Trade Idea

Guest Post: 6.7% Yielding BBB- Rated Preferred Stock From Energy Giant Enbridge

Guest Post: 6.7% Yielding BBB- Rated Preferred Stock From Energy Giant Enbridge


  • EBGEF is an investment grade preferred stock from energy midstream giant Enbridge that yields 6.7%. Dividends are qualified and received on a 1099.

  • Most investors are unaware that the dividend recently reset higher.

  • Enbridge has a long, successful track record which has led to 24 consecutive annual dividend increases for the common stock.

  • EBGEF should catch up to the improving environment for energy stocks and preferred stocks in general.

A Look Under The Hood Of PCI & PDI

PIMCO Dynamic Credit and Mortgage (PCI) and PIMCO Dynamic Income (PDI) still remain at the center of our Core Portfolio- as they have for the last 3.5 years.  The "PIMCO twins" have done extremely well on a risk-adjusted basis but there are changes afoot and we thought we'd go through some of them with our members.  

The main thesis has been relatively unchanged for most of these last three years- that these vehicles housed boatloads of non-agency mortgage backed securities purchased at just the right time.  One of the things closed-end fund ("CEF") investors often fail to recognize is the initial date of new fund launches.  These can be well-timed by fund sponsors providing a competitive advantage against the rest of the sector and create a great opportunity for investors.

That thesis may be shifting- not radically- but slowly over time.  In the last year, they've been moving away from that bread and butter investment.  While it still represents the largest sector in the portfolio, the size of it is declining in terms of market value. 

We will run through why this is and what it potentially means for investors.

Despite a -2.2% decline in non-agency debt in the fourth quarter, the sub-sector finished 2018 with a +3.3% gain surpassing the broader credit markets.  New issuance continues to trend higher yoy but did fall off in the fourth quarter.  The new issuance market has been largely dormant since the Financial Crisis but has, in the last couple of years, shown signs of life. 

In the table below, you can see private label mortgages (the ingredients for non-agency MBS) constituted over one-third of the entire market in 2007.  Shortly thereafter, the space was largely gone until last year when it doubled from 4% to 8%.  

(Source:  Ginnie Mae)

The decline in the fourth quarter for non-agency MBS stems from the widening spreads realized across most credit sectors.  Recall in our previous writings that the market lumps non-agency MBS in with high yield bonds, something we highly disagree with at this point in the cycle.  Our rationale is that ten years following the Financial Crisis where subprime mortgages cratered, these borrowers continue to make their payment.  

These formerly busted MBS' that are now "re-performing loans" meaning that either the borrower started making payments again or the loan was restructured so that they could afford the payments, continue to be a main driver of PIMCOs strategy since 2010.  However, in the last several months, the percentage of the portfolio devoted to non-agency continues to fall.  

In the last quarterly update (December 31), PCI had just over 50% in non-agency debt.  That is down significantly from early last year when the fund held over 70% in the sector.  Instead, high yield and non-USD EM credit is now approximately one-third of the portfolio.  The fund has also reduced their interest rate swap exposure increasing the duration of the fund.  This not entirely surprising given PIMCOs notion that the 10-year bonds have hit their highest yields of the cycle.  They do still have several hedges on the short-end of the curve and are long "the belly".  

PCI and PDI are not outperforming the multisector space like they normally do.  The main drivers of that are the lack of a significant rally in non-agency MBS compared to other sectors of the market and the relative differences of funds in that sector.  For instance, PGP, despite the significant drop it has taken recently, continues to be the top performer mainly because it is really an equity index.  Franklin Universal Trust (FT) is a fund that has over one-third of the portfolio in stocks.  So you do have to be careful comparing funds in this particular sector. 


The total return on PRICE has been a far different story and speaks volumes on the need to be ready to pounce on great opportunities.  We pounded the table in December about the deal of the year being offered up by the markets in these names, particularly PCI.  A confluence of factors came together to create this opportunity.  Those included:

  • Tax loss harvesting

  • Special distribution capture selling

  • A large drop in the NAV due to distribution payments

  • Massive negative sentiment in the CEF space

  • Fast widening credit spreads

In the chart below, you can see the darker line completely collapse in mid-to-late December because of those factors.  Of course the NAV was also down (partially) due to those same factors listed above.  In our Flexible Portfolio, we essentially used up all cash to go massively overweight the position.  


