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The Letter Creating income for today, wealth for tomorrow | Issue 7, october 2013 It's Time to Play Defense With This 10% Yielder by Marc Lichtenfeld, Senior Editor, The Oxford Income Letter Y ou may have heard the old sports adage, “Offense wins games, but defense wins championships.” Well, the same could be said for investing. There’s nothing wrong with some speculation and going for the big gains, as long as your core portfolio is invested the right way and you keep defense in mind for the long term. Being defensive can mean having stops in place, or investing in Perpetual Dividend Raisers – stocks that should outperform the market in any environment. Marc Lichtenfeld That being said, with the bull market four years old and the Fed beginning to tell the party guests it’s getting late and they have to get up early tomorrow to take the kids to soccer, I wanted to add a more defensive position to the portfolio. But defense doesn’t have to be boring. No one’s ever accused former Baltimore Ravens linebacker Ray Lewis of being dull (or Patrick Roy for our Canadian subscribers). And a strong defense doesn’t mean you don’t make money. Floyd Mayweather, one of the greatest defensive boxers in history, made over $40 million last month while barely being touched by the offensive-minded Saul “Canelo” Alvarez. This month, as investors, we’re going to copy Mayweather and assume a defensive posture while still throwing enough punches to ensure we get paid. And in the Blue Corner... Based out of Boston, Mass., Eaton Vance is one of the oldest investment management companies in the United States. It was founded in 1924. And even today, the firm still follows its founder Charles Eaton’s long-term approach to managing investments. The company offers a wide range of mutual funds, closed-end funds and separately managed accounts for individuals and institutional investors. When it comes to its closed-end funds, Eaton Vance has a total of eight that invest in common stocks and employ a number of option strategies. Time to Play Defense PG 2 The Perfect Copper Play PG 4 Oxford Income Mailbag PG 6 Profits Central PG 8 Marc's Directive on dividends My favorite, the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (NYSE: EXG), is a closed-end fund that engages in a buy-write (covered call) strategy. money calls on various stock indices. Nearly half of the portfolio is hedged with options. And if stocks go up, the fund can either buy back the options at a loss or sell the underlying stock. If stocks do not go up, the fund keeps the option premium. The fund holds mostly European and U.S. stocks and sells calls on European and U.S. stock indices to generate income and reduce volatility. Over half of the portfolio is invested in European stocks. What also helps protect us to the downside is the fact that, right now, we can own this fund at a 10.5% discount. In other words, investors are paying $0.895 for every $1 in assets. EXG: Top 10 Holdings That’s a good deal. Holding Headquarters % of Net Assets 1. Royal Dutch Shell plc 2. Nestle SA 3. Roche Holdings AG 4. HSBC Holdings plc 5. Sanofi 6. Vodafone Group plc 7. Unilever N.V. 8. Novo Nordisk A/S 9. BP plc 10. BASF SE Netherlands Switzerland Switzerland England France England England Denmark England Germany You can see from the chart on the next page the stock has mostly traded at a discount over the past few years. 3.31% 3.15% 2.66% 2.39% 2.25% 2.18% 1.81% 1.77% 1.74% 1.43% Investors have the opportunity to make money from the fund, not just by the stocks in the portfolio going up, but by the discount tightening and perhaps even becoming a premium. If, for example, we hit a flat market, the portfolio might not lose value, but the discount could shrink, handing shareholders gains. If you bought the position at $0.90 on the dollar and it’s now trading at $0.95 on the dollar, with no change in the portfolio, you’re up 5.5%. Not bad in a flat market. I chose this fund specifically over other Eaton Vance buy-write funds because of the European exposure. Most of the stocks in The Oxford Income Letter are American companies and I want to add diversification. And should the market turn south when the Fed does eventually decide to cut back on quantitative easing, we have some