Cabot Investors Conference 2014 Prospecting for High Dividend Yields Chloe Lutts Jensen Chief Analyst, Cabot Dividend Investor

Cabot Investors Conference 2014 www.cabot.net

Prospecting for High Dividend Yields

Chloe Lutts JensenChief Analyst, Cabot Dividend

[email protected]@ChloeAtCabot


S&P Yield vs. 10-yr Bond Yield


10-yr Treasury Yields

YTD


Average Yields

*financial preferreds


• REITs (Real Estate Investment Trusts)

• MLPs (Master Limited Partnerships)

• CEFs (Closed-End Funds)


Average Yields



Real Estate Investment Trusts

• Equity REITs own property, Mortgage REITs own mortgages

• Exempt from taxation at trust level• Must pay 90% of income to

investors


Real Estate Investment Trusts


Real Estate Investment Trusts• Tax Consequences–Distributions are mostly Ordinary

Income (70% on average)–May also include Qualified Dividend

Income, Long-Term Capital Gains and Return of Capital


Analyzing REITs• Funds from Operations (FFO)• Distribution History– Long and Stable History, No Cuts– Dividend Growth Rate

• Valuation– Price/FFO– Net Asset Value

• Debt


Realty Income Corp. (O)•5% Yield•Dividends Since 1994•Consecutive Increases: 16 years•Dividend 10 year CAGR: 6%• FFO Growing and Covers Dividend:

•Debt/Equity = 0.87 (2013)– 10-yr average is 1.05/Industry Average is 1.8


Average Yields



Master Limited Partnerships• Publicly-Traded Limited Partnership• Pass-Through Entity Free From

Taxation at the Corporate Level• Must be in Natural Resources,

Commodities or Real Estate


Analyzing MLPs• Distributable Cash Flow (DCF)

• DCF = EBITDA - interest - capital spending• Only subtracts cash costs• More informative than EPS

• Distribution Coverage Ratio•Coverage Ratio = DCF / distribution• Will be close to 100%


2013 Q3

2013 Q4

2014 Q1

2014 Q2

DCF $330.00 $429.00 $411.00 $367.00

Dist. $333.00 $328.43 $328.00 $244.00

DCR 1.00 x 1.31 x 1.25 x 1.5 x

2013 Q3

2013 Q4

2014 Q1

2014 Q2

DCF $132.30 $145.50 $190.30 $194.50

Dist. $206.80 $213.00 $214.50 $224.70

DCR 0.64 x 0.68 x 0.89 x 0.87 x


Master Limited Partnerships• Stable and Rising Distributable Cash

Flow• Coverage Ratio Above 1 x• Distribution Growth• Minimal Commodity Price Exposure• Fee-Based Income• Manageable Incentive Distribution Rights


Master Limited PartnershipsTaxation

•10% - 20% of Distribution = Income•80% - 90% = Return of Capital•Taxes on RoC are Deferred•Income Tax Due At Sale•Cost Basis is “reset” if the Original Unitholder Dies •Can Incur UBTI in an IRA


Delek Logistics Partners (DKL)• 5.2% yield• Traditional Mid-stream

MLP• Distribution up 27% since

Nov. 2012 IPO– Targeting 15% annual

distribution growth• Currently in third tier of

IDR schedule– Currently 75/25 LP/GP,

switches to 50/50 at $0.56

2013 Q3

2013 Q4

2014 Q1

2014 Q2

DCF $12.9 mil

$13.3 mil

$15.9 mil

$24.0 mil

Dist. $9.9 mil 10.3 mil 10.2 mil 10.5 milDCR 1.30 x 1.30 x 1.52 x 2.29 x



Closed End Funds (CEFs)• Limited Number of Shares• Often Income-Focused• Trade at a Market-Determined Price• Can Have a Discount or Premium– Price may Not Always Return to NAV– NAV Can Change– Compare to Historic Discount or Premium


Analyzing CEFs• Where do Distributions Come from?– Is the Source Reliable or Variable?– How are they Classified?–Managed Distributions

• Does it use Leverage?• What’s the Discount or Premium?


AllianzGI NFJ Dividend, Interest & Premium Strategy Fund (NFJ)• 78% Equity, 20% Convertible Bonds• Covered Calls on 90% of equities• 10% yield• 2.2% discount, 3-yr average discount of 4.6%• Most consistent distributions in the category• In 2013 distributions were 68% RoC


Special Opportunities Fund (SPE)

• Invests in other Discounted CEFs• Leverage is 23% of Assets• Currently Trading at a 7.5% Discount • Distributions are Mostly Income and

Long-Term Capital Gains• 1.8% Expense Ratio


Resources• MLPdata.com• CEFconnect.com

Documents

Cabot Investors Conference 2014 Prospecting for High Dividend Yields Chloe Lutts Jensen Chief Analyst, Cabot Dividend Investor