And thus, the YTD price returns are up low-to-mid teens easily besting the S&P 500.  That is fantastic performance for a bond fund.  Since then, we have taken off the overweight and moved back to our target weight in the Core Portfolio.  


With PCI at a +2.7% premium and PDI at a +15.3% premium, the funds are very close to fully valued.  We have not added to either of the funds in the last three months and continue to hold at levels slightly above their target weights.  We are happy to continue to collect the 8.5% income stream and wait for the next market hiccup to re-add the overweight position.  

Many investors think the shares are overvalued but we would disagree.  One of the reasons would be that they are still a couple of points off the 52-week highs in terms of premium.  In addition, z-scores are positive but no where near the +2 levels that would initiate a cause for caution.  Lastly, the new Federal Reserve's dovish tilts means that interest rates will remain lower, leverage costs are no longer the severe factor they were, and CEF structures earnings 8%-9% are now more attractive warranting a higher valuation.


One of the most common questions we receive from members is whether we think PCI or PDI will cut their distributions in the near-term.  Right now, we see nothing that would cause us concern about the sustainability of the payment.  PCI and PDIs distribution payment have been the same since October 2015.  In the interim, they have paid significant cash payments in the form of year-end special distributions.

Coverage levels for both funds fell off in the last few months, albeit from very high levels.  PCI was at 192% in December but it declined to 89.2% in February.  PDI was at 85% in December and is now sitting at 76% as of February.  We will be getting March figures in about two weeks time which should shed some significant light on trends. 

UNII levels are still nicely positive with PCI at +22 cents and PDI at 10 cents.  PHK, PGP, and RCS, all of which cut their distributions on April 1st, all have negative UNII values of -12 cents, -12 cents, and -21 cents*.  In addition, and this is the key, all three of these funds have issued 19a notices for most of the last two years.  If PCI and PDI were likely to cut, we would likely have to see many months of 19a notices come out.  We think the distributions are safe for several more months at the least.  

Concluding Thoughts

The reduction in the level of non-agency MBS is not a large concern for us.  PIMCO is known for putting the best ideas into these vehicles that they can find because they get the most bang for their buck.  Sticking a small position into PIMCO Income, their large open-end mutual fund, won't have any effect simply because of its massive size.  

One thing to consider is that most banks and hedge funds have been unloading these securities as they've closed the gap to par.   With the selloff in high yield securities and only the small decline in non-agency MBS debt during the same period, perhaps they took some of that position off to re-allocate towards high yield.  

In any event, with these funds there's a lot of trust in PIMCO management.  You're largely investing in a black box.  Well maybe not completely black but definitely obscured.  When you do that, you just have to study the NAV, assess the valuation, and compare to what else is in the market today.  

Most bond CEFs have recovered mightily since the start of the year so there aren't many other cheap options where you can earn 7.5%-plus yields with some upside optionality to boot.  For now, we are holding on to our position and collecting the income stream- though as we noted earlier, we did take off the significant overweight we had on PCI.  

Another market hiccup will surely come.  Until then, we have some dry powder sitting in open-end funds and even some cash that is on the sidelines ready to be deployed.  One of the hardest things an investor can do is buy when the market and these funds are selling off strongly.  Our marketplace service helps guide (hand hold) members who do get scared and don't know what to do during those times.  


Guest Post: Blue Harbinger | Omega Healthcare: Tempting 7.2% Yield, But Know The Big Risks

Guest Post:  Blue Harbinger | Omega Healthcare: Tempting 7.2% Yield, But Know The Big Risks


  • The last year has been volatile for healthcare REIT Omega, as it suspended its customary dividend increases.

  • This week's earnings announcement has given us important new insight about its long-term prospects.

  • This article shares our views on Omega's viability as an income investment.

  • Guest post by BLUE HARBINGER.

Guest Post Blue Harbinger: Attractive Income As Healthy Blue Chip Sells Off (Options Trade)

This is the second of our dividend stock series of exclusive articles from Blue Harbinger's The Value and Income Forum.


