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Published: September 25, 2009
Companies are clinging to their cash these days.
It's not hard to see why. Cash is harder to come by in a
recession. And this new mindset toward cash reverses a trend.
Shareholders, fed up with a long period of stingy dividends, put
pressure on companies in recent years to sweeten the pot. Many
companies did. This pleased investors. On the other hand, that
cash had to come from somewhere. Instead of socking earnings
into a rainy-day fund, many companies were cutting checks to
shareholders.
Now, many of the companies that boosted dividends to please
investors are now cutting dividends to save themselves. In the
most recent quarter, 233 companies increased their dividends, a
record low. That was down from 455 in the same period of 2008.
Meanwhile, 250 companies cut their dividends in the quarter, the
largest number in more than 50 years.
What’s interesting about this is that stocks have made huge
gains since March. The S&P 500, for example, is up nearly +60%
off its lows. But dividends haven't yet recovered.
There's reason to think it will be some time before they do.
One of the things driving large dividends was a belief that a
company could always raise more money if need be. Executives of
all but the largest and most credit-worthy companies now see
that that's not always the case.
But even investors who look to bonds may have trouble sleeping
as default rates continue to rise. In the first eight months of
the year, there were 147 default events. A Bank of
America-Merrill Lynch report estimates 40% of all U.S. junk
bonds outstanding in late 2008 will default by 2013.
Safer bonds, of course, don't expose their owners to that kind
of risk. And the safest bonds of all are the IOUs issued by the
U.S. government.
While there are numerous funds in
this space, BlackRock Enhanced
Government Fund (NYSE: EGF)
stands out as a long-term winner.
This closed-end fund invests in debt
and mortgage securities issued by
government-sponsored mortgage giants
Fannie Mae (NYSE: FNM) and
Freddie Mac (NYSE: FRE).
The fund pays a regular monthly
distribution of $0.105 per share, or
$1.26 annually, giving EGF a yield
of more than 7%.
EGF's mandate is to invest at least
80% of its $190 million in assets in
pristine U.S. government and agency
securities. According to its latest
quarterly report to the Securities
and Exchange Commission, the fund
had 64.1% of its portfolio in agency
mortgage-backed securities and 11.2%
in U.S. government debt. Only 1.0%
of its holdings were below
investment grade.
The portfolio has an average
duration of about 2.25 years, which
means the holdings will mature and
the fund’s principal will be
returned in about nine quarters.
This helps protect the portfolio
against rising interest rates. If
interest rates rise in the next
couple year, the fund can re-invest
at the higher rates.
EGF offers investors a great yield
of more than 7% with the safety that
the large majority of its portfolio
is in U.S. government securities.
For investors looking for dependable
income, it doesn't get much better
than this.
High-Yield Investing
subscribers have known about this
stock since February 2009, when
Carla Pasternak first profiled it.
Since then, they've seen eight
steady monthly payments and capital
appreciation despite some of the
toughest times the market has ever
seen. To see how you can join them,
go here.
-- Anthony Haddad
Staff Writer
StreetAuthority.com |
