Jubak's Journal12/9/2008 12:01 AM ET
10 picks for income investors
Sure, we're in a recession. But your retirement portfolio might not have time to wait for the bear market's end. These stocks combine high yields and solid fundamentals.
By Jim Jubak
Just look at these yields! Shares of Genco Shipping (GNK, news, msgs) are paying 53.3%. Diana Shipping (DSX, news, msgs) 47%. Monarch Coach (MNC, news, msgs) 33.3%. Wow!! Snap, 'em up, right?
Wrong. Now is no time to get giddy about yields. A Wall Street saw, "Pigs get fed, but hogs get slaughtered," is especially appropriate for income investors right now.
But I do have 10 picks in this column with juicy yields and solid fundamentals. There are no 50% yields in the bunch but no risky industries struggling to survive either. These 10 picks are based on three solid strategies for maximizing income in a retirement portfolio and for making money in the rally that will one day follow today's bear market.
Get the story behind the number
In a recession, especially in a deep, long recession like we're in now, companies in trouble wind up cutting dividends to preserve cash and fend off creditors. So huge 50% dividend yields aren't a sign screaming "bargain" but a result of plunging stock prices and of danger ahead.
Genco and Diana, for example, are both dry-bulk shippers. The business of sending cargoes of coal and other bulk goods around the world has collapsed with the slowdown in the global economy. Charter rates for the largest dry-bulk carriers have plunged to $2,773 a day, as of the end of November, from an all-time high of $233,988 a day on June 5. No wonder that Diana suspended its dividend in early November and that Star Bulk Carriers (SBLK, news, msgs) will pay its third-quarter dividend half in cash and half in shares.
Monarch Coach is in a different industry, recreational vehicles, but it's been hit just as hard by the recession, and only loans arranged at the last minute have kept the company afloat. Shares that had sold for $10 in April traded at 72 cents as of Dec. 5.
But it's also no time to write off all high yields. The financial crisis has pushed the prices of shares and bonds issued by many thoroughly sound companies to unprecedented lows. You won't get a yield of 50% from stocks and bonds like these, but you can pick up yields of 7%, 10% or 12% without the risk that the company is about to stop paying a dividend or go out of business. For example, the G series preferred stock of JPMorgan Chase (JPM, news, msgs) was paying a dividend yield of 7.6% on Dec. 5, for a bank that's likely to emerge from this financial crisis as the strongest U.S. bank.
Where to look for high yields
Investment-grade company bonds, in general, are paying the highest spreads on record above the yield on Treasury notes and bonds, according to Ryan Labs, a New York asset management company. Corporate bonds rated AA by Standard & Poor's are paying 4 percentage points more than Treasury bonds, Ryan Labs calculates.
These huge spreads over the yields on Treasurys have been created by two factors:
* Mass selling of corporate stocks and bonds by investors running away from risk has pushed up yields on corporate securities. (When the price of a dividend-paying stock or bond goes down, the yield goes up.)
* Mass buying of Treasury bills, notes and bonds by investors running toward safety has pushed down those yields. Treasury issues pay almost nothing right now because investors are so desperate to find safety. On Dec. 4, three-month T-bills paid a yield of just 0.02%. Two-year T-bills yielded just 0.84%, and 10-year notes were yielding just 2.57%.
So how do you play this extraordinary market to get the best return without taking on too much risk?
3 tacks investors can take
I've got three strategies to suggest, depending on how far off in the future your goal is and on how much extra short-term risk you're willing to take on. (You can implement these strategies with either stocks or bonds, but since whatever expertise I have is on the equity side of the financial market, I'm going to stick to stocks in my recommendations.)
Strategy No. 1: When the market gives you lemons, make lemonade. I've been talking about this strategy at The Money Show and in front of investment clubs for the past few months. This truly terrible market for stocks is a glorious, once-in-a-decade opportunity to lock in a 10% cash flow for retirement. If you lock up cash flow like this, it will reduce your need to sell stocks and bonds in retirement.
For example, let's say you need a $50,000 annual income in retirement, and you anticipate the market will be only mediocre, with just a 6% return during the years of your retirement. If you have a $300,000 retirement portfolio appreciating at 6% a year, you'll have $318,000 after one year -- minus the $50,000 you need to live on. That's actually a balance of $268,000 after one year. At that rate, you will deplete your savings at the end of Year 8.
Video on MSN Money
Oil refinery © Kevin Burke/Corbis
You can’t trust oil prices
Too much speculative trading in July drove oil to an unsustainable $148 a barrel. Now the opposite is true, Jim Jubak says: A lack of speculators is causing prices to tumble.
But let's say that you manage to put $100,000 of that portfolio into stocks or bonds that are now yielding 10%. That gives you a steady cash flow of $10,000 a year every year in retirement, before you sell anything. In that scenario you don't run through your retirement savings after eight years but after 10 years instead. You don't have to show up on your kid's doorstep with your belongings in a cardboard box until Year 11. That's two more years of financial independence from harvesting the lemons produced by this market.
