More isn't always better. Sometimes less is: Vigorously
exercising an hour a day strengthens the body. Vigorously
exercising three hours a day weakens it.
Income can be viewed through a similar lens. Sometimes the
intelligent course is to take less. You may go for the high yield
and initially benefit. But in time that high yield can lead to a
I refer to the immoderate habit of yield chasing. A
recent spate of emails solicited my opinion on
. For some reason, double-digit yields are attracting more
attention these days.
is a case in point; it's always been a deep well-spring for
income investors. But one e-mailer was interested in pumping the
handle a little harder. Specifically, to call forth a 26% yield
Sandridge Mississippian Trust I (
, a royalty trust with interests in oil & gas fields in
Sandridge paid a $0.50 quarterly distribution per unit last
month, which annualizes to $2. The attraction is both
apparent and enticing: In less than four years, a Sandridge
investor could receive his initial investment of $7.80 per unit
back in distributions alone.
Unfortunately, there's a catch. The Sandridge properties
are depleting at an accelerating rate - 20% quarter over quarter
in the fourth quarter of 2012. The distribution is highly
vulnerable and has been continually reduced over the past three
years. In short, Sandridge units are priced for further
distribution reductions, which are sure to follow.
Cross Timbers Royalty Trust (
is the moderate alternative. It owns interests in oil and gas
properties in Oklahoma, Texas, and New Mexico. Its 8% yield won't
stimulate the salivary glands, but its steady distribution (paid
monthly) and long operating history (22 years) ensures restful
nights. Thus, Cross Timbers benefits both portfolio and
Real estate investment trusts
(REITs) are also prone to excessive yield reaching. The
highest yields - 11%, 12%, even 14% - are found among mortgage
REITs, which borrow short-term at a floating rate to invest in
long-term fixed-rate mortgage-backed securities (MBS).
One e-mailer sought more insight to
New York Mortgage Trust (
, a mortgage REIT that invests in government-guaranteed
MBS. New York Mortgage yields over 14% on its $1.08 annual
These mortgage REITs earn the spread between their cost of
funds and the returns on their MBS portfolio. To goose returns,
they employ leverage - and frequently a lot of it: New York
Mortgage's debt exceeds its equity by a multiple of nearly
To be sure, leverage is a terrific wealth-enhancing tool in
today's low-rate environment. How long that environment will last
is anyone's guess. As rates move higher, New York
Mortgage's borrowing costs will move higher too, while the value
of its MBS portfolio will fall. Should this unsettling
paradigm materialize, dividend reductions will follow.
Commercial REITs are the moderate alternative. These companies
own the physical property. They are the actual landlords, not
mere financial conduits like the mortgage REITs.
Gladstone Commercial Corporation (
) is the moderate choice. It owns 85 commercial properties in 21
states from Connecticut to Texas.
Gladstone is a model of reliability The dividend has
been raised four times over the past 10 years, and has never been
reduced. At the current rate of $0.125 per share per month,
investors can expect to $1.50 over a year. At the current market
price, the payout produces a moderate but solid 8.5% yield.
So go for less in your income portfolio, especially if more
today has a high probability of becoming less tomorrow.
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