We just placed a new high-income-generating options trade on a healthy dividend paying blue chip stock that just sold off.

We believe this is an attractive trade to place today, and potentially tomorrow, as long as the share price doesn't move too dramatically before then.

We just placed a new high-income-generating options trade on a healthy dividend paying blue chip stock that just sold off. We believe this is an attractive trade to place today, and potentially tomorrow, as long as the share price doesn't move too dramatically before then.

The Trade:


We Sold PUT Options on Caterpillar (CATwith a strike price of $115 (7.5% out of the money), and expiration date of February 15, 2019, and for a premium of $1.05. That’s an extra 10.7% income for us on an annualized basis (1.05 / 115) x 12 months). If the shares get put to us before the options contract expires then we're happy to buy the shares of this blue chip dividend-payer at the lower price of $115. And if the shares don't get put to us, we still get to keep the extra income we generated no matter what.

Your Opportunity:

We believe this is an attractive trade to place today and potentially tomorrow as long as the price of Caterpillar doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 10%, or greater.


Our Thesis:

Caterpillar is an attractive long-term investment with a healthy dividend and trading at an attractive price relative to its long-term value. Near term technical conditions and fear related to the China "trade war" have already caused the share price to sell off too far (management just provided weaker 2019 guidance than previously expected). But because of the attractive premium income, and because we understand near-term volatility can drive the share price lower, we've elected to sell the puts (instead of buying the shares outright), which gives us the chance to pick up the shares at an even lower price (if they fall below the strike price and get put to us before expiration). Important to note, because near-term volatility and fear are higher, so too is the premium income available in the options market and on this trade specifically.

Near-Term Volatility:

Caterpillar announced earnings on Monday, and the market didn't like it. In particular, the company's revenue continued to grow across segments (construction revenue was up 8%, the resource industries segment grew 21%, and the energy and transportation segment grew 11%), but margins were weaker than expected (particularly in the construction segment where operating margin declined to 14.8% from 15.8%) and management provided lower than EPS guidance for 2019 than the Street was expecting (2019 GAAP EPS guidance of $11.75 to $12.75, versus the Street's expectation of 12.73). Global trade headwinds and fear (particularly related to China "trade wars") have been impacting the stock. However, in the long-term, the shares are increasingly attractive.

Long-Term Value:

In the long-term, Caterpillar shares are attractive because revenue is growing (and is expected to keep growing), but near-term volatility and fear have caused the shares to sell-off to an increasingly attractive price. In particular, even though margins, earnings and guidance came in below expectations, revenue continue continues to grow, and revenue and EPS are expected to keep growing.

About Caterpillar:

Briefly, if you don't know, Caterpillar engages in the manufacture of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It operates through the following segments: Construction Industries, Resource Industries, Energy and Transportation, Financial Products, and All Other. The Construction Industries segment supports customers using machinery in infrastructure and building construction applications. The Resource Industries segment is responsible for supporting customers using machinery in mining and quarrying applications and it includes business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The Energy and Transportation segment supports customers in oil and gas, power generation, marine, rail, and industrial applications. The Financial Products segment offers a range of financing alternatives to customers and dealers for Caterpillar machinery and engines, solar gas turbines, as well as other equipment and marine vessels. The All Other segments includes activities such as; the business strategy, product management and development, and manufacturing of filters and fluids, undercarriage, tires and rims, engaging tools, and fluid transfers. The company was founded on April 15, 1925 and is headquartered in Deerfield, IL.

Attractive Qualities:

1. Revenue and Earnings Growth

As mentioned above, Caterpillar's revenue continues to grow. Here are more specific details from a recent Morningstar report, by segment, emphasis ours:

Caterpillar shares declined nearly 10% after the company reported fourth-quarter adjusted EPS of $0.44, 15% below consensus estimates. The main contributor to the miss was lower operating margin in construction industries. Management also shared its 2019 GAAP EPS guidance of $11.75 to $12.75, which was below our estimate of $12.81.