This scenario will be especially attractive to investors who are pessimistic about future market returns. If you think we're in a long-term, secular bear market, with likely returns well below my 6% example, this strategy is for you. If you think we're going to bounce back from this bear and move directly into another decade-long bull market, you won't want to pursue this strategy. (It's a good insurance policy in case you're optimism is misplaced, however.)
What do you want to buy with this strategy? Stocks with current yields at 10% or higher where the dividend payout is sustainable at current levels for a decade or more. If the stock market recovers, of course, the dividend yield will drop, but you don't care. All you want to know is that if you buy $10,000 in annual cash flow now, you'll get at least $10,000 of annual cash flow in retirement.
Continued: 3 companies to consider
Let me give you three names that I've either bought recently for my own retirement portfolio (but no more recently than a week ago and that I'll hold for at least a year) or that I'm watching for a future purchase:
* Enbridge Energy Partners (EEP, news, msgs), paying a yield of 15.5% as of Dec. 5.
* Energy Transfer Partners (ETP, news, msgs), paying a yield of 11.2%.
* Natural Resource Partners (NRP, news, msgs), paying 14.9%.
The first two own natural-gas pipelines, and the last is a coal producer. All three are master limited partnerships. Enbridge Energy Partners was a pick for my old fixed-income portfolio (see the update of that 10-stock portfolio at the end of this column), and Energy Transfer Partners is a current Jubak's Pick.
Strategy No. 2: Get paid while you wait. I'm convinced the sectors that will bounce back the strongest once this bear market ends will be financials, housing and real estate, energy, commodities and infrastructure. But I've got only a guesstimate on when the bear will end (the fourth quarter of 2009). I'd like to make sure that I don't miss the start of the rally, when the market sees huge gains, but I don't want to see my money locked up in stocks that aren't generating any returns at all while I wait.
That's why a value investor such as Warren Buffett likes preferred stocks. They give you some upside to the rally -- although less than common stocks do -- and they pay high yields. In the current market, of course, you can find preferred-stock yields in common stocks, too.
In this group, I'm looking for stocks in sectors that will bounce back and for the protection that comes from owning the soundest companies in the sector. Again, here are three names that I've bought recently or that I'm watching for a future purchase:
* Caterpillar (CAT, news, msgs), yielding 4.4% as of Dec. 5.
* JPMorgan Preferred G (JPM-G, news, msgs), yielding 7.6%.
* Rayonier (RYN, news, msgs), yielding 6.7%.
Rayonier is a member of both my Jubak's Picks and "unfixed-income" portfolios. (See the end of this column for an update on the unfixed-income portfolio.) I'm adding JPMorgan Preferred G to Jubak's Picks with this column.
Strategy No. 3: My unfixed-income strategy. (See my Sept. 16 column, "3 more stocks for beating the bear," for more details on how this strategy works.) Buy common stocks with solid dividends and a history of raising dividends for the long haul. That way you let time and compounding work for you.
While you may be buying $1 per share in dividends today with stocks like these, you're also buying, say, 8% annual increases in dividends. In 10 years, that turns a $1-a-share dividend into $2.16 a share in dividends. The existing unfixed-income portfolio contains seven stocks at the moment. I'm deleting one, Exelon (EXC, news, msgs), because, for my liking, the company is too interested in acquisitions that would dilute its current competitive advantage. And with this column, I'm adding four more, for a total of 10:
* Chevron (CVX, news, msgs), yielding 3.5% as of Dec. 5.
* Deere (DE, news, msgs), yielding 3.5%.
* FPL Group (FPL, news, msgs), yielding 3.8%.
* Nucor (NUE, news, msgs), yielding 3.5%.
Video on MSN Money
Oil refinery © Kevin Burke/Corbis
You can’t trust oil prices
Too much speculative trading in July drove oil to an unsustainable $148 a barrel. Now the opposite is true, Jim Jubak says: A lack of speculators is causing prices to tumble.
I'm not recommending any specific bonds, as I noted earlier, because I don't research them regularly, and it would be the height of folly and arrogance to suddenly start spouting bond advice now. But there are really, really good buys in the corporate sector.
I'd suggest that if you've followed the stock of a solid company for a number of years that you take a look at its bonds. That way, you'll at least know enough about the fundamentals of the company to do a decent job of figuring out the risk in the bond. That's what I'm doing.
Anybody who wants to begin a discussion of good corporate bonds to buy now, please join me in my Market Talk message board. I'll start a thread with a few of my less outlandish ideas the day this column is posted under the revealing head of "Bond picks for stock investors."
Continued: Updates to Jubak's Picks
Updates to Jubak's Picks
Buy JPMorgan Chase Preferred G (JPM-G, news, msgs): This isn't a call predicting a turnaround in the financial sector. There's still a lot more pain and turmoil ahead for most financial companies.
