As companies try to conserve capital or comply with government loan restrictions dividends have been slashed. Thousand of companies worry that earnings will be unable to cover the payouts. Tens of billions of corporate dividends have been lost, primarily to those who need them most, retirees. There are scant few vehicles that can safely replace this lost income. Treasuries are yielding historic low yields. CD’s yield 1%,-2% or so, for six month paper.
This is forcing many to look elsewhere. Unfortunatley, elsewhere has higher risks. Many corporations with still high dividends have eroding revenues and earnings. Many have debt coming due which is likely to be refinanced at improbably higher rates.
Closed end income (CEF) funds have been battered beyond recognition as investors flee. One has to think that some of these will survive nicely and some may even be a good buy. But, which? Every time I have reach for yield in a CEF I get slaughtered.
One sector that may hold appeal is energy Master Limited Partnerships. Of course, there is always the spectre that oil prices may plunge, yet again. There are several forecasts calling for oil to dip below $20/barrel. Nevertheless, energy MLPs have shown strength over the last month.
As my income strategy I have been focusing on junk bonds. This morning’s WSJ reports that “more than 70% of the junk market is trading at distressed levels. The average junk bond yields about 17 points over Treasurys (sic).” There is a general feeling that about 9% of junk bonds will default by the end of the year. S&P is higher with expectations of 13.9% defaults. Both of these forecasts would be records. And the forecasts certainly scare me. But, I feel I am being compensated for the risk with currently high yields. I have been using JNK as my vehicle of choice. It has a current yield of 13% but of course that looks backward. I am keeping a pretty tight stop on the position. Should it fire off I am not sure where to go for replacement income. Other than a part-time job.
Hat tip to THE SHARK REPORT for Birinyi
