Tim Plaehn January 20, 2015 Comments Off

Any proper projection for 2015 has to start with a serious review of the 2014 performance from the different categories of income stocks. All income investments are not created equally, and keeping current on the market will keep your portfolio earning money. In this article I will go over each of the three categories of pass-through entities and the best strategies for investing in each.

Real estate investment trusts – REITs, business development companies – BDCs, and master limited partnerships – MLPs, all operate under special tax rules that require these companies to pay out the majority of free cash flow as dividends or distributions to investors. As a result of the tax treatments, these types of stocks typically pay better yields than the shares of traditional corporations.

The three different categories had strikingly different average performances in 2014. With this information income investors can look for value among the underperforming sectors or choose to ride the momentum of the better performing sectors.

• REITs were a hot asset class in 2014. By both the S&P U.S. REIT Index and the MSCI US REIT Index, the sector generated a 30.3% total return. Out of that total return, dividends accounted for about 4.5%.
• On the BDC front, the Wells Fargo Business Development Company Index declined by 15.2% on a price basis, offset by 7.2% in dividend income. The result is a total return for 2014 of –8.0%.
• For 2014 the Alerian MLP Index – AMZ– posted a price return of –0.8%. With distributions included, the AMZ returned +4.8%. The AMZ was more than 20% positive at the end of August 2014, and then lost all of its gains by the end of the year. Another fact that shows how troubled MLPs were in 2014 is that the Alerian equal weight index posted a –11.9% price return drop. The new year has not started off any better for MLPs, with the AMZ down another 4.5% over the first two weeks of 2015.

Making Income Investments in 2015

Starting out in 2015, the REIT share prices I follow have continued to march upward, in spite of a volatile overall stock market. At this point in the market cycle, REIT investors need to be concerned about share price peaks and a subsequent correction.

Historically, REITs often follow a very good year with a much lower total return. For example, from 2010 through 2014, the MSCI REIT index recorded these annual returns: 28.48%, 8.69%. 17.77%, 2.47%. and 30.38%. If the pattern continues, 2015 could be a single digit return year or worse for REITs. Of additional concern is yield contraction due to higher share prices. For example, while Ventas Inc. (NYSE VTR) is a very good REIT and one of our core holdings in The Dividend Hunter . the share price has appreciated by 30% over the last year and, even with a growing dividend, the yield has shrunk from 5% down to 4%, at least for anyone getting in now. Investors interested in cash income may want to sell VTR and reposition that capital into a higher yielding alternative. The appreciated share price would allow the purchase of more shares of a higher yielding stock that has not appreciated so much in value.

BDCs as a group have been affected by a range of investor fears including possible rising interest rates, a flattening of the yield curve, and exposure to clients in the energy sector. Those fears have brought down the good BDCs right along with the riskier companies in the group. BDC investors may be better served in 2015 by the more conservative BDC stocks, which would be indicated by histories of dividend growth and yields that are lower than the average of their peers. Investors should consider selling or avoid taking long term positions in the higher yield BDCs such as Medley Capital Corp (NYSE: MCC), Full Circle Capital (Nasdaq: FULL), or TICC Capital (Nasdaq: TICC) .

MLPs as a group have been crushed as energy commodity prices continue a decline that started in the third quarter of 2014. For the full year 2014, the West Texas Intermediate benchmark crude oil price dropped by 46% and the NYMEX natural gas price fell by 32%. The drop in MLP values has produced one of those opportunities in the market when share prices are down and everyone is afraid to buy, because of fear of further declines. At this point I believe it is a good time to invest in high quality MLPs with revenues not directly dependent on the prices of oil and gas and long term histories of steady distribution growth. That underlined part is important as we’re going after only the most stable.

Enterprise Products Partners LP (NYSE: EPD) is the largest MLP and is a lock for 6% annual distribution growth. EPD units are a lot more attractive at the current 4.3% yield than they were five months ago sporting a 3.5% yield. For a more aggressive MLP investment, Oneok Partners LP (NYSE: OKS) has some exposure to natural gas prices but also has a very long history of distribution growth. OKS now yields 7.65% compared to 5.4% before MLPs started to fall.

The main lesson to be learned from the 2014 returns of the pass-through stocks discussed here is that income focused investors need to diversify across all three categories. Another lesson is that dividend or distribution growth allows you to live with temporary share price declines. For my readers of The Dividend Hunter . I will be reviewing the biggest winners to see if that capital may be moved to now more attractive opportunities. I will also be digging through the losers from the last half year to find those income stocks that are still good investments, but have dropped due to herd mentality selling.

Constantly reviewing your income portfolio is important, especially as we’ve seen some big names cut dividends and distributions lately while others are doing fine, even raising dividends. Those are the ones we’re zeroing in on.

These dividend increases have me excited about the upcoming announcements on more of the stocks on the recommended lists of my Dividend Hunter and 30 Day Dividends newsletters. My unique dividend growth focused strategies should provide very nice returns for investors over the next couple of months and throughout 2015.

Strong performing REITs and MLPs are an integral part of the income strategy with my newsletter, The Dividend Hunter. And there are currently several in my Monthly Dividend Paycheck Calendar .

The Monthly Dividend Paycheck Calendar is set up to make sure you’re getting 6, 7, even 8 dividend paychecks per month from stable, reliable stocks with high yields. (Note: February has a whopping 8 payments!)

And it ensures that your dividend stock income stream will be more stable and predictable as you’re getting payments every month. not just once a quarter like some investors do.

The Monthly Dividend Paycheck Calendar tells you when you need to own the stock, when to expect your next payout, and how much you could make from stable, low risk stocks paying upwards of 8%, 10%, even 17% in the case of one of them. I’ve done all the research and hard work; all you have to do is pick the stocks and how much you want to get paid.

The next critical date this month comes on Wednesday, March 4th its closer than you think so you’ll want to take action now to make sure you don’t miss out. Click here to find out more about this unique, easy way of collecting monthly dividends .