Cabot Investors Conference 2014www.cabot.net Prospecting for High Dividend Yields Chloe Lutts Jensen Chief Analyst, Cabot Dividend Investor

Cabot Investors Conference 2014www.cabot.net S&P Yield vs. 10-yr Bond Yield

Cabot Investors Conference 2014www.cabot.net 10-yr Treasury Yields YTD

Cabot Investors Conference 2014www.cabot.net Average Yields *financial preferreds

Cabot Investors Conference 2014www.cabot.net REITs (Real Estate Investment Trusts) MLPs (Master Limited Partnerships) CEFs (Closed-End Funds)

Cabot Investors Conference 2014www.cabot.net Average Yields *financial preferreds

Cabot Investors Conference 2014www.cabot.net Real Estate Investment Trusts Equity REITs own property, Mortgage REITs own mortgages Exempt from taxation at trust level Must pay 90% of income to investors

Cabot Investors Conference 2014www.cabot.net Real Estate Investment Trusts

Cabot Investors Conference 2014www.cabot.net Real Estate Investment Trusts Tax Consequences –Distributions are mostly Ordinary Income (70% on average) –May also include Qualified Dividend Income, Long-Term Capital Gains and Return of Capital

Cabot Investors Conference 2014www.cabot.net Analyzing REITs Funds from Operations (FFO) Distribution History –Long and Stable History, No Cuts –Dividend Growth Rate Valuation –Price/FFO –Net Asset Value Debt

Cabot Investors Conference 2014www.cabot.net Realty Income Corp. (O) 5% Yield Dividends Since 1994 Consecutive Increases: 16 years Dividend 10 year CAGR: 6% FFO Growing and Covers Dividend: Debt/Equity = 0.87 (2013) –10-yr average is 1.05/Industry Average is 1.8

Cabot Investors Conference 2014www.cabot.net Average Yields *financial preferreds

Cabot Investors Conference 2014www.cabot.net Master Limited Partnerships Publicly-Traded Limited Partnership Pass-Through Entity Free From Taxation at the Corporate Level Must be in Natural Resources, Commodities or Real Estate

Cabot Investors Conference 2014www.cabot.net Analyzing MLPs Distributable Cash Flow (DCF) DCF = EBITDA - interest - capital spending Only subtracts cash costs More informative than EPS Distribution Coverage Ratio Coverage Ratio = DCF / distribution Will be close to 100%

Cabot Investors Conference 2014www.cabot.net Plains All American Pipeline (PAA) Yield: 4.5% Enbridge Energy Partners (EEP) Yield: 6.6% 2013 Q32013 Q42014 Q12014 Q2 DCF$330.00$429.00$411.00$ Dist.$333.00$328.43$328.00$ DCR1.00 x1.31 x1.25 x1.5 x 2013 Q32013 Q42014 Q12014 Q2 DCF$132.30$145.50$190.30$ Dist.$206.80$213.00$214.50$ DCR0.64 x0.68 x0.89 x0.87 x

Cabot Investors Conference 2014www.cabot.net Master Limited Partnerships Stable and Rising Distributable Cash Flow Coverage Ratio Above 1 x Distribution Growth Minimal Commodity Price Exposure Fee-Based Income Manageable Incentive Distribution Rights

Cabot Investors Conference 2014www.cabot.net Master Limited Partnerships Taxation 10% - 20% of Distribution = Income 80% - 90% = Return of Capital Taxes on RoC are Deferred Income Tax Due At Sale Cost Basis is “reset” if the Original Unitholder Dies Can Incur UBTI in an IRA

Cabot Investors Conference 2014www.cabot.net Delek Logistics Partners (DKL) 5.2% yield Traditional Mid-stream MLP Distribution up 27% since Nov IPO –Targeting 15% annual distribution growth Currently in third tier of IDR schedule –Currently 75/25 LP/GP, switches to 50/50 at $ Q32013 Q42014 Q12014 Q2 DCF$12.9 mil$13.3 mil$15.9 mil$24.0 mil Dist.$9.9 mil10.3 mil10.2 mil10.5 mil DCR1.30 x 1.52 x2.29 x

Cabot Investors Conference 2014www.cabot.net

Cabot Investors Conference 2014www.cabot.net Closed End Funds (CEFs) Limited Number of Shares Often Income-Focused Trade at a Market-Determined Price Can Have a Discount or Premium –Price may Not Always Return to NAV –NAV Can Change –Compare to Historic Discount or Premium

Cabot Investors Conference 2014www.cabot.net Analyzing CEFs Where do Distributions Come from? –Is the Source Reliable or Variable? –How are they Classified? –Managed Distributions Does it use Leverage? What’s the Discount or Premium?

Cabot Investors Conference 2014www.cabot.net AllianzGI NFJ Dividend, Interest & Premium Strategy Fund (NFJ) 78% Equity, 20% Convertible Bonds Covered Calls on 90% of equities 10% yield 2.2% discount, 3-yr average discount of 4.6% Most consistent distributions in the category In 2013 distributions were 68% RoC

Cabot Investors Conference 2014www.cabot.net Special Opportunities Fund (SPE) Invests in other Discounted CEFs Leverage is 23% of Assets Currently Trading at a 7.5% Discount Distributions are Mostly Income and Long-Term Capital Gains 1.8% Expense Ratio

Cabot Investors Conference 2014www.cabot.net Resources MLPdata.com CEFconnect.com