Combing For Opportunities In The High-Yield Wreckage


By some measures, 2015 hasn’t been a total disaster.

Through the first three quarters of this year, S&P 500 (SPY) constituents are only down an average of 6.2% on a total return basis (dividends reinvested).

The average stock in the Russell 2000 (IWM), an index of small caps, is down 7.0%. That’s still not too bad.

However, these returns mask the devastation occurring in high-yield land.

The average U.S.-listed common stock with a trailing 12-month dividend yield of 5% or more is down 19.6%. Here, I’m looking at trailing yield because some of these companies have already cut their dividends.

Others, like Tronox Ltd. (TROX), will soon be forced to cut their payouts. TROX is down 80.7% this year.

In early 2014, I warned that this type of cyclical, high-beta stock would become “corrosive” to shareholders. Many investors have since been burned.

Investors have also been scorched by the dumpster fires known as master limited partnerships (MLPs). The average MLP has a total return of -24.4% this year, although many “upstream” energy MLPs have fared significantly worse.

For example, Legacy Reserves LP (LGCY), which was on the Dividend Death Watch, is down 59.4%.

The “yieldcos” are another noteworthy group of high-yield casualties.

Over the past few years, a plethora of these dividend-paying structures, which typically own renewable energy assets, have been formed by parent companies.

For example, in 2014 SunEdison Inc. (SUNE) created TerraForm Power Inc. (TERP), which owns solar power assets. TERP is down 52.5% this year.

Given the carnage in various high-yield securities, there’s got to be some value somewhere, right?

Well, caution is still warranted. We have to be worried about dividend and distribution sustainability in many cases.

Also, the commodity bust will continue.

As I said in November last year, I firmly believe that we’ll see some magnificent defaults in the commodity complex. The unitholders of many overly leveraged energy MLPs will be wiped out, and that’s a problem for all MLPs.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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