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SCHD Is A Great Diversification Option For Dividend Growth Investors In Utilities

Summary SCHD is a great ETF with almost no utilities. Dividend growth investors are prone to liking utilities for reliable dividend growth. The holdings of SCHD offer great diversification across the other sectors at a very reasonable cost. The Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) offers investors a very interesting combination. As an ETF, it posts a fairly reasonable dividend yield of 2.88%; however, many dividend growth investors may turn their nose up at the weaker yield as their own portfolios are likely to produce a higher dividend yield. It is understandable that investors buying into a dividend ETF would have a strong focus on generating enough dividend yield to support their retirement. A Supplemental Holding While it is understandable that a 2.88% yield may be insufficient for investors that want to see their living expenses covered by dividends, it is still common for investors to need significant diversification in their holdings. When an investor builds a portfolio on the basis of high dividend yields, they may introduce a large amount of idiosyncratic risk because they will heavily overweight certain sectors. One common area for the dividend growth investors to focus on is the use of utility stocks. Using utility stocks as a major source of dividends is a fine strategy. Utilities can often benefit from having a regulated monopoly that protects their margins in tough times. If we look at risk factors from the perspective of the human in their entirety, we can say that higher utility prices are a natural risk for people. Owning the supplier of those utilities is a nice way to hedge against the risk of paying higher prices. When using SCHD to supplement a portfolio, the holdings of SCHD are a nice complement to what the investor might naturally pick. While the investor may focus on covering utility stocks, SCHD almost entirely excludes them. That means for the investor that is already holding utility stocks individually or holding a utility ETF, they will have significantly less duplication of holdings because SCHD is delivering the other dividend companies. The sector exposure is shown below: (click to enlarge) On The Other Hand While I love the way the portfolio is constructed and think it is a great complement to a portfolio that is heavy on utilities, investors should still be aware that if they are also picking stocks outside of the utility sector there could easily be some overlap. The top 10 individual holdings are demonstrated below: (click to enlarge) When you look at the top 10 companies, you’ll see many that may already be in your portfolio. That makes it a question of how much research you want to do into the individual large dividend payers. By focusing on the utilities an investor can effectively grab diversification through SCHD with an expense ratio of only .07%. For the cost, this is fairly solid diversification as long as the investor is not already holding several of the companies in their portfolio. A Third Option For investors that really want to make their portfolio entirely from scratch, SCHD has one last use. The holdings list creates a decent starting list for companies to research. One of the things that I like about the list is that they prominently feature gas companies in Exxon Mobil (NYSE: XOM ) and Chevron Corp. (NYSE: CVX ). While gas prices have become very low, they still remain a substantial risk factor for retirees. When gas prices are increasing, it means the investor will have to pay more to fill up their own car and the other companies that are transporting physical goods will be dealing with higher costs of transporting their inventory. Those factors make the oil companies natural holdings for an investor that wants to diversify against their own risk factors. Conclusion The Schwab U.S. Dividend Equity ETF is a great ETF for buying dividend yield. If an investor really wants to focus on dividend yield, they should be looking to use SCHD as a supplemental holding to diversify risk with a portfolio that holds more equity REITs and utilities. While I cover the mREITs frequently, I wouldn’t suggest investors buy into the sector until they know precisely what they are doing. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SCHD over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Cleco Merger Arbitrage Offers Low-Risk 13% Annualized Return

Summary Investors can earn a low-risk 13% annualized return by purchasing the stock at today’s price and waiting for the transaction to close. Mr. Market doesn’t appear to be properly accounting for the merger agreement, which calls for CNL to continue to pay its sizable dividend while shareholders wait for closing. CNL shareholders have already voted on and approved the transaction by a wide margin. Anyone who follows our work knows our typical modus operandi focuses on finding undervalued contrarian investments that offer asymmetric risk/reward opportunities. While we firmly plan to “stick to our knitting,” we occasionally look to supplement our returns with low-risk, high-return (relatively speaking) merger arbitrage opportunities. As Warren Buffett once said: “Give a man a fish, and you feed him for a day. Teach him how to arbitrage and you feed him forever.” We see a compelling risk/reward profile for a merger arbitrage trade of Cleco Inc. (NYSE: CNL ). We believe an investor can earn a low-risk 13% annualized return by purchasing the stock at today’s price and waiting for the transaction to close. Our analysis suggests there is a low probability of the deal not consummating. This outsized return opportunity exists because Mr. Market does not appear to be properly accounting for the merger agreement, which calls for CNL to continue to pay its sizable dividend while shareholders wait for the deal to close. Company overview Cleco Corporation is a regulated electric utility company headquartered in Pineville, Louisiana. CNL is engaged principally in the generation, transmission, distribution, and sale of electricity, primarily in Louisiana. Cleco Power owns 11 generating units with a total nameplate capacity of 3,340 megawatts. Cleco Power serves approximately 286,000 customers in Louisiana through its retail business, and it supplies wholesale power in Louisiana and Mississippi. The Deal On October 20, 2014, CNL announced that it had entered into an agreement to be acquired by an investor group led by Macquarie Infrastructure and Real Assets, British Columbia Investment Management Corporation, and John Hancock Financial. Under the terms of the definitive merger agreement , the investor group will acquire all outstanding shares of CNL for $55.37 per share in cash. The merger agreement also calls for CNL shareholders to continue to receive the sizeable dividend payments until the deal closes. CNL pays a quarterly dividend of $0.40 per share, which equates to a 3.00% yield based on today’s closing price. 