lehman Brothers (OTC: LEHMQ), the Fed lopped another three-quarters of a point off the Fed funds rate, taking it down to 2.25% on March 18.
That was considered the absolute floor at the time, a level that would stick. But that wasn't the case.
With all the media buildup leading up to the Olympic Games in Beijing this past summer, just about everyone and their brother was bullish on the China/India emerging market theme.
"Chindia," as it was coined, was supposed to be the next great economic wonder.
The belief that these markets did not need American demand swept international investment circles. Forecasts of double-digit GDP growth continuing for the next several years became the mantra of emerging market funds, and Wall Street analysts got caught up in the commodity bubble, which burst a month before the Olympic torch was lit.
The widely held belief of global economists was that these two sleeping giant economies would lap America in a matter of a few years, as per all the economic extrapolations and white papers published leading up to the Summer Games.
Stocks like Baidu.com (NASDAQ: BIDU), China Mobil (NYSE: CHL), China Life (NYSE: LFC), Huaneng Power (NYSE: HNP), PetroChina (NYSE: PTR), Infosys (NASDAQ: INFY) and Reliance Industries (not listed) seemed bulletproof given the revenue and earnings models being floated by the Chindia bulls.