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Why I Sold This Trust and Replaced It

Thursday - 2/7/2013, 11:41am  ET

What are your main objectives in this crazy investing game? Mine are growth and income. I want to hold stocks for the long term and take advantage of low dividend and long term capital gains tax rates. Yeah, I am pretty bullish on basic materials right now, because my “Spidey Senses” are telling me that the recovery has started in earnest. So, my big thing right now is keeping my eye out for stocks paying great dividends, but the trick is to find ones that hold their value and continue to pay regular dividends. If I find growth stocks on the rise that have high qualified dividends, I am in heaven. Okay, I worry about investing like some kind of serious gambler.

 We all want to believe we make dispassionate decisions for buying stocks, but we all know it’s almost impossible to keep greed, fear, panic, superstition and the love of the game out of the process. After all, no one knows the future, and in the end it is a semi-mystical thing we are doing. Sometimes after doing the research, I am left asking “is it the right move to buy this stock?” Whether we care to admit it or not, deciding yes or no comes down to a gut reaction. Some people do this much quicker than others. Most of the time we have already decided we want to buy a stock based on our gut, the research just settles our brain. Often once we have committed to a stock the hardest decision we will have to make (ego), is to recognize that we made a mistake and get out. Again, do we listen to our gut reaction?

 I woke up last Thursday to a very informative Seeking Alpha article about BP Prudhoe Bay Royalty Trust as a derivative in disguise. I hate to admit it, but fear and panic had me in their grips just then. BPT looks so beautiful on so many levels. It has a yield over 11% and a P/E of just a little over 9. I had just received my $2.31 per share payout from BPT and in addition was up about $4.30 per share on the investment since my mid-December buy. I had been watching BPT forever and finally pulled the trigger, but I didn't feel good about it. The article had been very detailed and gave a fair market value of $60 to the stock. Investors who got in a decade ago have received enough dividends to pay for the stock, but for us recent buyers the payouts may not reach this level. My gut told me sell, and when I told my wife about the article she said sell (women have this sixth sense). I did and it was gone in about sixty seconds. I thought (with relief), now I get to do research and find another stock to buy for a replacement. I’ll take my time and get a winner.

I went to work, took care of some calls and emails, talked to staff briefly and dug in for some research. The first thing I did was to take a look at MSN's Stockscouter. I looked at stocks rated 10 and then screened for dividend yield. The stock that jumped out at me was National Resource Partners . I looked at the quote; it was sitting at $22.24 paying a dividend of $2.20 per year about 10%. It was sitting right in the middle of its 52 week high and low ($28.22 and $16.90). Not too hot and not too cold. P/E a little high at 17 forward P/E is 11.5. Earnings were less than the dividend. I then read that assets consumed are written off to lower tax, making earning look lower than the cash available to make payouts to investors. My gut told me this was it.

But then I read the company profile and I was disgusted, but excited. They own mineral rights to coal bearing lands, cringe… but wait, they are diversifying and they got my attention with the word “trona.” I had been doing research on Rio Tinto the week before and found they had bought US Borax in the Mojave with the trona works in Owens Valley. What the hell is trona? Turns out it‘s soda ash, and it’s a key ingredient in the glass making and paper making processes, and baking soda is also made from it. This stuff is an important industrial commodity, and it’s in short supply.

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