Investing In Biotech For Yield
If the announcement by the Federal Reserve to raise interest rates was not enough to get your heart racing again about collecting guaranteed income from a CD, consider investing in a biotech stock that generates income… and lots of it.
Most investors look to biotech stocks for speculative and spectacular gains even if they are few and far between. If an investor has enough time, patience, and discipline to own a collection of these stocks, the results can be thrilling. But it could take a few years before the investor enjoys those outsized results. In the meantime, the money deployed into those stocks is not producing any income. Until any of those stocks produces a gain, they are truly “dead equity”. However, there is one stock that allows you to be a biotech investor and receive income, a double digit yield, at the same time.
The world of high yield, high-income stocks is littered with the same stories. The share prices usually declines over time or the dividend usually decreases every quarter until the investor is left with near worthless shares and not nearly enough income to offset the loss of principal. In many cases, it is both scenarios. These stocks are usually highly leveraged REITs or MLPs and by law must distribute 90% of their income to shareholders. This is good because the company avoids paying tax on that income and the income is never taxed at all if it is in a Roth IRA long enough. But it is hard to get excited about holding something that produces less and less income while the principal evaporates every year.
What if you were to turn these drawbacks into advantages and create an ever increasing income stream while maintaining the original value? You can do this with a stock like PDL Biopharma, Inc. $PDLI. Rather than finding the cure for cancer or Alzheimer’s, PDLI buys royalty and other income streams from other biotech companies and even universities. PDLI is not a pass-through entity but it does distribute a healthy dividend of over 16%. Since it does not have to give 90% of its income to shareholders, it can make investments into other income streams without having to continually raise money like a leveraged REIT.
Now to make this stock a source of ever increasing income will require a little effort. You could just collect the dividends every quarter but that will not give you any protection should the share price or dividend drop. Or, you could accept a lower payout like a 3% annual yield and reinvest the remainder into additional shares. On a $10,000 initial investment, you would receive $1,600 per year in dividends. Keep $300 for yourself (far better than most one-year CDs) and reinvest $1,300 into more PDLI shares. This accomplishes many things at once and gives you the best chance to win. For one, your income could increase by 13% if the dividend per share stays the same or is raised. Two, the value of the shares will increase if the share price increases. And three, the share price or dividend would have to fall by over 13% before you suffer a loss of principal or reduction in income. Each year you could have more income, more shares, or a higher principal amount and maybe all three. The position becomes stronger over time. Can you image the results if this were repeated every year for four, five, or more years in a row?
PDLI has earned some well-deserved negativity lately because some of their royalty streams will be drying up in 2016. This probably explains the 50% drop in the share price over the last year. But it cannot be all doom and gloom since there were a number of insider purchases early in December. A position in PDLI is not meant to be a core holding or the sole source of retirement income. It is an excellent candidate if you need something that produces a lot of income now and even more in the future.
Regards,
Brad Hartung
Category: Biotech Stocks