10/20/2014 merger press release: “Prior to closing, the transaction is expected to have no impact on Cleco’s dividend. Cleco shareholders will continue to receive dividends at an annualized rate of $1.60 per share until closing.” The Payout We believe an investor can earn a 13% annualized return by purchasing the stock at today’s price and waiting for the transaction to close. With the stock currently trading at $53.70, the relatively large deal spread combined with an attractive dividend payout presents a compelling risk/reward opportunity for a merger arbitrage trade. This outsized return opportunity exists because Mr. Market does not appear to be properly accounting for the merger agreement, which calls for CNL to continue to pay its sizable dividend while shareholders wait for the deal to close. The table below shows that CNL will pay a dividend in August and November if the transaction has not closed by then. The column titled “Total Profit” shows the cumulative profit that will accrue to an investor under the different closing dates. Our estimated annualized return is based on our expectation that the transaction will close by the end of August 2015. We think this is a reasonable estimate based on our research (details below). Keep in mind that the longer the deal takes to close, the lower the annualized return will be because of the time component of the calculation. Low-risk Transaction We believe the CNL transaction has a high probability of closing for the following reasons: – Modest deal size, all cash deal: This transaction is of average size and it calls for the Investor Group to pay CNL shareholders in cash. Given today’s accommodative lending environment, we believe the Investor Group will easily be able to raise the necessary funds. – Shareholder support: CNL shareholders have already voted on and approved the transaction by a wide margin. The merger proposal passed with more than 94% of the votes cast. – Termination fee: The merger agreement calls for the Investor Group to pay CNL $180m if they fail to close the transaction. – Fair valuation for the deal: Regulated utility assets are attractive in a world with extremely low interest rates. Furthermore, M&A activity has led to regulated utility assets becoming increasingly scarce. We analyzed the CNL transaction versus recent comparable deals and found the valuation multiples to be consistent with what investors have been willing to pay for similar assets. (click to enlarge) Source: FactSet Should the deal fail to close, we believe CNL could be sold to a different party for a similar price. This view is based on the recent history of CNL and how the current merger agreement came about. In June 2014, CNL received an unsolicited bid from the Canadian investment group, Borealis Infrastructure. In response, CNL retained Goldman Sachs to run a formal sale process. At the time, press reports said the company was seeking a deal in the range of $61-62 per share. Our research indicates that four different parties made serious overtures for CNL: Macquarie Group, Iberdrola, Borealis Infrastructure, and CenterPoint Energy. Regulatory Approvals Needed CNL still needs to receive the following regulatory approvals before the transaction can close: 1) Hart-Scott-Rodino Antitrust approval: We view this approval as a formality. The Investor Group acquiring CNL is a financial buyer and has no other competing businesses in the operating footprint. The application has already been filed. 2) Federal Communications Commission approval: We think approval of license transfers is a formality. CNL expects to file the application this quarter. 3) Foreign Investment in the United States approval: We think this approval is a formality. The financial buyers are from Canada and Australia. CNL expects to file the application this quarter. 4) Federal Energy Regulatory Commission approval: We expect a timely approval by FERC given the Commission’s stance on similar M&A transactions over the years. The application has already been filed. 5) Louisiana Public Services Commission approval: We expect this approval to take the longest but we believe the LPSC will grant an approval given the accommodative concessions made by the acquiring Investor Group. These concessions include promises to maintain employment levels and employee compensation, a commitment to appoint individuals from Louisiana to the board of directors, and a vow to remain operated by local management and headquartered in Pineville, Louisiana. The merger application was filed with the LPSC in February with a status hearing last month. We analyzed past utility deals that have occurred in Louisiana and found that historically the LPSC has approved these types of transactions (despite the occasional saber rattling). Perryville Energy Partners LLC, Dolet Hills Power Plant Operations, and Cajun Electric Power Cooperative Inc. are all examples of utility transactions that have been allowed to proceed. Utility Transactions Historically Take ~250 Days to Close We analyzed the group of comparable utility transactions cited above and found that average “days to close” was 258 days. It has been 204 days since the definitive agreement was announced. If the transaction closes at the end of August, like we expect, it will be 314 days, which seems reasonable compared to industry history. (click to enlarge) Source: FactSet Conclusion We see a compelling risk/reward profile for a merger arbitrage trade of CNL. We believe an investor can earn a low-risk 13% annualized return by purchasing the stock at today’s price and waiting for the transaction to close. Our analysis suggests there is a low probability of the deal not consummating. This outsized return opportunity exists because Mr. Market does not appear to be properly accounting for the merger agreement, which calls for CNL to continue to pay its sizable dividend while shareholders wait for the deal to close. Should this transaction fail to close, we don’t think investors would suffer a permanent impairment of capital as CNL could likely sell itself for a similar price to a different party. Disclosure: The author is long CNL. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The author and/or employer may buy or sell shares in any company mentioned, at any time, without notice. The information contained herein is believed to be accurate as of the posting date. Readers should conduct their own verification of any information or analyses contained in this report. The author undertakes no obligation to update this report based on any future events or information. This article represents best efforts to convey a fact-based opinion. Our conclusions may be incorrect. This is not a recommendation to buy or sell any securities. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Author.

