TAKING STOCK: A managed risk

Dear Mr. Berko:

This may sound undoable, but I would like to be an aggressive investor with five or six speculative stocks that have good long-term potential (not more than three years) and get a dividend income of 5 to 6 percent. I have done some research and found a number of interesting stocks. However, I keep coming up with several roadblocks. All of the stocks I've looked at are too speculative and make me nervous, and very few pay dividends. Last year, you recommended PDL BioPharma Inc. at $7.50. It paid 60 cents, or almost 8 percent. It hasn't gone up much (it's $8 now), so do you think it's still a good stock to buy? I will be using $30,000 from a certificate of deposit that earns 1 percent. I know I could lose money on what I will buy, but my wife and I discussed this, and we want to take the risk if there is a decent possibility of getting a better return. What do you think?

FP, Portland, Ore.

Dear FP:

You and many other good folks who have begun taking market risks you never dreamed you would take will be in for a rude awakening if the Dow Jones industrial average begins to teeter and tank. And a growing number of market watchers peering into the financial horizon believe that Federal Reserve Chairman Ben "Santa Claus" Bernanke is hinting that the teetering and tanking may be happening sooner than later. Be very careful out there.

PDL BioPharma (PDLI-$8) is a biotech company with a patented process to create human antibodies and has licensing and royalty agreements with various pharmaceutical companies. This year, revenues may increase nicely to $425 million, and earnings could increase to $1.61. Next year, revenues and earnings are expected to come in at $490 million and $1.92, respectively. And there's even a rumor that the dividend will be increased later this year. However, I think PDLI is a reasonably speculative buy.

There are many issues like PDLI. However, their risk and volatility patterns are off the charts. But I think there's a better way to gamble that $30,000 with less risk.

Rather than purchase a half-dozen speculative issues - keeping an eagle eye on their daily prices - consider purchasing $15,000 of the Fidelity Select Biotechnology Portfolio (FBIOX-$144.25), a no-load, five-star fund with a low 0.83 percent expense ratio. FBIOX invests in companies that are engaged in the research, development, manufacturing and distribution of and that benefit significantly from the scientific and technological advances in biotechnology.

FBIOX's $3.4 billion portfolio owns issues such as Onyx Pharmaceuticals, Medivation, Alexion Pharmaceuticals and others that I never have heard about. But proof of its success is in the pudding: Its one-, three-, five- and 10-year returns are 31.7 percent, 23.9 percent, 15.5 percent and 12.8 percent, respectively.

Be sure that you check the box that says "reinvests capital gains and dividends." Those are good numbers, almost as good as the performance records of the investments in which many members of Congress participate.

Now, with the remaining $15,000, purchase 4,760 shares of Chimera Investment Corp. (CIM-$3.21). Founded in 2007, CIM operates as a real estate investment trust, distributing at least 90 percent of its income to shareholders so that most of that income isn't subject to federal taxation.

CIM invests in residential mortgage-backed securities, commercial mortgage loans, real estate-related securities, debt and equity tranches of collateralized debt obligations, and well-backed second lien loans on commercial, retail, office and industrial properties. This is a leveraged mishmash of high-yielding mortgages and related securities, and the 36-cent dividend yields 11 percent.

Normally, I wouldn't go near something like this wearing a hazmat suit. However, CIM has protected itself against rising interest rates and from the possibility its assets will decline in value if the real estate underlying its mortgages goes sour.

Yes, it's risky, but this is a managed risk. The $15,000 investment in CIM will pay $1,650 in annual dividends, a 5.8 percent yield on your total $30,000 investment. Sit on this for three years, and spend some time in the amen corner of church each Sunday just in case.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2013 Creators Syndicate Inc.

Published: Wed, May 29, 2013

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