protection in that we’ve only paid 90% of the true cost of the portfolio. As you can see from the chart, the top holdings include Royal Dutch Shell plc (NYSE: RDS), Nestle SA (OTC: NSRGY) and Roche Holding AG (OTC: RHHBY). That doesn’t mean the price can’t go lower or the discount can’t widen, but starting off paying 10% less than the portfolio’s true value is certainly a strong defensive position to be in. Do Right With Buy-Write Buy-write funds typically outperform in flat or bear markets as the income from the covered calls generates extra returns that a fund which only invests in stocks wouldn’t achieve. Closed-End Fund – Similar to a mutual fund but it trades like a stock. The price is based on supply and demand. Closed-end fund prices usually trade at either a discount or premium to the net asset value (NAV). If stocks go down, the extra income from the calls act as somewhat of a buffer against the market’s volatility. Example: If a fund's NAV is $10 but it trades at $9, it's In a bull market, the funds often underperform, though they still generate meaningful income, which I’ll get to in a moment. trading at a 10% discount. Buy-Write Strategy – Selling covered calls on a stock or index. The fund generates income by selling slightly out-of-the2 Marc's Directive on dividends That’s Great... But How Much Will I Get Paid? “We're buying a stock for 10% less than it's worth, it pays a 10% yield, the vast majority of which is tax deferred, diversified outside the United States and is managed tax efficiently.” The Eaton Vance Tax-Managed Global Diversified Equity Income Fund currently sports an annual yield of over 10%. The dividend is paid monthly. Even better, the fund, as its name suggests, has certain tax advantages. It is managed in order to avoid paying taxes as much as possible. If you sold the stock for $12, you’d pay taxes on $3 in capital gains ($12 sale price minus $9 adjusted-cost basis). So for long-term investors, stocks that pay income that's considered return of capital is a great way to defer taxes on that income. This year, through August, 83% of the distribution has been considered return of capital, while 17% is investment income. So let’s review: So the fund may sell a stock at a loss in order to offset a gain. We’re buying a stock for 10% less than it’s worth, it pays a 10% yield, the vast majority of which is tax deferred, diversified outside the United States and is managed tax efficiently. But perhaps more importantly, much of the income received by investors is considered a return of capital. We’ve covered return of capital before when discussing Master Limited Partnerships (MLPs). A return of capital is not taxed as income and instead lowers the cost basis of the investment. That’s a defensive strategy that would make the ’85 Chicago Bears (one of the greatest defensive teams in NFL history) jealous. And they won a championship. If you bought a stock at $10 and received $1 in income that is classified as return of capital, you would not pay taxes on that $1 until you sell the stock. Action to Take: Buy the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (NYSE: EXG) for the Retirement Catch-Up/High Yield Portfolio at market. And use our customary 25% trailing stop to protect your principal and your profits. n At that point, your new cost basis is $9 ($10 purchase price minus $1 return of capital). EXG: Historical Discount/Premium to NAV 10% 0% -10% -20% -30% /08 3 9/1 /09 3 9/1 /11 /10 3 9/1 3 9/1 3 /12 3 9/1 /13 3 9/1 Steve’s Bond Insights The Perfect Copper Play... With Interest by Steve McDonald, Bond Strategist, The Oxford Income Letter Furthermore, when China gets back to full throttle (and it will), the price of copper will fly. Analysts are calling for $3.66 per pound by the end of the year. weak commodities market and the ongoing sell-off in bonds have combined to offer some of the highest total returns we have seen from bonds in over five years. A Almost all commodities have fallen from their highs, but copper in particular has had a rough year. It’s down 14% so far this year, compared to a 15% gain in the S&P 500. The price of the metal has dropped to $3.22 per pound, down from $3.72 a year ago. On top of this, worldwide demand for copper, excluding the Chinese STEVE MCDONALD market, is still expected to increase by 4.3% this year and 5.15% next. This is another factor that should drive copper prices higher. The chart below tells the whole story of how badly copper prices have been hit. The other key factor supporting copper’s recovery is that the metal is an absolute essential. Everything that uses electricity or exchanges heat must have it. There is no industrial production without it. Copper Price: Year-to-Date $3.80 $3.70 $3.60 $3.50 $3.40 $3.30 $3.20 $3.10 $3.00 Copper is signaling a trend reversal through the triple bottom. 