I’m going to spend the next several points discussing how I construct an income centric portfolio to support a higher than 4% withdrawal rate in early retirement.
music selection: “Runaround” — Van Halen
I went FIRE on 5OCT2012 with a withdrawal rate just a hair over 9%. That was a little steep for comfort but it was during the middle stages of a roaring bull market and I was comfortable applying some leverage. Today, my withdrawal rate is a hair over 6% (and falling!). The core of the portfolio is built around high yield issues. My portfolio wide yield on cost is 8.44% even with a few positions that have no yield.
The first leg of that approach is leveraged instruments such as MORL and BDCL. I’ve covered MORL before but BDCL is new to the raptor. That is a double levered basket of “Business Development Companies”. These operate quite a lot like REITs in that they deploy mostly short term capital long term and exploit the yield curve. These invest in start up to mid size businesses providing a mix of debt and equity financing. Yields are fat, 90% of cash flow must be distributed to shareholders to maintain tax advantages, and BDCL carries leverage. It currently yields almost 18%.
The second leg is the use of MLPs. These are “Master Limited Partnerships.” Like the REITs and BDC’s, these are tax exempt so long as they distribute 90% of cash flow to shareholders. They operate in physical resource infrastructure so as pipelines and timber. I currently like Hi Crush Partners (HCLP) in this space quite a lot. Current yield is 8.5%. The company has a profitable sand business providing sand to electronics manufacturers and glass companies. There is also a profitable and growing sideline in Frak sand for shale drilling. Any return to 100 dollar oil will provide a nice boost to yield.
I also have some shipping companies purchased when the time was right (not now!), the best of which is CPLP which has a yield on cost of 14.15%. I have 22% capital gains there and am pondering an exit (buy low, sell high!) The rest is made up of some oil and gas companies that are in some cases struggling a little at the moment.
I’ll be back on Wednesday to talk about fixed and semi fixed income which provides reasonable yield while reducing volatility.
Devour your prey raptors!