But I think the stock market is gradually starting to realize that JPMorgan Chase is one of the few financial companies that will come out of this crisis stronger than it went in. There's nothing like having major competitors such as Citigroup (C, news, msgs) and Lehman Bros. (LEHMQ, news, msgs) implode. There's nothing like picking up the assets and Wall Street business of a Bear Stearns and the assets and consumer network of a Washington Mutual (WAMUQ, news, msgs) for a song.
I'm buying JPMorgan's preferred stock instead of its common stock to further protect myself against turmoil in the sector. I'm giving up some, but not all, upside by picking the preferred. The preferred shares do trade 15% or so below their 52-week high. In return, I'm getting a substantial 7.6% yield. (Please note that while you can find a current price for these shares on MSN Money by using the ticker JPM-G, to get news on JPMorgan Chase, you'll need to check the symbol of the common stock, JPM.)
As of Dec. 9, I'm adding these shares to Jubak's Picks with a target price of $42 a share by next December. This buy along with the two sells below increases the cash position in Jubak's Picks to 45%. (Full disclosure: I own shares of JPMorgan Chase Preferred G in my personal portfolio. I'll be adding to that position three days after this column is posted.)
Sell Gilead Sciences (GILD, news, msgs): Shares of Gilead had launched a small rally while the market tanked in the week after Thanksgiving. But on days when the stock market has itself rallied, such as Dec. 8, the shares have retreated. I see this as a sign that investors are using Gilead's shares as a haven from the current market turmoil. That means the stock will hold up well when the bear shows its claws again but is likely to lag in any end-of-the-bear rally.
I'm going to use the recent move up in Gilead's shares as a selling opportunity. As of Dec. 9, I'm selling Gilead out of Jubak's Picks with a 17% gain since I added it to the portfolio Sept. 25, 2007. (Full disclosure: I will sell my personal position in Gilead Sciences three days after this column is posted.)
Sell Freeport McMoRan Copper & Gold (FCX, news, msgs): I had decided that I would hold Freeport MoMoRan for the late 2009 recovery in the global economy and in copper consumption.
But the company's decision to suspend its dividend has changed my thinking. When the shares were paying a dividend yield of better than 5%, I was getting paid fairly well to wait. But now I'm getting paid bupkis, so I'm going to sell into the current rally with the idea that that move increases my flexibility and decreases my risk. (I can buy Freeport McMoRan shares back later or go with some other mining or industrial stock.)
I think we're a good three to six months away from the bottom in copper prices. As of Dec. 9, I'm selling these shares with an 80% loss since I added the shares to my portfolio on Feb. 26, 2008. (Full disclosure: I will sell my personal position in Freeport McMoRan Copper & Gold three days after this column is posted.)
Updates to Dividend Stocks for Income Investors
Paying a dividend doesn't protect a stock from getting slaughtered when investors think the company is going to cut the dividend or that it's business model is so broken that it won't be able to keep growing the dividend in the future.
That's what's happened to two of the stocks in this portfolio of mine. Dry-bulk shipper Genco Shipping (GNK, news, msgs) is suffering in the collapse of shipping rates as the global recession cuts traffic in commodities such as coal. Macquarie Infrastructure (MIC, news, msgs) has been smashed by a credit crunch that has reduced the partnership's ability to get the debt financing it needed to leverage the relatively modest returns it gets on its investments in infrastructure.
As of Dec. 9, I'm dropping both stocks from this portfolio and selling the last certificate of deposit I've been holding in this account. I would use the plunge in the other stocks in this portfolio as an opportunity to buy and increase the yield of my portfolio. To fill those three slots I'm adding Suburban Propane Partners (SPH, news, msgs), with its 11.64% yield; Potlach (PCH, news, msgs), with its 7.9% yield; and DuPont (DD, news, msgs) yielding 6.8%. You can find the complete list by following the link to the portfolio in the left margin of this page.
Developments on past columns
"A better way to fight low yields": How is this portfolio different from the Dividend Stocks for Income Investors? That first portfolio concentrates on high current yields. This portfolio looks for stocks with decent current yields and a history of growing dividend payouts.
That puts the power of compounding behind these dividend payouts for investors with long holding periods. It also gives these income stocks a degree of protection against inflation that's unusual among income stocks or bonds.
I'd promised to get my "unfixed-income" portfolio up to 10 stocks by December. First, however, I'm going to sell Exelon (EXC, news, msgs) out of the portfolio. Management at this company seems intent on diluting the company's huge advantage in nuclear power generation -- with its lower operating costs and lower carbon emissions -- by acquiring another utility. No thanks.
I'm adding these four stocks to the portfolio: Chevron (CVX, news, msgs), Deere (DE, news, msgs), FPL Group (FPL, news, msgs) and Nucor (NUE, news, msgs).
The other stocks on the list are Enbridge (ENB, news, msgs), ING Groep (ING, news, msgs), Oneok Partners (OKS, news, msgs), Rayonier (RYN, news, msgs), Toronto Dominion (TD, news, msgs) and US Bancorp (USB, news, msgs). I'll have this list posted as a portfolio in the left margin of my columns as quickly as we can get a portfolio built.
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