Yield of dreams

Was it only five years ago that millions of citizens happily dropped their cash into no-risk Treasurys and bank CDs that earned them respectable money? It is hard to remember now, following so much time at the Banktown Strutters Ball.

The abnormal normal era, having given us the Fed's SIRP (subatomic interest rate policy) until the economic recovery or the sun's death, whichever comes first, means there are no longer any safe + profitable interest plays. Many of those who formerly craved guaranteed investments still do -- except their flight to "safety" in Treasury paper is now guaranteed to lose money after inflation sinks its teeth into returns.

Ah, but others refuse to take no yield for an answer. In the new world disorder, some gravitate toward the AT&Ts and Johnson & Johnsons. We ourselves own a dust mote's worth of Southern Co. (SO), which keeps the lights on in Georgia and thereabouts.

Still others have a taste for raw meat. Ten-percent-plus yields. You can find them ... although they tend to be, by traditional standards, jolly strange contraptions.

In a SIRP world, anything that offers a licentious yield is bound to be tweaky. You'd better understand what you're getting into.

Jason Zweig, in the Wall Street Journal, has a cautionary tale about an entity called Cornerstone Advisors, which flogs three closed-end funds. (Tip of the stovepipe hat to Kid Dynamite.)

At Cornerstone, investors are receiving "distribution yields" of roughly 22% of net asset value, and the shares trade for much more than the value of their underlying assets. According to the WSJ Market Data Group, the Cornerstone funds are the three highest-yielding of the 657 closed-end funds in the U.S.

Twenty-two percent? Champagne for the house! Uh, wait.

Most of the yield at Cornerstone, however, doesn't come from its investments. In past years, it came from giving investors some of their original assets back. Now, it comes out of money the funds' investors have just added.

In each of the past five years, the Cornerstone Progressive Return fund distributed more than 10 times as much in dividends and other payouts as it earned in net investment income.

It sounds like the Cornerstone managers would be right at home in Congress.

Anyway, Cornerstone -- like the government -- has discovered that you can bribe people with their own money. It's legal, and as Kid Dynamite notes, Cornerstone spells it out for anyone who can squint.

Zweig concludes:

Investing has sunk to this: People are willing to pay a big premium for the privilege of getting their own money back, after fat fees, without interest—apparently because it gives them the illusion of earning a high yield.

Desperate people do desperate things. Investors who are starved for yield do desperately stupid things.

Does this mean that no high-yielding fund or stock can be trusted? Of course -- in the investing world nothing can be trusted implicitly. But an occasional siren's song may be listened to. Ghost Money has already written about Prospect Capital (PSEC). Another company that is much in favor these days is American Capital Agency Corporation (AGNC). 

Todd Johnson, who impresses us as a shrewd analyst of income-generating investments, sums up the case for AGNC here. Ghost Money likes that its last six dividends have been dividends, not return of capital.

The company's press releases say that AGNC "is a real estate investment trust that invests in agency pass-through securities and collateralized mortgage obligations" -- quick! The smelling salts! Slap slap, stay with us -- "for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity." There you go, backed by the United States government. What could be more rock-solid?

Ghost Money doesn't fully understand the business model, but it is leveraged and seems to be an artificial creature of the SIRP. We think it dissolves at the end of the interest rate night. That could be a while yet.

Full disclosure: Nothing to disclose. We do not own AGNC.

Keywords: [yield] [interest rates] [Cornerstone][Kid Dynamite] [Jason Zweig] [AGNC]

Ghost Money's author does not claim to know what he's talking about. He is not an investment advisor. This site is for entertainment, if it can even manage that.