Income Security Recommendations

BondsOnline Advisor – September 2006

By Stephen Taub

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.

Income Security Recommendations

Stock	Ticker	Type	Current Price	Current Yield	Firm
Global Signal	GSL		$50.98	4.20%	BancAmerica
DR Horton	DHI		23.62	2.70	Merrill
Illinois Tool Works	ITW		43.95	1.90	Merrill
U-Store-It	YSI		20.39	5.70	Merrill
Kimco Realty	KIM	REIT	41.47	3.20	Reuters, PreferredsOnline
Realty Income	O	REIT	24.27	6.1	Reuters
Simon Property Group	SPG	REIT	89.11	3.50	Reuters
Tanger Factory Outlet Centers	SKT	REIT	35.32	3.90	Reuters
Weingarten Realty Investors	WRI	REIT	41.50	4.50	Reuters
DJ Select Dividend iShares	DVY	ETF	66.03	3.13	BancAmerica
Rydex Russell Top 50	XLG	ETF	98.54	2.03	BancAmerica

* E – equity; REIT – real estate investment trust; CB – corporate bond; Pr – preferred; MLP – master limited partnership; ETF – Exchange Traded Fund.

Standard & Poor’s/Bond Strategy

S&P asserts that the corporate bond market is currently navigating several cross currents. “These include growing signs of an economic slowdown amid elevated cost pressures, along with a visible buildup of tensions regarding shareholder versus bondholder interests,” it explains.

It points out that while financial markets have been rallying as the Fed winds down its rate hikes, spreads have been slowly widening. “On balance, we maintain our cautionary stance on corporate credit, particularly for lower quality segments,” it adds.

S&P is looking for the Fed to raise the target rate by another 25 basis points in October, to 5.5%, and then hold its rate policy steady through mid-2007. However, it warns that long lags in monetary policy imply that past tightening has so far barely affected the economy. “Thus, bond market optimism may be overdone;” it adds.

The upshot: S&P is looking for the 10-year Treasury yield to move down to 4.78% from a high of 5.25% at June end.

Among corporate bonds, S&P asserts that the current rates rally is likely to prove short-lived, especially as other major central banks continue to drain liquidity.

Merrill Lynch/Hedge Fund Bond Strategy

Analyst Mary Ann Bartels, who writes the brokerage’s Hedge Fund Monitor, points out that hedge funds recently began to sell their long positions in the 10-year Treasury note but remain short the T-Bond as a possible interest rate hedge. “Near term we expect yields to continue to fall but for rates to back-up again later in the year,” she adds.

Lipper FundMarket Insight/ Fixed Income Summary

Lipper is upbeat about the bond market, noting that there was plenty of wind behind its sails in August as major benchmarks turned broadly higher. It points out that with the exception of Target Maturity Funds, every classification of fixed-income mutual funds have posted positive year-to-date returns. However, it warns that most fund categories won’t end the year anywhere close to their five-year annualized return.

Still, Lipper asserts that everything seems to be falling into place for fixed income. “GDP, housing, and employment figures all point to a slower economy ahead,” it explains. “The Fed paused, bond markets cheered, and now we’re in a position to expect rate cuts ahead.”

Banc of America Securities/Dividend-Paying ETFs

The investment bank is talking up dividend-oriented exchange-traded funds, proclaiming 2006 the year of the equity income ETF.

It points out that low interest rates and dividend tax relief combined to make the DJ Select Dividend iShares (DVY) the most popular ETF of 2005, with inflows exceeding $2.2 billion even as yields on market money funds were rising.

The ETF newcomer on the block: WisdomTree. It trotted out 20 new funds in June alone. “Steady if unspectacular dividend growth is attractively valued in today’s market place, in our view,” BofA asserts. “But high-yielding slow growing companies may suffer if tax rates rise,” it warns.

It singles out one ETF to consider: the Russell Top 50 (XLG). “The largest 50 US companies found support early in the recent correction and have broken out to new highs,” according to a recent 98-page report. “Small caps are not recovering impressively, and the best of their multi-year outperformance is likely over.”