5 Impressive Mid Cap Growth Mutual Funds To Consider

When capital appreciation over the long term takes precedence over dividend payouts, growth funds become a natural choice for investors. These funds focus on realizing an appreciable amount of capital growth by investing in stocks of firms whose value is projected to rise over the long term. However, a relatively higher tolerance to risk and the willingness to park funds for the longer term are necessary when investing in these securities. This is because they may experience relatively more fluctuations than other fund classes. Meanwhile, mid-cap funds are ideal investment options for investors looking for high return potential that comes with lower risk than small-cap funds. Mid-cap funds are not very susceptible to volatility in broader markets, making it an ideal bet given that the macroeconomic conditions have generally offered a roller-coaster ride in recent years. Below we will share with you 5 potential mid-cap growth mutual funds . Each has earned either a Zacks #1 Rank (Strong Buy) or a Zacks #2 Rank (Buy) as we expect these mutual funds to outperform their peers in the future. T. Rowe Price Diversified Mid Cap Growth (MUTF: PRDMX ) maintains a diversified portfolio by investing a lion’s share of its assets in mid-cap companies that are believed to have above-average earnings growth potential. PRDMX focuses on acquiring common stocks of companies having market capitalizations similar to those included in the S&P MidCap 400 Index or the Russell Midcap Growth Index. T. Rowe Price Diversified Mid Cap Growth fund has a three-year annualized return of 17.9%. PRDMX has an expense ratio of 0.89% as compared to category average of 1.31%. Buffalo Mid Cap (MUTF: BUFMX ) seeks capital appreciation over the long run. BUFMX invests a major portion of its assets in domestic companies having market capitalizations identical to those listed in the Russell Midcap Growth Index. BUFMX primarily invests in equity securities including common stocks, preferred stocks and warrants. Buffalo Mid Cap fund has a three-year annualized return of 14.7%. As of December 2014, BUFMX held 53 issues with 3.16% of its assets invested in CME Group Inc Class A. Thrivent Mid Cap Growth A (MUTF: LBMGX ) invests a large chunk of its assets in mid cap firms having market capitalizations within the range of market cap of issuers in popular indices including the Russell Midcap Growth Index or the S&P MidCap 400/Citigroup Growth Index. LBMGX seeks to provide long-term capital appreciation by generally investing in common stocks of companies. Thrivent Mid Cap Growth A fund has a three-year annualized return of more than 14.7%. Andrea J. Thomas is the fund manager and has managed this fund since 1997. Brown Capital Mgmt Mid-Cap Investor (MUTF: BCMSX ) seeks capital growth over the long term. BCMSX invests a majority of its assets in mid-cap companies. BCMSX defines a company as a mid-cap one if it has market capitalization similar to those included in the Russell Midcap Growth Index. BCMSX is expected to maintain a Mid-Cap Fund’s portfolio with a maximum of 5% of its assets in cash. Brown Capital Mgmt Mid-Cap Investor fund has a three-year annualized return of more than 13.4%. BCMSX has an expense ratio of 1.15% as compared to category average of 1.31%. Westcore MIDCO Growth (MUTF: WTMGX ) invests heavily in mid-cap firms that are believed to have an impressive growth potential for earnings and cash flows. WTMGX considers firms having market capitalizations identical to those listed in the Russell Midcap Growth Index. Brown Capital Mgmt Mid-Cap Investor fund has a three-year annualized return of more than 16.6%. As of March 2015, WTMGX held 76 issues with 2.30% of its assets invested in Mead Johnson Nutrition Co. Original Post