The performance of the construction industries segment during the quarter was the biggest disappointment. While revenue grew approximately 8% year over year, operating margin declined to 14.8% from 15.8%, well below our estimate of 20.7%. Issues cited for the margin decline included weak demand in Latin America and the Middle East. At the same time, freight and materials costs were elevated. Consistent with our research, management was upbeat on U.S. construction activity for 2019.

Caterpillar's resource industries segment maintained its upward growth trajectory, increasing revenue 21% year over year, and segment operating margin increased to 14.3% from 9.1%. Mining customers continued to invest in capital equipment as commodity prices remain supportive. Management remained positive about its 2019 outlook for the segment due to ongoing reductions in customers’ idle assets. Additionally, there are early indications of strong demand for quarry and aggregate machinery.

Caterpillar’s energy and transportation segment also showed healthy growth in the quarter. Revenue increased 11% year over year, while operating margin increased to 17.2% from 15.5% in the year-ago period. Strong power generation sales, especially to data centers, contributed to the segment’s performance. Rail service revenue also increased. A strong U.S. economy and robust demand for gas compression equipment are likely to boost 2019 segment revenue 2019.

2. Attractive Growing Dividend

Also very important, Caterpillar continues to generate plenty of healthy income to support its continuing long-term dividend growth.


Here is a look at Caterpillar's uses of cash, which shows after debt servicing and dividend payments, the company has plenty of cash to support share repurchases and growth.

And for reference, Caterpillar's debt is rated fairly highly according to the rating agencies. This is an indication of the company's long-term strength and health, despite the good, but softer than expected, earnings announcement.

3. Attractive Valuation:

Also important, Caterpillar's valuation is currently reasonable, and will be even more reasonable if the shares get put to us at the lower price, ceteris paribus.


For example, here is a look at the price targets set by Wall Street analysts covering the stock.

And as you can see many of these price targets have been updated since the earnings announcement (see table below), and they are still expecting upside for the stock (although there may be near-term volatility, which is why we elected to sell the puts instead of buying outright).

For more perspective, here is our previous Caterpillar article from many months ago (9/27/17) when we elected to sell our CAT shares for a very large gain. We sold the shares at a slightly higher price than they trade at now, but the earnings have grown dramatically since then, making the current valuation even more attractive, in our view. Here is an excerpt from that article:

Caterpillar has a lot more long-term upside potential, but we sold 100% of our Caterpillar shares this morning for a gain of +110% after owning them for 19 months.

Important Trade Considerations:

Two important considerations when placing options trades are upcoming earnings announcements and dividend dates because they can increase volatility and dramatically impact the value of your options contract in unexpected ways. However, in the case of Caterpillar, they are largely non-issues. First, CAT just announced earnings, therefore we don't have to worry about earnings surprises for this trade considering the next announcement comes after the options contract has expired. And with regards to the dividend, CAT just went ex-dividend on its quarterly dividend last month, so we don't have to worry about any quarterly dividend payments impacting the options value during the life of this options contract which expires in less than one month.


Caterpillar is an attractive, long-term, blue chip, dividend-paying company (we believe the dividend will keep growing). However, the shares just sold-off dramatically because the latest 2019 earnings guidance provided by the company was weaker than expected. Nonetheless, CAT is still expected to grow, and the valuation is relatively attractive by historical standards. Rather than purchasing shares outright, we have elected to sell income-generating put options. The premium income on these options is attractive because short-term fear and volatility is high. And if short-term fear and volatility drive the share price even lower, then we're happy to purchase shares at the lower price, per our options contract. And if the contract never gets executed, and the shares never get put to us, then we're still happy to simply keep the attractive premium income we just generated, no matter what (i.e. we keep the premium income whether or not the shares get put to us).

Disclosure: I am/we are short CAT Puts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


Blue Harbinger: Kraft Heinz: Why This Hated 5.4% Yielder May Have 25% Upside (Guest Post)

This is the first of what we think will be a series of exclusive articles from Blue Harbinger's The Value and Income Forum.  


As the shares have sold off over the last 18 months, the dividend yield of Kraft Heinz (KHC) has climbed to 5.4%. And after reviewing why the market hates Kraft Heinz, this article provides 7 reasons why contrarians may want to consider investing, including why the shares may have more than 25% upside. We conclude with our views about investing in Kraft Heinz.



