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As you know, it's Newsletter Advisors Wednesday.  This week we sit down with Carla Pasternak of High-Yield Investing and High-Yield International. Carla's a long time expert on dividend and income investing and today brings us keen insights on opportunities for short-term gains and longer term holdings. 

Ian: Are the markets safe now for dividend investors? 

Carla: Things appear to be calming, but some question marks remain. Standard & Poor's recently said that they expect 2009 to be an awful year for dividends. That said, there are still good values out there, especially in exchange traded debt and telecoms with predictable cash flow.  

Ian: What do you do to distinguish between safe and unsafe dividends? 

Carla: For funds, I look at the sources of the distributions. I examine the balance sheet, the tax records, the annual report, and notes to the financial statements. I want to see how much of the distribution comes from investment income and earnings, and what comes from currency gains -- which are less predictable. I also want to know how much comes from capital gains, like selling stock or options. Most importantly, I look to see how much comes from return of capital, which is the lowest-quality distribution because it grinds down the asset value. A couple that have pretty high-quality dividends right now are the PowerShares Emerging Markets Sovereign Debt (NYSE:PCY) ETF and the Templeton Global Income Fund (NYSE:GIM).

Ian: Where are you seeing the best values right now? 

Carla: I recently found some great values in exchange traded bonds that are either on the low end of investment grade or the high end of sub-investment grade. I featured AAG Holdings' 7.5% Senior Debenture (NYSE: GFW) in January when it was trading at $12.89. Today it's above $18, and it still pays a 10% yield. I also like exchange traded bonds from US Cellular (NYSE: UZV), Deutsche Bank (NYSE: DKT), and General Electric (NYSE: GEA).  

Ian: What do you think about Canadian trusts? Many are offering great yields right now.

Carla: They are, but you have to be careful. I know Canadian trusts very, very well. I live in Calgary -- its income-trust land right here. I've written their annual reports and know the CEOs well. Many Canadian trusts are gas plays, and gas prices aren't in good shape right now. You need to look at the oil/gas production mix and the reserves mix.  

Beyond that, you need to look at the quality of the oil--pure light crude is where you get the best money. You also need to look at the trust's hedging--how far out it is and what rate they've hedged at. Some trusts are smarter than others. Some hedged oil prices at $60, and some hedged it at $120. You have to look at all these issues, and you can't just go for the highest yield.

I've never just gone for yield. I look at the stability and the security of the yield. I end up in some remote corners of the income universe that most people, including institutions, don't bother with. For example, exchange traded bonds provide unusually high yields, but they don't have enough units outstanding to be liquid enough for a large institutional investor to move in and out of without affecting the price. 

Ian: Are there any strategies you use that can help investors gauge dividend safety?
Carla: Most of the safeguards involve taking a good, hard look at the financial statements and usually the notes to the financial statements as well. For example, I look at the balance sheet to see what kind of long-term obligations the company has and what kind of cash is available to pay these off. I also take a good look at the notes to the financial statements to find out when a company's debt is coming due. Then I can assess if it has ample cash flow and cash reserves to cover this debt plus continue paying out shareholders at the current rate.
I don't expect my readers to do that--that's what I'm here for. Before I present any investment idea, I scour through the financial statements to ferret out the details of the company's financial performance and liquidity. I then use my findings to size up how safe the dividend appears to be in the months and years ahead. 

(Put Carla's extensive research to work for you -- take a look at High-Yield Investing today)

Ian: What's your No. 1 focus when picking income investments?
Carla: I would have to say risk/reward is my main measuring stick. Generally, the more risk you are willing to take, the more potential reward you can expect.
Investors have to decide for themselves how much risk they can tolerate in return for the potential reward. Readers of High-Yield Investing are spread across the risk tolerance spectrum. That's why I like to present a range of opportunities, though I myself tend to be somewhat conservative. 
In fact, I'll reveal a little secret of how I write High-Yield Investing. In my spare time, I also teach writing. I always tell my students to imagine their audience sitting in front of them as they write. Well, one member of my audience is my mother. In fact, she's right in the first row. She lives off the income from her investments, which I manage. I ask myself, "Is this security suitable for my mother?" If so, I rate it as a conservative or reasonably safe investment idea. If not, I consider it suitable for more aggressive investors.
I conduct a lot of research to help me gauge the risk/reward potential of a security. The Securities and Exchange Commission's free website (http://www.sec.gov) is one of our favorite hunting grounds. It allows me to dig through current and historical financial statements and pore through the notes to the statements to get a good reading on the company's performance and liquidity.
Even so, the financial statements just show a point in time. That picture can change rapidly as management responds business conditions. The bottom line is that every investment carries some risk, even Treasury bills, money-market funds or even a bank or credit union CD. Investors must weigh how much risk they are willing to stomach in return for the potential reward. I see my job as helping them to see clearly the risk and the reward potential. In the months ahead, I look forward to providing my fellow investors with income strategies that offer exceptional value in a market that has become deeply oversold.

Ian: You recently took over StreetAuthority's High-Yield International. Are there any international regions or sectors that you like right now? 

Carla: I'm looking at Europe, especially European Banks, because no one likes them. Credit Suisse (NYSE: CS), HSBC (NYSE: HBC), Banco Santander (NYSE: STD), Deutsche Bank (NYSE: DB), and National Bank of Greece (NYSE: NBG) are really turning around. With Citigroup (NYSE: C) crippled and Lehman Brothers and Bear Stearns gone, banks that have fixed their balance sheets quickly are set to gain market share. There will be a new banking elite group, and some of these European banks will be part of it. 

A big "thanks" to Carla for sharing her knowledge of high-yield investing and giving us some great investment ideas. I'll be sure to follow up some of them myself.  

You know I'm mostly a growth-story kind of guy, but I firmly believe that high-yield investments should also be an integral part of any investor's portfolio-and that's why I asked Carla to share her insights with us today. I truly hope you can take away some great investment ideas and give serious consideration to Carla's services. 

Carla's in-depth research on European banks appears in her August issue of High-Yield International. (Click here to find out more about it.) Carla also covers an Asian ETF yielding 11.9%. This fund is up +48% this year and is poised to keep going. Get the name of it in Carla's latest issue of High-Yield International. Go here to get your copy now.