13 20 b Fe r Ma r Ap y Ma Jun Jul The Safest Way to Play Copper Despite all the signs the price of copper is about to soar, it is still a turnaround story. That means there are lots of possible outcomes other than the one we expect. All of us have waited for turnarounds that “should” have happened but never materialized. g Au To put yourself in the best and safest possible position, and still make enough money to make it worth your while, buy a bond to play this one. Source: StockCharts.com What’s the cause of the metal’s horrible performance? A bond will eliminate 99% of the risk, earn income from day one and allow us to participate in the eventual turnaround in copper prices. In large part, it’s China. The burgeoning nation consumes 40% of the world’s copper. When its demand dipped due to its sluggish economy earlier this year, the market for copper fell apart. The market price of a bond in a copper company will follow increasing demand for copper. But as the chart also shows, the triple bottom since May is a solid technical indication that the year-long downward trend is about to reverse. And the healthy sell-off in bonds since last spring has produced some amazing values. We can buy a BBB-rated bond (that’s investment grade) with a 99% success ratio, from one of the best copper companies in the world, at a significant discount – $0.89 on the dollar. For one, China is already showing signs of improvement. Despite a two-quarter slowdown, its government expects to reach its 7.5% economic growth target for this year. That will result in much higher demand for copper in the coming months. That means higher current income, higher total returns, 4 Steve’s Bond Insights increasing bond values as copper prices move higher, a capital gain at maturity and the safety of a BBB rating. • It will pay 19 interest payments of $17.50 per bond, $332.50 total interest. Virtually Zero Risk • A capital gain of $110 per bond at maturity ($1,000 principal returned at maturity – $890). Southern Copper Corp. (NYSE: SCCO) earns about 81% of its revenue from its copper operations, has an operating margin of 48% and a cost of production of $1.35 per pound. • All priced at a discount, $890 per bond! Let’s do the math: 19 x 17.50 + 110 / 890 / 110 months x 12 months (for one year) = 5.42% Its nearest competitor, Freeport-McMoRan (NYSE: FCX), only sports a margin of 26% and has a much higher cost of production, $1.85 per pound. A 5.42% annual return from an investment grade bond has been unheard of since before the crash in 2008. Even better, Southern Copper has enough cash to complete all of its current capital projects even if copper prices drop to $2.00. The real beauty of this strategy, though, is we make money no matter what happens to the demand for copper or the market price, or China for that matter. Its mine life is 104 years compared to Freeport-McMoRan's mine life of 34 years. It also has the highest reserves in the industry and an expected growth rate of 12.5% for the next five years. China could literally go into a recession (not likely, of course) and even in that extreme circumstance we would still be paid our interest every six months and our capital gains at maturity. This is the real deal. And as copper prices improve, which will drive Southern Copper’s fundamentals higher, this bond will move up in price, too. The result will be a much higher annual return long before maturity, maybe as early as next year. Currently, Southern Copper has a bond available with a coupon of 3.5% that matures in November 2022. The current price is about 89 (or $890) per bond. The CUSIP is 84265vaf2. Remember, here’s what you’re getting: BOND: Southern Copper Corp. • Income from day one. • A capital gain at maturity. CUSIP: 84265vaf2 Maturity: November 