Today, in my real life job, I'm trying to help a client who had an investment in an energy trust, taxed in a similarly confusing manner to a MLP. He initially invested a sum of money to 'buy an income stream'.
Let's pretend that the position was initially $20,000 that was drawn from Consumers CU. It would be worth about $200 today.
Now, you could start 'stock picking' by citing how you simply know that BP and Shell are 'reliable'. If you were a stock picker that is.. and not at all like this other company. But then one wonders, in an efficient (and its pretty efficient with algo and HFT at the least) why are you guys able to find a position that offers an anomalous amount of yield, that also happen to be in some of the best known oil and gas companies in the world?
The focus on yield and buying an income stream is misleading. In the case that I'm working on, you can see this. The price spirals down, the dividend is subsequently reduced, yield drops, people sell.. and so on.
Now, we could stock pick and say that will never happen to a big oil company because they are too big to fail. But the price of the company can drop. Which brings us to your question, how much would the dividend need to drop?
I'd like to refocus the question:
- Why would a company sustain a yield at 9%?
- Even if they could sustain it, where is the money coming from when revenues are down and the company is focused on reducing Capex?
- If they cannot sustain it, what happens to the price if dividend is reduced?
- At what point in the cycle has the yield and principal declined to the point where the income flow is underperforming a fixed income investment with guaranteed principal?
I just don't think you can focus on the yield when margins are so tight that the entire thing is being squeezed. Dividend has to drop eventually, and when it does you don't get the chance to say 'oh it's now not as good as a CU' and swap, because when you swap, your principal is likely dented also.