Posted At : December 2, 2009 10:36 AM
Stock Market update – How to invest in this market
It’s been a very exciting year for the markets, and after what we’ve been through, no matter the market does makes us nervous. Unfortunately many people have been left on the sidelines, afraid to do anything, and being penalized by making next to nothing.
The key is to get the very best returns with the least risk possible…essentially great returns with less risk, and our “real-return” investment strategy should continue to work well. We have been concentrating on high-dividend paying equities, selected real-estate investment trusts (REITs), preferred stocks and master limited partnerships (MLPs). These instruments offer the upside potential of equity markets but with the huge benefit of an income stream to enhance returns and that often limits the downside risk during a market correction. Naturally these are not without risk so it’s necessary to make sure you know what you are doing in this arena or use someone that does.
Interestingly, market statistics show that high-dividend-paying stocks have outperformed non-dividend-paying stocks (with lower volatility) over the long term. They tend to outperform during bear markets, and in a recession their stock prices depend less on earnings. But equity income investing is not just about picking those stocks with the highest dividend yields. A company must also have a track record of dividend hikes, a low payout ratio (as a more moderate dividend is less likely to be cut), reliable management and growing earnings. Many learned the hard way that many companies that had historically safe dividends like General Electric did the unthinkable and cut their payouts to shore up balance sheets. Given those circumstances, high dividend stocks should not be purchased with a buy-and-hold mentality, but tactically managed for changes in the company’s management strategy and financial position. In fact every portfolio should be managed tactically.
Preferred stocks have always been a favorite, as they are senior to common equity but offer much more attractive yields. Currently there are still many good ones paying well over 8 to 10%. For taxable accounts, MLPs are incredibly attractive. MLP’s are publicly traded energy partnerships that trade on major exchanges and offer an opportunity to maximize income because they are required to return all profits to unit holders. Since most MLPs operate oil and gas infrastructure such as pipelines, processing plants and storage tanks, they are also attractive as investments in the underlying hard assets owned by the MLPs. MLPs also have huge tax advantages, especially for high net worth individuals, as the dividends are generally 85% tax free. Considering the possible capital appreciation and the yields, which are between 8% and 12%, these are hard to beat. And last but not least, bonds are still very attractive. Some Tax-free municipals look good but be very very selective. The real pop is in corporate bonds with excellent yields, just recently with 10%+ for under 2 years.
In the world we live in today, the greatest long-term risks to an income-oriented investor are rising interest rates and inflation, which erode the relative value of the income stream. As much as the Fed insists monetary policy will remain accommodative for the foreseeable future, upward pressure on interest rates will likely continue, especially in light of the growing federal deficit and accompanying inflation fears. Therefore, stay very short with your bonds. That is where the biggest bang for the buck is anyway. Protect yourself. Tactical management is the key to reducing this impact of inflation and protecting principal and income over the long term.
Regards – Keith Springer