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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Investor2 who wrote (38603)	7/24/2010 3:35:57 PM
From: E_K_S	1 Recommendation Read Replies (1) \| Respond to of 78751

Hi Investor2 - This is exactly the situation I am trying to figure out too. My largest holding is in the Vanguard GNMA fund (currently about 10% of the portfolio) which I have tagged as my fixed income component of the portfolio. I use the income that it generates to live on and I like the safety the fund provides. About a year ago (post crash) I pulled out 25% and bought utility stocks at a very good bargain and yield. I have recently been selling more GNMA (about another 10%)harvesting my LT capital gains and trying to invest these proceeds in bond like equivalent securities. The best I can come up with are some selected preferred stocks, some which I have been able to buy at a deep discount. However, I am taking more risk so I have diversified these positions into a basket of stocks that I call "high yield" hybrid bond like equities. The group consist of REIT preferreds, utility stocks, MLP NG companies and other midstream NG pipeline, gathering & storage companies. These companies have good cash flows that generate excellent income (stable income & growing revenues especially in the NG sector). I am able to achieve a combine yield of about 6.5% compared to under 3% for the GNMA. One of my favorites which I plan to add to on any significant sell off is Tortoise Power and Energy Infra (TPZ) which has been discussed on this board. The nice part is they pay their distributions monthly which is similar to what the Vanguard GNMA does. Their managed portfolio currently yields around 6.7% and sells at a 6% discount to its NAV (this discount spread can vary as high as 9% to as low as 4%). If you buy on large market volatility swings it's possible to lock in at a higher spread. Liquidity is pretty good as the fund trades over 69K shares a day compared to a similar ETF (MLPG) that trades on average only 7K shares/day. I have also put some of the GNMA proceeds into Flaherty & Crumrine Preferred Income Fund Inc. (PFD). This is one that Paul Senior alerted me to. The fund is trading near it's high, you can generally buy shares at a discount to its NAV on extreme market volatility days (ie 200pt down days). The Fund yields 8.5% but has almost 2x the management fee (1.96% vs .85%) as TPZ. It pays it's distributions monthly and you can elect to have your dividends automatically reinvested. It's difficult to buy individual preferred securities (spreads are large, not too liquid, fees can be large), so I think the higher management fee is worth it. finance.yahoo.com The Strategy: My strategy is to book most of my LT capital gains (some of my shares have 15% gains) from my Vanguard GNMA and invest the proceeds into my "bond like" basket of utility & preferred stocks. When the yields on my utilities fall below 5% and/or PE rises over 14 and/or I have a significant capital gain, I plan to move the funds into (1) other new "bond like" candidates or (2) add to TPZ or PFD Funds. Eventually as rates begin to rise, I will build up treasury ladders and/or work these monies back into the Vanguard GNMA or other equivalent bond funds. I need both the safety that these investments provide and the monthly income it generates. The key to this strategy is to understand the extra risk associated with the equities in my "high yield" hybrid bond like equities and manage the risk accordingly. I try to do this with diversification, buying quality large cap equities and allocating some of the money into closed end funds. EKS

To: Investor2 who wrote (38603)	7/24/2010 4:14:43 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78751

I2, It's a dilemma I don't know how to resolve. I don't keep a fixed percentage of my portfolio in fixed income funds. Very possible, given my age and lifestyle, that I'd be best served if I did reduce my exposure to stocks by having and keeping more fixed income investments. It's a difficult conclusion or realization for me to come to. I have more in fixed income now than I've had in any of the past 30 years (except for '09). Opportunistically and with hope, I've recently taken chunks of money from some of my fixed income funds (bond funds&convertible bond funds&bank accounts) and made purchases of individual stocks that I'm attracted to. There are a lot of companies out there that look good to me on a valuation basis. Even something like XOM which is trading now at very attractive levels for a conservative investor with a long term view. For a conservative investor, Chevron gives you almost a 4% yield. (I've been a recent buyer of both.) I may take some of the monies from utility stock sales and put them back into high-yield bond funds. That has its drawbacks too...chasing yields has been very dangerous for me.