Whether you want straight income or prefer a little capital appreciation with your cash, these five plays should be on your list, says Bryan Perry.
Hello, I'm talking with Bryan Perry today, and we're talking about which sectors are going to do well for 2013. Hi Bryan, and thanks for being here.
Thanks for having me, Nancy.
We've had a real nice run in the market recently...you know, since fall. Some people are starting to get into more income-oriented things. They're a little afraid maybe of what the equities in general are going to do. What is your view on that? Do you think there's room just for straight equities, as well as both equities with income? What are your favorites?
Oh, absolutely. Especially, we've seen last year the banks were hot. That was all the talk at the end of the year, how well JPMorgan (JPM) and Bank of America (BAC) did and all that.
In that same vein, we can stay in the financial sector and get 9%, 10%, 11% yields by being in what are called business development companies (BDCs). They are taking up the job of what the banks have really not wanted to do primarily, and that is lend.
We've seen the reserves grow dramatically-because that's what the Federal Reserve has done, is grow their reserves-but that money's not getting into the system through M2, and so the lending is way down, even though the reserves are way up.
Well, the BDCs come in and they lend money to small- to medium-sized businesses that are generating upward of $10 million, to $20 million, to $30 million, to $40 million. And they're lending them that money with equity kickers attached to it, warrants, so that if there's an exit strategy they can make money not only on the interest that they charge those companies, but also if they sell the company they have a part of the stock.
Those are really picking up the slack where the banks are, and they're only covering about 10% to 15% of what's available in terms of the backlog out there, so there's a lot more to go. As long as the banks maintain this posture of reflating their balance sheets and not having to take risks by lending, the BDCs are stepping in and doing just all that-they're picking up that, and with great momentum.
Now, are they confined to certain sectors, or do they sort of spread the wealth around in terms of lending?
They do. Certain ones are dedicated toward technology and life sciences, and media. Other ones are dedicated toward industrial. Other ones maybe just want consumer staples, very conservative. So it varies, but they tend to all have their niches.
I recommend in Cash Machine about five of them, because they all hit on these different areas that I'm feeling like they can do well at, and it's a nice way to be a banker to small- to medium-sized business at a time when the economy is starting to get a little bit of traction here, but banks, the SBA is very slow. To access capital, capital formation is tough for a lot of small companies.
The BDCs are making good money and they're providing a much-needed service right now, and really I think everybody wins in this. The sector itself is just doing very well, and there's a lot of insider buying, too, which tells you that there's more to go.
What kind of dividends do they generally pay?
Well, for instance, Fifth Street Finance (FSC) pays a 10.5% yield.
Well, that's nice.
It pays a monthly dividend, Nancy. Your second largest shareholder is David Einhorn of Greenlight Capital. He does his homework, last I heard.
Yes, he does. So, that's a nice one. There are some other companies, too...like MLPs that you like.
Right. Exactly. Taxes are going up-and I expect that to continue gradually through higher taxation, especially on wealthy people. Energy has been...we're back up toward $100 a barrel in oil. Natural gas is a big play long term because we have a lot of it through hydraulic drilling, and horizontal drilling, and fracking. And now we're becoming a very large energy country again, in terms of we might even start exporting.
That would be an amazing thing.
I know. So, with all the geopolitical risk out there, and the downsizing of defense and all that-even with an administration that's kind of anti-fossil fuel-the onshore oil and gas-exploration business, and production, is booming.
It's really going well. And those companies...a couple in there I like are BreitBurn Energy (BBEP), with about a 10.5% yield, and the new one that listed about ten months ago is Memorial Production Partners (MEMP). They're buying just proven properties, rolling them up into their MLP, and they're kicking out around 11.5% yield.
These are kind of the ways that people can ride the energy wave, have an inflation-protected income, and tax-protected income in their cash accounts.
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