Stock Market Sectors and Bonds for Higher Investment Income Yields
Stock-Markets / Dividends Dec 04, 2009 - 09:37 AMBy: Mike_Larson
The Federal Reserve’s policy of pegging interest rates to the floor is having a slew of consequences. It’s driving down the dollar. It’s helping fuel new asset bubbles. It’s leading to the misallocation of economic resources.
And perhaps most importantly for you, it’s punishing savers. By cutting the federal funds rate to a range of zero percent to 0.25 percent, the Fed has forced rates on short-term Treasuries, short-term certificates of deposit, and money market accounts into the gutter. You can’t earn squat on these safe, cash-like investments.
So where can you turn for the income you need to pay your bills … support your family … and maybe someday help put your grandkids through college?
You know I don’t like long-term Treasuries because Washington is torpedoing this nation’s balance sheet. And I’m not a big fan of most longer-term U.S. debt, including corporate and junk bonds. They’ve rallied so far, so fast that they’re looking dramatically overvalued.
Instead, I have three alternatives that are worth considering. Let’s talk about them now …
Income Alternative #1: MLPs Offer a Nice Way to Hunt For Yield in the Energy Sector
We’ve seen a sharp rally in the price of all kinds of energy products. Crude oil prices have surged 139 percent from last December. Gasoline is up 157 percent. Heating oil costs almost twice what it did last winter. Even lowly natural gas has climbed from around $2.40 per million British Thermal Units to around $4.50 now.
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| MLPs can make money regardless of what happens to the price of oil. |
But let’s be honest … the business of exploring for, producing, and trading energy is relatively high risk. You can spend years — and hundreds of millions of dollars — drilling for oil and gas. If the price tanks somewhere along the line, your investment can blow up in your face!
Yet consumers and businesses never completely STOP using energy, regardless of the cost. That means the industry still needs to store and transport gas, oil, and other petroleum-based products around the country each and every day.
That’s where energy Master Limited Partnerships, or MLPs, come in. These companies own many of the storage and distribution networks that energy companies use to get their products to market.
They get paid whether energy prices rise or fall. And because of how they’re organized (in the corporate sense), they spin off handsome dividends. It’s not unusual to see yields of 5 percent, 6 percent, 7 percent, or more in the sector.
Don’t get me wrong: MLPs still trade like stocks. So there’s definitely price risk involved. But I believe they’re a solid alternative for yield-starved investors.
Income Alternative #2: Utilities Spinning Off More Income Than Any U.S. Treasury
Another sector that offers juicy yields: Utilities. That includes natural gas providers, electric companies, and even telecommunications firms.
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| Businesses need electricity, even during a recession. |
These businesses clearly aren’t recession proof. When the economy tanks, so does demand for power and telecommunications services. But the swings are typically much less severe than what you see in housing, technology, or manufacturing. And even during the worst downturns, those core businesses still tend to spin off healthy amounts of cash.
Again, you don’t have to look very hard to find handsome dividend yields in the sector. Many leading utilities yield at least 5 percent or 6 percent. That’s better than you can get anywhere on the Treasury curve, considering that even 30-year bonds yield just 4.31 percent.
That’s not all, either. I’m seeing a heck of a lot of healthy stock charts in the sector, with breakouts all over the place. Buy the right stock at the right time and you can earn a juicy yield AND rack up some capital gains.
Income Alternative #3: Go West … East … South — Anywhere but Here!
Of course, you don’t have to keep all your fixed income money in the U.S. if you don’t want to. In fact, you probably shouldn’t!
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| A falling dollar can give foreign bonds an extra boost. |
Why? The dollar has been falling virtually nonstop for months now. That hurts foreign owners of our debt. But the process works in REVERSE for U.S.-based investors.
If you buy a foreign, fixed income security, and the dollar falls, the dollar value of your holdings RISES. Any principal and interest payments you receive in the foreign currency translate back into more dollars when you repatriate the money.
On top of that, foreign yields are much more attractive than those offered here in the U.S. Two-year Treasuries yield just 0.77 percent here in the U.S. But the same maturity security yields 1.16 percent in Canada … 1.35 percent in Germany … and 1.65 percent in Spain. In New Zealand, you’re looking at 4.03 percent. In Australia, 4.32 percent. In Indonesia, 5.2 percent.
Bottom line: You can earn higher yields AND get a currency “kicker” by investing in foreign, fixed income securities. Foreign dividend-paying stocks are another alternative. Many yield much more than their U.S. counterparts.
Until next time,
Mike
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