Leveraged Income Experiment

[George the original one]

> BDCs seem to be recovering since June.

Yeah, yeah, rub it in

[mattgti]

I need to make time to do analysis on individual companies. I've made a google spreadsheet including all of the tickers mentioned in this thread and a few others. Need to sort/rank.

Foreign taxes are reflected in the yield of SDIV. Not sure about the others. No leverage. RWX, EDIV are index funds.

Thanks for this trading log and your shared spreadsheet. Very helpful.

[secretwealth]

> BDCs seem to be recovering since June.

Yeah, yeah, rub it in

[George the original one]

I added 200 NSH yesterday.

[workathome]

Can you explain to me the 522 P/E? That seems crazy. I'm not familiar with this type of investment.

[George the original one]

@workathome -

Due to depreciation schedules, one values Master Limited Partnerships (MLPs) like REITs. Their distributable cash flow (DCF) is what matters, rather than the GAAP profit/loss. Thus PE is nearly irrelevant... although a low PE would still be desireable.

Admittedly, NSH is operating on the edge since they are paying slightly more in dividend than DCF. Mr. Market recognizes this as a risk that the dividend may be cut and prices it accordingly, thus NSH has a high yield. The gamble, on my part, is that I can collect the yield and sell before the price deteriorates if they can't improve DCF. Usually this is a reasonable gamble with MLPs since the general partner does not desire the MLP to crash & burn.

Read the earnings conference call and you can make some inferences as to their future... Mr. Market did not react badly and traded 50% more shares than average.

[mattgti]

George,
Can you shed some light on why you chose the holding company (NSH) vs the MLP (NS)?

Also, I don't understand why they each have different yields and also a different pattern of historic distributions. Perhaps the holding company is smoothing it's distributions to shareholders?

See page 5 of this management presentation on their website that shows the distribution history following different trajectories.
http://phx.corporate-ir.net/External.Fi ... U9MQ==&t=1

I did end up buying SDIV along with RDS.A, PSEC, and others.
-Matt

[George the original one]

July numbers
https://docs.google.com/spreadsheet/ccc ... y=CMHbguoK

Due to selling off BDCs and mREITs, income is becoming lumpy as I compensate by shifting more into MLPs.

[George the original one]

@mattgti - NSH has a more consistent dividend growth, which is what probably drew my attention originally. NS looks like it has topped out for dividends, but with a 10% nominal yield, I'm going to have to investigate...

[George the original one]

August results posted:
https://docs.google.com/spreadsheet/ccc ... y=CMHbguoK

August income reflects the obvious effect of a concentration in stocks that pay dividends in Feb-May-Aug-Nov. Total return has been suffering since early May when the market peaked.

[George the original one]

Once again added ARCC to the portfolio since they're making a secondary offering. Buying BDCs or mREITs when there is a secondary offering has proven beneficial in the past.

[George the original one]

September results are posted at https://docs.google.com/spreadsheet/ccc ... y=CMHbguoK

You can see how shifting the portfolio's holdings away from BDCs and mREITs has affected the monthly payouts... no longer smooth!

[540]

May I ask why the move out of BDCs now?

[George the original one]

Reduce volatility. I'll be needing the money in 2 or 3 years.

As secretwealth noted, BDCs will still be getting their income, but the need to raise cash for future investment while interest rates are rising will mean they will generate more secondary offerings and cut dividends... that forces market price down, which has a more severe effect on leveraged portfolios than non-leveraged portfolios.

ARCC has just gone through this cycle (dividend cut, now a secondary offering), so they're relatively safe for the next 6 months.

[George the original one]

October 2013 results are posted: https://docs.google.com/spreadsheet/ccc ... y=CMHbguoK

Portfolio is fully invested again and I'm comfortable waiting until the next interest rate crisis before making any changes.

[workathome]

Do you have any short positions to hedge against market declines?

[George the original one]

No short positions.

[dhh]

Thanks George for publicly running your leveraged income experiment. I just discovered it last week. Reading through the thread posts and looking at your spreadsheet has been quite educational.

Do you think that using corporate bonds (2-3 years to maturity) instead of equities would be a viable alternative?

I would think bonds would reduce the volatility and risk of a margin call, allowing for increased leverage. The increased leverage might compensate for the lower yield of the corporate bonds in comparison to REITs/energy equities. I would also hope that the relatively short time to maturity would be able to weather any gradual interest rate hikes by the Fed.

[frommi]

I would think bonds would reduce the volatility and risk of a margin call, allowing for increased leverage. The increased leverage might compensate for the lower yield of the corporate bonds in comparison to REITs/energy equities. I would also hope that the relatively short time to maturity would be able to weather any gradual interest rate hikes by the Fed.

Bonds are correlated with REITs and mREITs, this would be a really terrible idea . And buying bonds on margin is a really bad idea. You get very little returns through the interest rate spread but in a blackswan event of a rising interest rate spike you get crushed. This is the type of fragil invesment talib talked about in his book "Antifragility".

[dhh]

Bonds are correlated with REITs and mREITs, this would be a really terrible idea . And buying bonds on margin is a really bad idea. You get very little returns through the interest rate spread but in a blackswan event of a rising interest rate spike you get crushed. This is the type of fragil invesment talib talked about in his book "Antifragility".

Thanks for the reply. I hadn't considered the possibility of an interest rate spike, but yes, that would be quite disastrous for bonds purchased on margin. Would REITs and mREITs have a correlating spike down as well?

What financial instrument do you think is the most well-suited to harvesting income using margin? Are GTOO's equities the best in terms of reward/risk ratio?