In this episode of the Left Brain Thinking podcast, host Chuck Jaffe interviews Brian Dress, Director of Research at Left Brain Investment Research, about the evolving high‑yield market. They note that traditional high‑yield bond yields have compressed (the HYG index now under 5%), creating an unfavorable risk‑reward profile. To maintain attractive income opportunities, Left Brain is broadening its "Chosen List" beyond high‑yield bonds to include income‑producing equities such as REITs, business development companies, and other dividend‑paying stocks. The conversation spotlights Blackstone Minerals (ticker BSM), an asset‑light royalty and mineral‑rights company with a dividend yield above 7%, minimal debt, and strong free‑cash‑flow coverage, illustrating the new income‑security focus. Dress explains how the firm evaluates dividend safety—examining capital allocation, debt reduction, free‑cash‑flow multiples, and distribution trends—to ensure reliable payouts. The episode also promotes a 25 % discount subscription code (THINKING25) for listeners and includes standard disclaimer language that the discussion is not personalized investment advice.
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Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. You can learn more about the firm at leftbrainir.com and follow them on Twitter @leftbrainir. Today, well, we're talking about the changing landscape for high-yield investments. and we're doing that with Brian Dress, Director of Research at Left Brain Investment Research. Brian, great to chat with you again.
Great to be here again with you, Chuck.
We are looking at a very interesting time for high yield investments. There's a significant amount of demand. There's a diminishing amount of supply. That's basically a truism for the industry, but apparently it affects you guys at LeftBrain because, well, high yield is an important component of what you do. And so now you're broadening your definition and actually making changes to your chosen list, aren't you?
Yeah, that's right, Chuck. Last time I was on the show a few weeks ago, I talked to you about Occidental Petroleum bonds, Oxy bonds. And of course, we're always looking for high yield bond opportunities, like you say at the top of the show. But as we look for bond selections, even at the lowest credit quality, we're seeing yields that are contracting precipitously. What we see now is it's a pretty unfavorable risk-reward situation for bond investors. The high yield index, HYG, is yielding less than 5% right now. That tells you you're not really getting a lot of reward for the risk you have to take for some of the lower quality credit. And so as we continue to look for yield, we've decided to sort of broaden our definition. We used to give a chosen list of bonds each month to subscribers. But we've increased the definition to income securities, creating a new methodology. And so we're looking for not only bonds that make sense, but we're looking for income securities like REITs and business development companies and other companies like that, that are equities but provide sort of a bond profile of return and risk.
That's a pretty radical change. And we should highlight the fact that the chosen list, something that is central to Left Brain Investment Research, The Chosen List being updated and now being changed. And if folks want to check it out, we're going to point out that for our listeners, if they use the code THINKING25 at leftbrainir.com, they can subscribe at a 25% discount. They can do that all the way through March the 12th. So if you are interested in more of what you hear us talking about now, You can take advantage of that by using the code Thinking25. Now, obviously thinking, well, it's left brain thinking, but also your thinking when it comes to high yield is changing. So the idea here is not that we're gonna go way out the risk scale, which is what you'd have to do if you stayed with just high yield bonds. The idea is better yields without getting too crazy in risk.
Yeah, that's right. You know, and there's another risk on the horizon that we're seeing, you know, through Jarvis, we've seen a lot of our inflation indicators starting to go off and people who are familiar with investing in bonds will know when you see inflation and interest rates rising on the back of that, there is concern in owning bonds where you could see prices fall in the face of that inflation. And so we're trying to find ways to replicate that bond return. Without exposing ourselves not only to that interest rate risk but also that credit risk that we talked about at the top of the show here.
What this means is that high yield is still going to mean high yield bonds to you, but it's also going to mean some very selective and potentially creative income-producing stock, business development company kinds of picks. So give us an example. What is something that maybe we haven't heard of or thought of as an income-producing or a high-yield security that you now have on your chosen list?
