As the month of October begins, dividend growth investors all over the world check up on their portfolio health and scout new investment opportunities. With recent market declines and an overall shakiness to the major averages it would seem that several stocks are going on relative sale these days offering better pricing from all time highs and better valuations as well. This fact presents two opportunities for myself and my portfolio as I have the decision to choose between averaging down with some of my current newer holdings or expand my portfolio by adding new higher yielding stocks.
For the month of October I thought about shaking things up a bit and mention several new names I am considering that all offer relatively high yields and run the gamut from standard common stocks to closed end funds. For those that do not know, a closed end fund is basically like a mutual fund except it issues a finite amount of shares that is traded on the stock exchanges. Unlike a regular open mutual fund which can issue new shares to new investors at any time, a closed end fund cannot and its stock value is determined by basic supply and demand laws and trade either at discounts or at premiums to their net asset value (NAV) which is basically the sum of the value of their current assets. Not all closed end funds are created equal and “dividends” received might be a return of capital which is taxed at different rates than standard dividend distributions. Plus, many closed end funds employ leverage to enhance returns and with rising interest rates coming down the pipe higher borrowing costs may impact future earnings. With all that being said here are my October stock considerations.
First, up is a utility that I have been watching in recent weeks, Hawaiian Electric Industries Inc. (HE). This company, as the name suggests, produces, purchases, transmits, distributes and sells electricity in Hawaii. It also owns American Savings Bank, the third largest bank in Hawaii. As you know I have been particularly fond of the financial sector for many months and this stock seems to offer the stability of a utility along with financial sector exposure. The stock currently yields a very juicy 4.70% with a PE of 15.21 which is well below the S&P and industry peers.
Next, is the closed end fund DNP Select Income Fund Inc. (DNP). This fund primarily invests in very stable public utilities in the oil and gas sector, as well as electric, water and telecom industries. Some holdings include, Sempra Energy, Verizon Communications Inc., AT&T, Inc., Williams Companies, Inc., Southern Company and Duke Energy Corporation to name a few. DNP also, owns MLPs as well as corporate bonds. DNP currently has a high distribution rate 6.20% and trades at a premium of 2.96% to its NAV. This fund has a very long distribution history as well going back almost three decades.
Another high quality closed end fund I was looking at is Reaves Utility Income Fund (UTG). Like DNP, this fund invests in many of the same high quality dividend names we already invest in such as Vodafone Group, Union Pacific Corp., Aqua America, Inc., AT&T, Inc., Royal Dutch Shell, Verizon Communications Inc., Dominion Resources, Inc. and many more including MLPs Enterprise Products Partners and Enbridge Energy Partners to name a few. This fund currently has a distribution rate of 6.30% and is trading at a discount to NAV of -4.29%. This basically means you are paying less for the shares of UTG than the holdings are actually valued at.
Finally, I have been looking at Tortoise Energy Infrastructure (TYG). As the name suggests, TYG primarily invests in energy infrastructure including many of the top oil and gas pipeline names we all know such as Plains All American Pipeline, Magellan Midstream Partners, Enterprise Products Partners, Energy Transfer Partners to name a few. TYG current has a distribution rate of 5.10% and is trading at a discount of -10.04%. How’s that for a sale price. Demand for this closed end fund has definitely declined as oil prices and overall interest in the energy sector has taken a beating in the past few weeks.
I think you can see that I have an affinity for looking at investments in stable, “boring” reliable industries. Each stock above represents a utility, telecom or oil and gas infrastructure play. All steady cash flow businesses by any measure. I figure the added risk of investing in a closed end fund that uses leverage to enhance results might be tempered by the conservative holdings in each respective portfolio.
Of course, the above all look interesting to me and one cannot deny the attractiveness of the yield each one offers. Place these closed end funds in a tax advantaged account and reap even more benefits from your distributions received. However, I am also considering averaging down some of my current new holdings I initiated about a month ago. Those stocks include The Bank of Nova Scotia (BNS), The Toronto-Dominion Bank (TD) and Royal Bank of Canada (RY). While all solid financial plays by any measure; I will be watching each of them in the coming days and week to see if I’d feel more comfortable averaging down or initiate a new position in one of the high yield plays above.
What stocks are on your shopping list for October? Are any of the names I am considering on your list as well? Please let me know below.
Disclosure: Long BNS, TD, RY