$10k a Month Investment Income Club UPDATE: AMZA, PFFA, and NEWT
Dear Subscriber,
2020 UPDATE On AMZA and PFFA (Our preferred cash reserves/10%+ high yield safety fund) and Newtek Capital (NEWT).
First off, if you are like me and have owned Newtek Capital since our first recommendation in 2014, DO NOT SELL NEWT!!! If you have reinvested your dividends you literally have a ZERO COST BASIS and every dividend you get is an INFINITY return cash-on-cash.
But if you have a "normal" cost basis above $14 or higher, we are going to take profits here and let the NAV come back to a 12%+ dividend.
Why take such prodigious profits now? Just being good portfolio managers--and protecting/harvesting those prodigious profits.
During the Q3 2019 earnings call, the management team stated that though the SBA 7-A loan growth was estimated at 25% at the beginning of the year, it is likely to end up at just 10.8%, which is a big disappointment. However, the management is estimating that the growth would be 10–20% going forward. If the weakness in 7-A loan growth persists, it is obvious that these projections will fail.
Page 16 of its Q3 2019 earnings presentation says that the 7-A business slowed down because “the economy (and loan demand) was slowing.” We see demand for SBA 7-A loans slowing in 2020 with the overall economy slowing but not stalling in 2020 with a contentious 2020 election cycle. The recent reporting from regional, not money center banks, show slower loan growth as well and that means lower 7-A loans will slow down as well.
PS: If you watch CNBC or ESPN a lot, you see my long-time pal Barry Sloan pitching Newtek loans all the time. When they start running ads 24/7, that tells me the pipeline is not full.
AGAIN--if you bought the shares BEFORE or shortly after NEWT's BDC conservation in October/November 15, you don't care about 10-20% reduction in stock price--your cash-on-cash quarterly dividend is virtually free money and for YOUR portfolio will never ever get a cash-on-cash return like that again in your life!!!
My bet here is we will get a chance to buy NEWT under $20 again. But yes, NEWT turned out to be an amazing investment--once in a lifetime. Congrats to all the subscribers who have shared the ride!
AMZA/PFFA Update
If I would have told you that with ultra-safe PFFA you would have earned a 35% return in 2019, you would have called me nuts. But thanks to the Fed/VIX meltdown Dec 14-30 last year, we got an amazing 2019 return for our "SAFE" cash reserve investment from the 2019 low!
I am proud to say we have a very strong relationship with the InfraCap portfolio management team and communicate regularly. One issue of concern with AMZA has been adjusting the distributable cash flow when the meltdown in the MLP space finally ended and the sale of call options for income got a little more complicated when call options on rising MLP prices get exercised (which hurts NAV).
Jay Hatfield and his team have thus updated their option income strategy, and we love it! Here is a summary of our conversations.
AMZA and PFFA Update InfraCap MLP ETF (AMZA)
#1) The shifting of the December AMZA dividend payment into January was due to a technical issue with the fund closing its fiscal year at the end of October and the company’s accountants trying to determine the tax characteristics of the final two dividends and basically making a worst-case guess.
Net-Net: For us AMZA investors, the date shift means investors receive 13 dividend payments in 2020.
2) Learning from the past few years (and a wee bit of feedback from yours truly) Hatfield has decided to publish a more simple dividend policy for AMZA. As you know, the fund earns dividends/distributions from the MLPs it owns and sells call options against its equity positions to enhance the cash income to the fund in order to generate higher cash flow to enhance the size of the monthly dividends.
While during the extreme short attacks/raids by hedge funds against defenseless MLPs (who normally can't buy back shares to fight back against these short raids), Jay and his team have been able to generate 10%+ cash flows from selling call options on positions that hardly EVER got called away.
But given that Jay and I see the profitability of endless bear raids against MLPs ending (and MLP valuations somewhat normalizing even in the age of ESG portfolio management dumping energy sector exposure) there are market conditions when that high level of call option premium income is not possible or prudent.
3) Going forward in 2020 and beyond, the AMZA dividend will be set at the MLP portfolio yield (currently 10% ish) plus 5% from call options selling. The 5% is expected to come from less gross profit from option premium. The dividend will be fixed at a level rate, using the formula of the portfolio yield plus 5%. I expect the rate will be reviewed every six months and reset using the formula.
Currently, the AMZA portfolio yields around 10.3%, so the 2020 dividend yield will be around 15%.
We also discussed whether a reverse stock split makes sense, and I said I would favor that move simply because many institutional investors cannot own equities below $10.
Final point. Like I shared, PM Hatfield expects, and I agree, that energy midstream stocks and MLPs will have a very good year in 2020 relative to the overall equities market. After several years waiting for share values to turn around, I expect AMZA to show share price appreciation as well as continue to pay a very attractive dividend yield.
Key point: Since the daily AMZA price is set by the daily Net Asset Value (NAV) of the ETF positions + cash, setting the dividend at a more conservative (but still a very attractive yield) will allow the AMZA share price to appreciate along with the energy midstream sector as fewer positions will be called away.
AMZA: Buy Under $5 with $6.50 target
Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
If you own PFFA, you know it declared a $0.55 dividend that was paid in December. The regular PFFA monthly dividend is $0.19 per share. The $0.36 of an additional dividend amount is the income the fund earned in excess of the monthly dividend payments. BTW, if you hold PFFA in a taxable account, that excess payment is treated as regular dividend income for tax return purposes.
Based on the current share price, PFFA will continue with a 10% yield after expenses on the PFFA portfolio and the PFFA dividend will stay at the $0.19 per share per month.
Our $10k-a-Month Investment Income Club is off to a fast start in 2020. We will be expanding our membership size as we transfer to a new publishing partner in the near future.
We will reinvest our NEWT profits and $10,000 original capital is some additional compelling high/secured dividend plays that we are working up as I type.
IF you are a $10k a month Portfolio Builder, keep reinvesting those dividends. Here's an example of the power of reinvested dividends. My wife has a taxable account that I manage with high dividends and mild leverage. By reinvesting NEWT dividends since 2015, her original $20,000 in NEWT alone is worth $68,000 and generates about 60% cash-on-cash returns from the original $20k. I use margin in that account to buy AMZA and PFFA (and others in our portfolio) during market meltdowns that occur while our TR MacroMarket recession index stays above 15 (currently 16.2%).
Our proprietary MacroMarket indicator (licensed in part from London School of Economics) goes back to 1988 and has called EVERY American recession during that 32 year time period. My point? When the market melts down (as it does on average every 6-8 months) on unfounded recession fears, use low-cost margin to buy high yield securities on sale (like we did in late December 2018)--it just makes SO much sense. Let the cash flow from new securities pay off the margin loan!
PS: Low-cost margin is just one of the reasons I use Interactive Brokers for margin accounts. Jay and his team use Interactive Institutional as well--their options market making team is first-rate and seems to always improve my orders.
New investments and January portfolio updates by end of the month.
Cheers!