Peter. <Any ideas for which sector(s) is next?>
Just as important as what sectors will benefit is how do you play those sectors In other words, what kind investment strategies are clearly indicated by the economic, social and political conditions of the new era that's now unfolding?
According to Steven Roach and other perceptive observers, the conditions emerging now are different from what investors became accustomed to in the most recent bull market. Growth, when it resumes during recovery from this recession will be much slower than the bubble years. With fewer areas of growth to exploit, investors will gravitate to the realization that the income component of total investment return is important to include in their portfolio building strategy. Bonds and income producing stocks will become more of a focus than has been the case in recent years.
And, of course, the early birds who find and establish positions in the best income vehicles should also be able to reap some very low risk capital gains as those slower to recognize the new theme will follow behind and push prices.
This post yesterday was the first of several I want to write that deal with strategies and sectors that I think are going to be successful in the months and years ahead.
"Income investing today. Suggestions that work.
Capitals gains are great. Hey, I luv em as much as anybody. And there will always be opportunities for them if you
know where to look.
BUT, some of us have investment plans that include part of our capital being deployed to produce a more
predictable income - consistent with capital preservation. AKA "safe money" vs "risk capital" that we invest and/or
trade for cap gains.
Not easy to find good income opportunities in this market, is it?!
The Fed's aggressive easing has decimated MMF rates. Treasury only MMF rates have been pounded down to 2
1/2 to 2 3/4%. And the slowing economy has the Long Treasury current yield @ 5.28% last I looked.
There are LT corporate bonds with good yields, if you know how to do your own research. Here's just one of
many examples:
finance.yahoo.com
Note this bond is selling at a considerable premium to the original 9 7/8 coupon to currently yield 7.68%. So
remember, when you're studying individual bonds remember to check if and when it is callable. With a "premium
bond", you're always at risk of an early call closer to par via pre-redemption and sinking fund features built into the
original bond indenture. Each bond indenture is a little different so be careful in you due diligence. Suffice it to say,
unless you are a pro or a shrewd amateur who really knows how to research fixed income ideas, you may be well
served in the long term by consulting a competent investment professional. During my brokerage career, I did a lot
of bond work. But many young brokers accustomed to the easy life of the tech bubble, haven't developed
competence in the fixed income arena. Be careful.
So much for interest bearing instruments.
What about DIVIDENDS? They seem to be the forgotten component of investing.
Not only by investors spoiled by a mega boom, bubble, parabolic tech mania market. Heck if I showed up on most
Web threads even after the Mar 2000 tech peak taking about dividends, I'd have been run outta town on a rail<g>
It was easy money time. Who needed to be conservative. That was passe'.
Nor were issuing corporations interested. Dividend growth languished as corporate cash flow was instead directed
into years of ambitious stock buy back plans.
Without digging up specific research papers, suffice it to say that numerous PB (pre-Bubble) studies of overall
investment returns covering many decades of market data consistently show dividends to be a large %age
component of the total return investors receive on their capital.
If top economists like Steven Roach and others are on the right track about the unfolding era we face, both
investors and corporations are (or will soon be) recognizing that new strategies and tactics are required in a LT
slower growth investment environment.
Here's a prediction for those of you who enjoy them. I promise you<g> that in the months ahead, WS Investment
Strategy and Market Analysis Departments as well as financial publications like Barrons, Institutional Investor,
Forbes and IBD will be falling all over themselves echoing this theme:
THE REDISCOVERY OF DIVIDENDS
AKA, "Who ya gonna call" now the parabolic profits party is O-V-E-R.<g>
The income produced by dividends will slowly resume it's traditional role as an an important component of the total
return investors earn over the long term in their stock portfolios.
But with current dividend yields on common stocks still new historic lows across the market, a little creative
thinking is needed to achieve our objective for the safe money we want to earn income on.
IMHO, preferred stocks, after being off the table for years, look like an idea that's coming back into the limelight.
My recent recommendation here of the Newmont Mining Convertible Preferred is one example.
But before you set out on search mode, I'm going finish with only 2 more suggested screens. You should be able to
develop additional screens specific to your investment objectives as you dig through the various sectors and stocks:
1. Look at balance sheets. And avoid heavily indebted companies. That puts your dividend at risk during a severe
recession and more so if we are moving into a mildly to moderately deflationary environment.
2. Look at revenue, earnings and cash flow and their trends. Shrinkage in those key numbers could endanger
adequate dividend coverage. If a company is paying out almost all their profit in dividends, the risk of a significant dividend cut is very real. I've seen it happen many times.
Although Conagra has several preferred issues that pays a high dividend.
finance.yahoo.com
finance.yahoo.com
Conagra is also a classic example of an interesting speculative income play. But it's leveraged balance sheet and
poor dividend coverage present a higher level of risk than conservative investors would want assume in putting their
safe, income capital to work.
siliconinvestor.com
If you scroll down the profile, notice debt is almost twice equity. And CAG is paying out approx 90% of their
TTM earnings just to maintain the dividend. This isn't what I'd consider an investment quality income investment.
Look forward to hearing what kind of ideas people come up with. Good luck with the search. It's fun.
Cheers,
Isopatch"
Closed end muni bond funds are another good idea if your tax bracket makes 6 to 6 1/4% free of federal taxes attractive. A quick look at a comparative yields table for the different marginal tax rates will give you a quick answer as to whether they are competitive with the taxable alternatives in the above quoted post.
Iso. |
