Income Security Recomendations
BondsOnline Advisor - January 2006

The new look and focus for 2006 of The BondsOnline Advisor strives to present you with income investment insights from analysts throughout the United States.  Bonds, preferred stocks, real estate investment trusts, or master limited partnerships can be a part of a successful income portfolio – and BondsOnline and PreferredsOnline provide the “Income Investor Tools” to keep you informed.

Citigroup Investment Research-Closed-end Funds
Citigroup recommends three income-oriented closed-end mutual funds. Eaton Vance Tax Advantaged Global Dividend Income Fund (ETF) is a leveraged portfolio that invests primarily in large-cap, dividend-paying equity and preferred securities. It is currently yielding around 6.6 percent, which is a bit above its peer group average of 6.5 percent. The fund has also raised its dividend twice in the past year, by a total of nearly 10 percent and also declared a special year-end dividend. The fund, which is currently trading at an 8.2 percent discount to its net asset value (NAV), posted an 8.6 percent return last year.

The Eaton Vance Limited Duration Income Fund (EVV) mostly invests in mortgage-backed securities (MBS), senior floating-rate corporate loans, and high-yield corporate bonds. Its current yield is 8.49 percent and it is currently trading at a 6.6 percent discount to its NAV.

BlackRock Municipal Income Trust (BFK) is a national investment grade closed-end leveraged municipal bond fund that seeks to provide tax-exempt income. Citigroup notes that the Fed’s frequent tightening last year resulted in a total of 127 dividend cuts in the national leveraged municipal bond fund sector. In fact, of 94 funds, 64 have reduced their dividends. BlackRock, however, was one of the few funds to increase its dividend in 2005, “and it appears to be capable of maintaining its dividend for quite some time,” the research firm adds. So, it recommends the fund even though it is trading at an 11 percent premium to NAV. Its current yield is 6.6 percent.

Merrill Lynch-Regional Banks
Merrill Lynch’s bank analysts say that despite an expected near-term end to the Fed tightening cycle, they are not broadly bullish on bank stocks because relative valuations are full and they foresee several fundamental challenges in 2006. Even so, they recommend a number of large regional banks, in part because the median large-cap bank currently yields 3.8 percent, and dividends should grow about in line with EPS. Merrill singles out three large-cap regional bank stocks--PNC Financial, Wachovia, and Wells Fargo.

The investment bank expects Wachovia’s earnings per share to climb 10 percent this year, asserting it has “vastly improved its sales and service execution over the past five years” and has been generating above average core deposit growth while also gaining market share. The stock trades at a 10 percent P/E discount to the median large-cap regional bank and yields 3.8 percent.

The bank analysts expect Wells Fargo to generate 11 percent EPS growth in ‘05 and 10 percent growth in ‘06, well above peer group median levels of 8 percent and 6-7 percent. They note that Wells Fargo has a long-term track record of consistently delivering low double-digit revenue and EPS growth and is located in attractive, growth-oriented markets throughout the Western half of the US. Its dividend yield is 3.3 percent.

The bank analysts point out that PNC generates nearly 65 percent of its total revenue from fees vs. about 40 percent for typical large regional bank, and most of its fee income comes from growth-oriented sources such as assets management, fiduciary/brokerage and securities processing. “PNC is well positioned for a flat yield curve given a securities portfolio with a short duration (about 2.1 years), a low loan-to-deposit ratio and a greater than average percentage of funding from non-interest bearing deposits,” the analysts note. Its yield is 3.1 percent.

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Merrill Lynch--REITs
Merrill Lynch is also recommending several high-yielding real estate investment trusts (REITs). Merrill points out that REITs have outperformed the S&P 500 for six years now. For 2006, it forecasts an 8 percent to 10 percent total return, a “modest deceleration” from 2005 and a sharp decline from the 31.5 percent gain registered in 2004. Merrill says it believes the stocks are expensive based on several valuation metrics, suggesting that PE multiple contraction is possible next year.

Even after this runup, the office REIT average yield is 4.7 percent and the average yield of the REITs in the investment bank’s coverage is 4.2 percent. It has a buy rating on 30 of the companies it covers, or a little more than 34 percent of the total.

Merrill likes two apartment REITs: Equity Residential (EQR), the nation’s largest apartment owner, which yields 4.3 percent, and Archstone-Smith (ASN), which yields 3.8 percent. Its top retail REIT recommendation is General Growth (GGP), the second largest mall company, which yields 3.2 percent. Its top picks in the office sector include Vornado (VNO), which yields 3.6 percent, and Boston Properties (BXP), which yields 3.5 percent.  Merrill’s top pick in the industrial sector is Prologis (PLD), a global provider of distribution space, yielding 3 percent.

UBS—Fixed-Income
UBS’ fixed-income strategists in general favor short to intermediate maturities, citing the flatness of the yield curve. They recommend investors ladder their fixed income holdings between the two- and 10-year portions of the maturity spectrum in the taxable bond market. In the municipal market, however, they favor the 10- to 15-year range. Looking at individual sectors, they recommend a modest overweight of mortgages, municipals, and TIPS; market weight Treasury and agencies; and underweight corporate bonds.

UBS—Ford Bonds
UBS bond analyst George Lambertson recommends selling some of Ford Motor’s bonds in light of Moody's recent downgrade of the credit ratings of Ford and Ford Motor Credit. He citied Moody's, which said that in light of the negative outlook and Ford’s weak positioning within its auto rating methodology, Ford’s rating could come under pressure over the next 6 to12 months. “Risks that could contribute to further downward rating pressure include acceleration of consumer preferences away from trucks and SUVs, any further erosion in Ford's US market share, and an increase in incentives,” the analyst wrote. So, he says to sell bonds maturing later than 2010 and, from a relative value perspective, he prefers Ford Credit bonds that mature not later than 2010.

Morningstar—Short-Term Funds
Analyst Dieter Owen Bardy says the AMF Short U.S. Government Fund (ASITX), which gained 2.3 percent in 2005, is far ahead of its typical short-term government fund's 1.5 percent return. “The fund's conservative interest-rate positioning in a rising-rate environment was a big help,” he notes. Its 0.48 percent expense ratio is well below its typical no-load peer's 0.7 percent charge. The fund owns many adjustable-rate mortgage bonds, so as rates go up, the yields on these bonds reset to match the new higher interest rates. “Currently, a full third of the portfolio is dedicated to such bonds, whereas most rivals only hold a fraction of that,” Bardy points out. Its current yield is 3.8 percent.

CreditSights—Corporate Bonds
Analysts Louise Purtle and Fara Lupiano recommend shifting to an underweight allocation in the overall high grade sector and maintaining underweight on the high yield sector. “To our mind there is little doubt that corporate spreads will be moving wider during the year, and we see the key questions being not if there will be capital erosion in this asset class, but when it will occur, how severe it will be and which sectors will be most affected,” they write.

On a sector basis, they are moving to Overweight from Marketweight on Aerospace/Defense, Capital Goods, Machinery & Equipment and Utilities, while moving to Underweight from Neutral on Paper & Forest Products, Retailers and Oil & Gas. They also lowered their recommendation on the Brokers to Marketweight from Overweight.

© 2006 BondsOnlineGroup, Inc.