Published:
December 29, 2008
I
first wrote about
MFS Government Market Income Trust (NYSE: MGF, $7.45) in my
newsletter, High-Yield Investing, back in February 2008 when it
was trading at $6.94. Despite
turbulent markets since that time, it has held its value
extremely well while also making regular monthly distributions.
In fact, the fund has delivered total returns of +19%,
year-to-date.
MGF has a managed distribution policy, where its stated goal is
to pay out up to 7.25% of its average portfolio value. In the
most recent fiscal year, ended on October 31, 2008, MGF
distributed $0.52134 per share. Of this amount, $0.32604, or
almost two-thirds, was derived from net investment income, and
the balance was return of capital. The fund's payouts varied
monthly from $0.042 to $0.045 a share. At current prices, the
total $0.52 payout equates to a yield of 7.0% ($0.52/$7.45).
MGF's aim is to provide high current income with a secondary
focus on capital appreciation. The fund, while focused on U.S.
assets, may also invest in foreign and emerging market
securities and can make use of derivatives.
In these troubled times, however, MGF is playing it very safe.
As of its last portfolio update on November 30th, 96% of its
portfolio was in bonds and the balance in cash. Of that amount,
94% of the total bonds were from U.S. organizations.
Breaking down MGF's portfolio further, 66% of the investments
were in mortgage-backed securities issued by government agencies
such as Fannie Mae (NYSE: FNM). Despite Fannie's well-publicized
struggles, these bonds are rated "AAA." The mortgage and housing
bill passed by the U.S. Congress in late summer has put to rest
any fear that the agency might go under.
Of its remaining portfolio, 19% is in agency debentures and
another 3% in investment-grade corporates. Emerging market debt
made up only 2% of MGF's holdings. Overall, 93% of the fund's
assets were rated "AAA." Of the other 7%, all were rated
investment grade -- "BBB" or higher.
Since 1987, MGF has
provided solid returns of +7.1% per year in terms of net asset
value and +6.6% for share price. The current net asset
value is $7.15, which should provide something of a floor for
the share price.
Looking ahead, the fund is poised to continue to deliver returns
in the high single digits. The prices of mortgage-backed
securities and debt issued by Fannie Mae and Freddie Mac (NYSE:
FRE) have risen sharply since the Federal Reserve said that it
would buy up to $500 billion worth of mortgages bonds guaranteed
by Fannie Mae, Freddie Mac, and Ginnie Mae, as well as an
additional $100 billion of the corporate debt of Fannie, Freddie
and the Federal Home Loan Banks. On Friday, December 5th, the
New York Fed kicked off the buying spree with a $5 billion
purchase of agency debt.
The MGF story has at least one potential risk. Strong inflation
could eventually result from the recent monetary and soon to be
applied fiscal stimulus used to jumpstart the U.S. economy. If
inflation took off, the values of the bonds held by MGF would
then decline. However, we believe inflation is not an immediate
issue, as commodity prices remain in near freefall, and the
recession is growing more virulent. Any uptick in inflation
should be at least 18 months away and noticeable in time to exit
MGF if it were to occur.
Another potential risk factor is a market rally could lead
investors to rotate out of safe havens like MGF, as bullish
sentiment makes higher-risk/higher-reward investments more
attractive.
MGF
provides both safety and a strong yield. The fund should appeal
to safety-conscious investors who believe they can spot signs of
inflation if they were to emerge.Good investing!
Carla Pasternak
Editor
High-Yield
Investing
About High-Yield Investing
High-Yield Investing is
a monthly investment newsletter that brings you a wealth of information on the
market's leading income stocks and funds, as well as a host of relatively
unknown investment options that you probably won't find coverage of anywhere
else. Many
of these securities provide investors with annual dividend yields of 10%, 15%,
even 20% or more. The newsletter not only provides subscribers with
investing ideas that produce incredibly high dividend yields, but the kicker is
that these high-yield investments have also consistently outperformed the major
market averages. (Learn
More)
About Carla Pasternak
Editor of StreetAuthority.com's High-Yield Investing newsletter since its
inception in May 2004, Carla Pasternak draws on a variety of financial
backgrounds to make profitable calls on income-generating stocks for her
readers.
Carla has been employed in the investment industry for more than two decades.
In addition to her work as a writer for several nationally recognized financial
publishers, her previous experience includes a position as president of a
well-respected investor relations firm. She has also been writing shareholder
reports for public companies since 1980.
A highly successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select companies
that not only pay rich dividends, but that also deliver strong long-term capital
gains. Furthermore, Carla's experience in writing SEC filings gives her the
added insight required for her to truly understand a company's current and
future financial health.
On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When
she's not watching the market, she's teaching business courses at the college
level and managing millions of dollars in portfolio assets.
To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield
Investing -- please visit
this link.
|