8, 2022 Moody’s Rating: BBB • Participating in future increases in copper prices. • The potential to earn a higher annual return before maturity. One of the largest copper producers in the world. The company is involved in the mining, exploring, producing, smelting and refining of copper and other materials in Peru and Mexico. Exploration activities are currently underway in Chile, as well. And it’s all without the risk of the stock market. This is how to make money on copper and limit your downside risk to virtually zero. Our current yield, what we earn in income based on the discounted price, would be 3.9% (That’s 3.5% divided by $890). The perfect copper play... with income. n The bond mentioned here is for educational purposes only. It will not be tracked. It is intended as a potential investment idea only. And, again, this is a BBB-rated bond, investment grade. No junk in copper! If you’re interested in more research and trading recommendations from Steve in the bond market, call our VIP Services Team about his Oxford Bond Advantage service at 888.570.9830 or 410.454.0498. If all we do is hold this bond to maturity: 5 The MAILBAG We’ve received a tremendous response from subscribers. We always believe it’s good to share these questions and clarifications of dividend investment strategies with all our subscribers. As always, feel free to send us emails at [email protected]. Q: I was hoping to get your viewpoint on how ETFs are related to dividend investing. I have done my research on several ETFs like: XLV, XLP, DVY, SDY, SPY, and XLY. For more Chairman's Circle Membership information, please click here. Q: What’s the best way to do a dividend reinvestment plan (DRIP)? Through my broker or through the individual companies? – Mel H. Marc responds: – Adam K. I’m not a fan of dividend-paying ETFs for one reason. They do not have a track record of raising dividends every year. Marc responds: Even some of the ETFs that invest in the Dividend Aristocrats Index or Dividend Achievers Index – indices of stocks that raise the dividend every year, do not raise the dividend annually. Through your broker, assuming the broker doesn’t charge any fees. Most of them don’t. When you reinvest your dividend through your broker you get two advantages: I prefer a portfolio of individual stocks that each have a track record of annual (and large) dividend raises. A company that has been raising the dividend every year for 10 or more years is going to do everything in its power to continue raising that dividend, even if it’s just to continue that track record and stay on the lists and indices of Perpetual Dividend Raisers. 1. All of your stock information is located in one place, rather than having various separate accounts that you need to keep track of. 2. It’s usually cheaper. Most companies charge a fee for reinvesting the dividend. And then selling your stock could be expensive through the plan. But if you’re with an online broker, it will cost you nothing to reinvest the dividends and when you go to sell it, the commission will be about $10. Q: In your book, Get Rich with Dividends, there is a chapter on selling call options in order to generate more income. Will you be recommending trades like this in The Oxford Income Letter? There are a handful of companies that offer discounts on reinvested dividends but they are not very common. It’s almost always easier and cheaper to reinvest your dividends through a discount broker. Just tell the broker you want all (or specific stocks) dividends reinvested. – Sheff S. Marc responds: Q: I am 43 years old and have $50,000 I want to invest using your program. How much money can I expect to have when I retire? Sheff, you’re in luck. In the very near future, I will be launching a trading service designed to turbocharge dividend income with the help of options. There’s still some work to be done on it so I don’t have more details other than it will probably be offered to Oxford Club Chairman's Circle Members later this year and then to everyone else early next year. – Leo L. 6 MAilbag page Con'thead / Club news Marc responds: after 10 years with dividends reinvested – $50,000 will turn into $160,556. At that point the annual income will be $7,202. I don’t know when you plan on retiring so that’s a tough one. But let’s plug