If you don’t know, Kraft Heinz manufactures and markets food and beverage products. For example, its products include condiments and sauces (e.g. Heinz Tomato Ketchup), cheese and dairy (e.g. Kraft Macaroni and Cheese), ambient meals, frozen and chilled meals, and for infant and nutrition. It’s headquartered in Chicago, but operates globally (its geographical segments are United States, Canada, EMEA, and Rest of the World). The company was founded on July 2, 2015 when the H.J. Heinz Company acquired Kraft Foods Group in a transaction valued at $54.9 billion.

Why The Market Hates Kraft Heinz

We are using the steady and significant sell off of Kraft Heinz shares over the last 18 months as evidence that the market hates the stock. Specifically, KHC is down 50% , but why? Here are a few reasons:

1. Questions remain as to whether Kraft Heinz has the ability to grow sales organically (i.e. not via acquiring other companies). According to Morningstar, “sales have languished, falling 1% on an organic basis on average since fiscal 2015.” And according to the Wall Street Journal:

“Organic sales fell by 1% in 2017, as a 0.5% increase in prices failed to make up for a 1.5% decline in volume.”

Accrording to The Motley Fool:

“The company said in early November that its rebound plan was starting to take root, and CEO Bernardo Hees pointed to an almost 3% boost in organic sales as support for that claim. Still, gross profit has declined over the last nine months even as expenses rose, leading to far lower profitability in 2018.”

2. Brand value has been eroding. Specifically, the company has been focusing so hard on operations (particularly on the integration of operations) that they’ve basically neglected brand strength, and thereby reduced the value of intangible brand assets. Management continue to suggest the company will put more emphasis on brand value (for example, last quarter’s earnings presentation lists “Continue to expand and deploy capabilities for brand and category advances” as part of the investment outlook and “growth agenda), but we’ll believe it when we see it. The upside of the intense focus on reducing costs is very strong operating margins (more on this later), but it has come at the cost of reduced brand value (i.e. the company is not spending enough to strengthen its brands, in our view). Also worth mentioning, consumer preferences change over time, and demand for frozen, chilled and boxed meals changes over time and depending on the market cycle (more on market cycle later).

3. The Market Fears More Expensive Acquisitions. Kraft Heinz has been spending heavily on acquisitions, and the market doesn’t trust that the spending spree has stopped. For example, here is a look at some of the recent acquisitions that did, and did not, go through:

Acquisitions are expensive, can result in a lot of debt, and are usually less desirable than organic growth. Plus if they’re not a good fit, they can take a company away from its core competencies. For example, the failed Unilever deal in the above table would have taken Kraft Heinz into the “household and personal care products” space. And given KHC’s recent track record, many investors fear there may be more expensive acquisitions ahead.

4. Kraft Heinz does have a significant amount of debt. For example, here is a look at the company’s debt coverage ratios, which have generally been on the rise in recent years.

The company’s debt remains investment grade with a stable outlook, but its near the lower end of investment grade, as shown in the following graphic.

And if interest rates continue to rise in the years ahead, it’ll make it more expensive for Kraft Heinz to refinance its debt when it comes due, per the following maturity schedule.

And worth mentioning, not only will rising interest rates increase the cost of refinancing debt, but the company is also be challenged by inflationary pressures related to higher input costs, such as resins as well as freight and logistics costs.

What’s Good About Kraft Heinz?

Despite the reasons listed above for why the market has hated Kraft Heinz, the company does have a variety of good things going for it. For example…

1. Strong Cash Flow: For starters, Kraft Heinz continues to generate very strong cash flow to support the big dividend payments. The following chart shows free cash flow per share significantly exceeds the dividend payments, and is expected by analysts to continue to do so for years to come.


And for more perspective, here is a look at the company’s historical uses of cash.

2. Improving Margins: Another very impressive quality of the Kraft Heinz company is its very strong, industry leading margins. We mentioned previously that the company had been neglecting spending to increase brand value, but the other side of that is very strong profitability margins, such as gross, operating, and net margins, as shown in the following table. This is a big part of the reason why Kraft Heinz has such strong free cash flow to support its big dividend.