Sure. So we've spent a lot of time over the years in the energy space, especially on the high-yield bond side of things. There's a company here called Blackstone Minerals, ticker BSM, that has kind of a novel business model. They own royalty rights and mineral rights for oil and gas production, but they don't have the same risk involved with your general normal energy E&P company. They don't spend the money, they don't do the outlay of capital to do the production. They allow companies who are established in production to come in and lease the rights. So it's kind of an asset-light business in the energy space, which is pretty unusual. Usually see very capital-intensive businesses in energy. So we like the business model here, especially the fact that the company has almost no debt and has a dividend yield well in excess of 7% at current prices. So we see not only kind of a low-risk situation here, but also potentially really nice reward and, and income as well.
When we talk about a stock like, in this case, BSM, Blackstone Minerals, how does this differ from a stock that you're buying that's a growth stock? Because when you're buying bonds, you're basically saying, we like the yield here, as long as we think the bond is secure, we're going to hold this bond unless something changes with the yield picture. Well, unless they cut their dividend or what have you, even the stock price goes up, the yield on what I put in now would still be 7.5% or roughly what it is at BSM today. So does that change the way you invest in stocks? A, a stock that makes your chosen list as a high income stock, are you investing in that differently from an equity investment the standard stock that has been on your chosen list?
Yeah, so for our stocks on the chosen list, you know, we're usually looking for companies that can double in 2 to 3 years. You know, we're taking a bet on the company expanding their gross margins or acceleration in revenue. When we look at a company like BSM, we definitely look at it sort of through the same lens that we do bonds. You know, when we buy bonds, we try to buy bonds that are at a discount. And so not only do you get the chance to collect the yield, You get also get a chance to have potentially have price appreciation as a bond goes from maybe 75 back to par or 100. So what we have here in a company like BSM is the opportunity to collect a yield that's near 8%. And also considering the opportunity that, you know, if oil prices stay stable or go higher, you have some optionality there too. So it kind of replicates what we do in the bond world. We're just moving over to an equity type security.
but that does mean that functionally you're not going to be disappointed if this stock doesn't have that, hey, it can double in 2 to 3 years.
Oh, absolutely. No, we're definitely playing this on the income side of things. And then, you know, you get that nice option on the other, on the other hand that you might have some price appreciation in the stock. But like you said, we're definitely focused on the income yield more than anything else here.
And that's important for folks to understand because they definitely have come to learn what Left Brain is looking for. But now when we're talking about stocks that are income producers, it's about that yield. And let's just point out one more thing. You know, you talked about company with little debt, all the things that make BSM attractive to you. For folks who are income-oriented investors, what they're most concerned with is always the safety and security of the dividend. Is there a left-brain thinking way that makes you say, yeah, we trust this dividend?
Yeah, you know, that's a great question. That really is. Getting to the heart of the matter here. There is a way that we look at it. You know, we're basically always looking at the capital allocation. That's how we judge how well is a company managed. In 2020, obviously extremely challenging environment for oil companies. And BSM is no different. Their revenues were down precipitously, but they were able to pay down about 3/4 of the debt outstanding during 2020, despite those low prices, through not only the fact that their company is quite profitable on a free cash flow basis, But they were also able to make some asset sales that helped them pay down that debt. So with the company having liquidity of around $280 million and just $120 million of debt, you know, we feel really strongly that the dividend looks good here going forward. And I would also point out they had a 60-cent distribution at the end of Q3, and at the end of Q4, we just read the conference call, they raised the distribution by 10 cents a share. Up to 70 cents. What really makes us feel that it is safe is that free cash flow was 1.8 times the amount that was paid out in the dividend. So they have a lot of room even to raise the dividend in the next few years. But we do think there's a lot of safety in sort of the distribution in this business, especially considering there's almost no capital expenditure involved. It's their business model.
It's Blackstone Minerals, BSM. It is now part of the income securities part of the chosen list. Not the equity side, even though it's a stock, but the income side of the chosen list from Left Brain Investment Research. And again, if you want to check it out and see what they're doing, you can do it right now at a 25% discount by using the code THINKING25 at leftbrainir.com. Brian Dress, thanks so much for joining me. We'll talk to you again soon.
Thanks so much, Chuck. Always a pleasure.
Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm at leftbrainir.com and on Twitter @leftbrainir. Remember to use the code Thinking 25 through March 12th at the Left Brain website to get 25% off a subscription to the firm's services. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and plan to put your Left Brain Thinking cap on every week. Until next week, stay safe, everybody.