some numbers into the dividend calculator. After 20 years, the $50,000 is worth $577,210. Generating $32,220 or a yield of 64% on your original investment. Of course, there are no guarantees that the stocks’ returns equal the historical average or their dividends grow at 10% per year, but I think those are realistic assumptions. If we assume a starting yield of 4% (the portfolios in The Oxford Income Letter have higher average starting yields) and a dividend growth rate of 10% (ditto on the growth rates), stocks rise by an average of 7.48% per year (the historical average), October Edition News@TheOxfordClub The European Opportunity Expedition: This November 29-December 8, The Oxford Club will lead a luxurious tour you won’t want to miss! On this amazing journey you will travel in style from picturesque Zurich – a town that boasts magnificent landmarks such as the legendary Kronenhalle and Kunsthaus art museums... to historic Liechtenstein – home to some of the strongest and most private banks in the world... to charming Innsbruck – known for its medieval architecture and the extraordinary Mint Tower... and finally to breathtaking Vienna – full of hidden cultural delights such as the Kunsthistorisches Museum and the Hofburg Imperial Palace. Of course, you’ll be hosted by one of the Club’s top experts – Marc Lichtenfeld. He’ll help you find out if Europe is a bargain and discover whether now is the time to buy European equities. Plus, you’ll dive headfirst into the rich Swiss biopharma scene. For more information on this world-class tour and to reserve your space now, call Event Manager Karoline Bowman at 800.638.7640 or 410.366.5494, or email her at [email protected]. 2014 Sydney-Bali Cruise: When it comes to exotic itineraries, this one has it! The Chairman’s Circle Wealth Cruise sets sail February 16-28, in 2014, from Sydney, Australia. Board the luxurious Crystal Symphony en route to northern Australia’s tropical, charming city of Cairns, cruise the stunning Great Barrier Reef, visit the famed Komodo dragons at Indonesia’s Komodo Island, view the majestic Mount Rinjani volcano, and finish your excursion at the tropical island paradise of Bali. Along the way you’ll be hosted by Club Publisher Julia Guth and Event Director Steven King, while hearing plenty from the very best financial experts around... Marc Lichtenfeld, Senior Editor of The Oxford Income Letter, along with Alex Green, Steve McDonald, Matthew Carr and experts from Australia. Call for more information, or reserve your cabin now! Call 888.684.7245. ! NEWThe Oxford Club's 2014 Investment U Conference: March 26-29, 2014, Carlsbad, Calif. – The Park Hyatt Aviara. In March, The Oxford Club will host its 16th anniversary Investment U Conference. To celebrate, we’re gathering some of the world’s top analysts, researchers and investment editors in Carlsbad, Calif. to answer all of your investment questions. That includes: Chief Investment Strategist Alexander Green, Chief Income Strategist Marc Lichtenfeld, Bond Strategist Steve McDonald, Emerging Trends Strategist Matthew Carr, Resource Strategist Sean Brodrick, Global Companies Founder Rick Rule and many more. Together, we've asked them each to reveal the best investment advice they’ve ever received… their best investment ideas for the next six months… and their best income ideas for the next five years. For more details, contact us now at [email protected] or 561.243.6276 or 800.926.6575 x 104. 7 PORTFOLIOS The Instant Income Portfolio Avg. Yield on Rec. Price: 4.8% Projected Annual Dividend Growth: 11.7% Avg. Avg. Yield on Curr. Price: 4.2% Dividends Raised Annually for an Avg. of 12 Years Income for today. Company/TickerRec Rec Price Current Price Buckeye Partners, L.P. Apr-2013 (NYSE: BPL) MLP $58.80 $65.79 $2.11 6.5% Buy $54.03 Intel (Nasdaq: INTC)Apr-2013 $21.05 $23.09 $0.45 3.8% Buy $18.92 Lorillard (NYSE: LO) Jun-2013 $42.32 $45.25 $0.55 5.0% Buy $34.45 Meredith Corp. (NYSE: MDP)Apr-2013 $38.72 $45.62 $0.81 3.7% Buy $36.41 Buy for $28 or less $20.35 Buy $60.46 Date Dividends Collected CurrentRating Trailing YieldStop* Nippon Telegraph and Apr-2013 $21.59 $26.49 $0.00 3.6% Telephone Corp. (NYSE: NTT) ADR Raytheon Co. (NYSE: RTN) May-2013 The Compound Income Portfolio $61.66 $0.55 2.8% Avg. Yield on Rec. Price: 4.9% Projected Annual