The Big Picture for the Week of August 26, 2012

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Just a quick fun post;

For a while now I've been kicking around an idea called the live by (dividend) sword die by the (dividend) sword portfolio. The two names I've always thought of in this regard have been Seadrill (SDRL) and Terra Nitrogen (TNH). In the last few days a couple more names with some similar attributes have come to my attention that makes the portfolio name ready for prime time.

Last week's Barron's had a profile on a company called Prosafe whose ADRs have symbol PRSEY and a couple of days ago I stumbled across an article at Seeking Alpha about Navios Maritime Partners (NMM).

Seadrill operates oil rigs. The revenue comes from renting out the rigs based on negotiated terms. The way in which the company is managed they pay out a lot in dividends and rely heavily on debt for expansion (that being new rigs). The stock has not been around very long but has generally moved from the lower left to the upper right. The debt seems to be the biggest risk factor but thus far has not been a problem. Google finance shows the trailing yield at 7.97% but that will be a moving target based on how well the company does but dividends are a priority and should remain high as long as the company executes well. Seadrill has a fairly large weighting in both the iShares Norway ETF (ENOR) and the Global X Norway ETF (NORW).

TNH is a fertilizer company. The history of the unit price has been to be very volatile. Buy it at the right time and you make a lot of money quickly but buy at the wrong time and the loss could be crushing--based on TNH's history anyway. Volatility seems to have tapered off in the last year but that could be due to volatiltiy in the broader market having tapered off.  The stock obviously plays into the Malthusian theme and has about a 5% weight in the Global X Fertilizer ETF (SOIL), we own SOIL in many separate accounts and in RRGR. Google Finance reports TNH's distribution rate to be 7.8% but again it should be thought of as a moving target.

Prosafe makes living quarters for oil rig workers. The facilities appear to be very comprehensive for being out in the middle of the cold foreboding North Sea (and other parts of the world). Despite getting crushed during the financial crisis the stock has not been that volatile for a oil service-ish stock yielding north of 7%. Most of the ratios seem pretty good and although the debt situation is not ideal it has been coming down. This is one I still need to look at in more detail so for now the name is merely interesting.

Navios is a shipping company. Most of the shipping companies have very high dividend yields and very volatile share prices. Amusingly it has what is probably the chart for a shipping stock that I have ever seen which isn't necessarily saying much as many of them have been crushed and never came back. NMM has only been trading since 2008. It went down a lot during the crisis but managed to make a lot of it back since the March 2009 low. Google finance shows the distribution yield to be 12.4%.

The article I read on NMM painted a very positive picture but without having investigated further I don't know if that is accurate. Just eyeballying a couple of things it appears to not be a sickly dog with fleas which is not enough of an argument to buy.

Both TNH and NMM are partnership stocks so there are tax implications to understand before considering either one. Most partnership stocks have something to do with the movement of oil or gas and although there are a couple of others that are similar to TNH, I am not familiar with any other shippers that are structured as partnerships. While I can't quite put my finger on it, there is something interesting about stocks other than oil and gas being structured as partnerships.

Back to the idea of the live by (dividend) sword die by the (dividend) sword portfolio. The yields here are pretty fat but the potential for the bad kind of volatility is very high. Generally it seems like these types of things do well except for when they don't which is to say that whenever the next bear market comes I would expect holdings like these to get pasted. I don't yet know whether these specific companies are great, good, mediocre or lousy (I think a couple of them are pretty decent) but even great companies can get pasted in a bear market with Caterpillar (CAT) being an example I use often in this context. I believe it is an excellent company with great prospects but whenever the next bear comes it could easily go down by 50-60%.

I don't know whether I could own a name with these types of attributes for separate accounts or not in that buying one at the wrong time could be stress inducing for clients but might fit better under the hood of the fund we manage in a smaller than normal weighting.

One aspect of this blog is looking over my shoulder at process and so the above paragraph is thought process. If I do anything in this space I will be sure to share it here.