3. Attractive Valuation: KHC is currently very attractive from a valuation standpoint relative to peers. For example, the following table shows its strong Enterprise value relative to EBIT and EBITDA and relative to peers.

4. Transitory Issues Not Expected to Repeat: You may be saying so what if KHC has a low valuation if its business outlook is not good. However, its business outlook is better than the market seems to expect. For example, recent profitability has been held back by several factors not expected to repeat such as recent supply chain inflation, unfavorable bonus accruals and commercial investments.


5. Kraft has room to grow: Not only will the absence of transitory issues favorably impact future profitability, but so too will the company’s ability to grow. For example, as mentioned in the graphics above, the company recently experienced some quarterly sales momentum and they believe it can continue. Further still, there are opportunities for Kraft to distribute its goods across Heinz’s international sales footprint thereby growing top-line numbers. Kraft is also underpenetrated in club and dollar store channels thereby more room for growth relative to peers and thanks to Heinz’s established channels.

6. Analyst Love Kraft Heinz: Even though the market hates the stock (i.e. the share price is way down), Wall Street analyst love it. For example, over the 23 analysts covering Kraft Heinz, the majority have buy recommendations, and their price target ($58.10) suggests the shares have more than 25% upside versus the current market price. However, it may be worth taking these analyst price targets with a grain of salt, considering they been recommending “buy” for many months while the share price has continued to decline.

7. Market Cycle: Of course no one has a crystal ball that predicts with 100% certainty what will happen next in the stock market, however an argument can be made that now is an attractive point in the market cycle to consider investing in contrarian/value consumer staples stocks, such as Kraft Heinz. For example, as the nine year bull market run has shown signs of slowing over the last quarter, so too has the outperformance of growth stocks over value stocks started to slow.

In particular, most value stocks (including the consumer staples sector) did not sell off as much as the rest of the market as they are perceived safer, and generally perform better in an economic slowdown. Kraft Heinz, however, has continued to sell off hard, for a variety of inappropriate short-sighted reasons as mentioned above (e.g. one-time transitory challenges not expected to repeat) and thereby creating an increasingly attractive entry point for value-focused income investors, in our view, especially considering the company is showings signs of momentum in organic top-line growth.


Kraft Heinz has basically been spending the last few years getting its ducks in a row relative to the competition and positioning itself for long-term leadership and value. But because the market is notoriously short-term focused it underappreciates what the company has been doing.

Specifically, Kraft Heinz is hated because of its negative organic sales growth, its eroding brand value, its expensive acquisition propensity, and its increased debt ratios (not to mention the share price is down dramatically over the last 18 months). However, there are reasons to believe now may be a good time for income-focused contrarian investors to consider the shares, including its big dividend, strong cash flows, industry leading margins, attractive valuation, its falling away one-off detractors, its improving growth outlook, the fact that analysts love it, and because of where we are in the market cycle.

In our view, if you are looking to add an attractive dividend yield to your portfolio, from a diversified company that is not a REIT, BDC, MLP or CEF (these are the categories in which income investors are often over concentrated), you might want to hold your nose and consider picking up some shares of Kraft Heinz. The dividend is well-covered, and the shares could have more than 25% upside from here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


Two Equity/Balanced Closed-End Funds That Can Be Used As Fixed Income Substitutes In Your Portfolio (Guest Post From George Spritzer)

Two Equity/Balanced Closed-End Funds That Can Be Used As Fixed Income Substitutes In Your Portfolio (Guest Post From George Spritzer)


  • Gabelli Global Utility & Income (GLU) is trading at a 12.6% discount and yields 7.20%.

  • Nuveen Real Asset Income and Growth Fund (JRI) is trading at a 14.41% discount and yields 8.60%.

  • Either of these funds can be used as fixed income substitutes for more aggressive investors who want a higher yield.

  • In the article, I describe why the discounts for these closed-end funds may be higher than normal, but over time I believe the market will bring their discounts down closer to their peers.

  • Article by guest writer:  George Spritzer.