Dividend Growth: 12.3% Avg. Yield on Curr. Price: 4.7% Dividends Raised Annually for an Avg. of 10 Years Dividend reinvestment for tomorrow. Company/TickerRec Rec $80.62 Date Price Current Price Dividends Collected CurrentRating Trailing YieldStop Brookfield Infrastructure Apr-2013 $37.80 $38.00 $0.86 4.8% Partners (NYSE: BIP) MLP Darden Restaurants (NYSE: DRI)Aug-2013 $49.05 $49.81 $0.00 4.5% Lorillard (NYSE: LO) Jun-2013 $42.32 $45.25 $0.55 5.0% Meredith Corp. (NYSE: MDP)Apr-2013 $38.72 $45.62 $0.81 3.7% Omega Healthcare Investors (NYSE: OHI) Sep-2013 $27.74 $30.25 $0.00 6.4% Raytheon Co. (NYSE: RTN) May-2013 $61.66 $80.62 $0.55 2.8% Texas Instruments (Nasdaq: TXN)Apr-2013 $34.15 $40.85 $0.56 2.8% Williams Partners (NYSE: WPZ) MLPApr-2013 $51.27 $51.30 $1.71 6.9% Buy None Buy forNone $55 or less BuyNone Buy None BuyNone BuyNone BuyNone Buy None The Retirement Catch-Up/High Yield Portfolio Avg. Yield on Rec. Price: 8.8% Avg. Yield on Curr. Price: 8.3% Current Price Emphasis on current high yields. Company/TickerRec Rec Date Price Dividends Collected CurrentRating Trailing YieldStop Buckeye Partners, L.P. (NYSE: BPL) MLPApr-2013 $58.80 $65.79 $2.11 6.5% Buy $54.03 Eaton Vance Tax-ManagedOct-2013NewNew $0.00 10.0% Buy 25% TS Global Diversified Equity Income Fund Goodrich Petroleum Corp. Series C May-2013 $25.40 $26.50 $1.08 10.0% Buy $20.03 Preferred (NYSE: GDP-C) PennantPark Investment Corp. Jun-2013 $11.16 $11.47 $0.56 9.8% Buy for $8.66 (Nasdaq: PNNT) $12 or less Williams Partners (NYSE: WPZ) MLPApr-2013 $51.27$51.30 $1.71 6.9% Buy $39.68 Prices as of 9/18/2013. * Use a 25% trailing stop. Trailing stops are adjusted to reflect dividends collected. † Prices adjusted for stock split. ADR – American Depository Receipt. MLP – Master Limited Partnership. REIT – Real Estate Investment Trust. mREIT – Mortgage Real Estate Investment Trust. The Oxford Club, LLC provides its Members with unique opportunities to build and protect wealth globally, under all market conditions. We believe the advice presented to Members in our published resources and at our seminars is the best and most useful to global investors today. The recommendations and analysis presented is for the exclusive use of subscribers. Subscribers should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not secure future results. Recommendations are subject to change at any time, so subscribers are encouraged to make regular use of our website, www.oxfordclub.com. Publisher Chief Investment Strategist Senior Editor Editorial Director Managing Editor Julia Guth Alexander Green Marc Lichtenfeld Andrew Snyder Mike Kapsch Assistant Editor Event Director Director of Research Art Director Graphic Designer Priyanka Marple Steven King Chris Matthai Jennifer Ross Alison Kassimir © 2013, The Oxford Club, LLC | 105 W. Monument St., Baltimore, MD 21201 | 800.992.0205 Protected by copyright laws of the United States and international treaties. This newsletter may only be used persuant to the subscription agreement and any reproduction, copying or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of The Oxford Club, LLC. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. You and your family are entitled to review and act on any recommendations made in this document. The Oxford Club expressly forbids its writers from having a financial interest in any security they recommend to their readers. All Oxford Club employees and agents must wait 24 hours after an Internet publication and 72 hours after a publication is mailed before taking action on an initial recommendation. The Oxford Club does not act as an investment advisor, or advocate the purchase or sale of any security or investment. Investments recommended in this newsletter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Basic subscriptions costs for The Oxford Income Letter are $129. Subscription includes membership to The Oxford Club. The newsletter is published monthly by The Oxford Club, LLC, 105 W. Monument Street, Baltimore, MD 21201. Non-U.S. dues are higher and vary from country to country. Send address changes to The Oxford Income Letter, 105 W. Monument Street, Baltimore, MD 21201. For questions regarding the status of your membership call Member Services at 443.353.4056 or fax to 410.246.2297. Our website is: www.oxfordclub.com.