Banc of America Securities/REITs

The investment bank recently upgraded Global Signal (GSL) to “Buy” from “Neutral.” A major reason it singled out the wireless tower REIT is its belief that dividends will continue to rise. Over the next 12 months, BofA expects Global Signal’s dividend to rise from $0.53 to $0.59.

The brokerage notes that for the past two years, GSL has maintained a dividend payout between 91 percent and 117 percent of Adjusted Funds From Operations (AFFO), which it calls “a real-estate derived proxy for cash flow.” BofA notes that its $0.59 estimate represents a 98 percent payout of estimated second-quarter, 2007 AFFO.

Put in context, BofA asserts that Global Signal’s yield is above the current REIT average of 3.9 percent, “offering a protective cushion if REIT valuations reverse, as we believe they will.”

Reuters Research/Retail REITs

The wire service asserts that while it is tempting to play retail stocks as interest rate hikes wind down, REITs that rent to big-name merchants may be better.

“These offer retail exposure that differs a bit from what one could get by owning shares of a particular merchant, or even a diversified portfolio of merchants,” Reuters points out.

The research firm asserts that most retail REITs have comfortable payout ratios. In other words, there is room for dividend growth and, “perhaps more important at a time when there is so much concern about the future of consumer spending, some leeway to at least maintain payouts if times turn tight,” according to a recent report.

The key firms include:

• Kimco Realty (KIM) : It specializes in neighborhood strip shopping centers, often anchored by large drug stores or supermarkets.
• Realty Income (O). It specializes in free-standing single-tenant neighborhood-oriented retail stores.
• Simon Property Group (SPG). It is known for regional malls, “many of which are upscale and most of which include many of the major nationwide specialty merchants and department stores,” according to Reuters.
• Tanger Factory Outlet Centers (SKT). It specializes in factory outlet shopping centers.
• Weingarten Realty Investors (WRI). They are mostly neighborhood strip shopping centers, often anchored by large drug stores or supermarkets, according to Reuters.

If you want to play retail stocks, Reuters recommends three ETFs: PowerShares Dynamic Retail Portfolio (PMR), Retail HOLDRS (RTH) and SPDR Retail ETF (XRT). “The ETFs that focus on this area didn't suffer unduly during the bad periods, and fared reasonably well in August, when the market snapped back in anticipation of a more accommodative Federal Reserve,” it points out.

Merrill Lynch/REITs

Merrill Lynch provides these current average dividend yields for a wide range of REIT groups:
Apartment: 3.9%
Strip Center: 3.8%
Regional Mall: 3.6%
Triple Net: 6.8%
Office: 3.8%
Industrial: 3.0%
Self-Storage: 2.8%
Diversified: 3.4%

Merrill also singles out the shares of U-Store-It (YSI), citing an announcement that the company’s CEO (Dean Jernigan) shelled out $3.9 million to buy shares in the company. “We view this inside purchase activity as a significant positive since most REIT executives are selling (not buying) their own stock and Mr. Jernigan would not purchase additional stock in the company if he was not confident that the company’s turnaround strategy was not unfolding in a positive manner,” according to a recent Merrill report. It reiterated its Buy rating, adding that the company remains its top pick in the storage sector.

Merrill Lynch/High Quality and Dividend Yield

Merrill’s monthly dividend screen resulted in several changes since August. New additions include DR Horton (DHI)and Illinois Tool Works (ITW). Also, one company dropped off: General Mills.

The screen of roughly 1,600 stocks is based primarily on the growth and stability of earnings and dividends over a 10-year period; Return on Equity (ROE) greater than the average S&P 500 ROE; Debt/Equity lower than the S&P 500; Dividend Yield greater than the S&P 500, and Merrill Lynch indicates the likelihood that the dividend will remain the same or be increased. Finally, the ratio of the last 12-months’ free cash flow to dividends must be greater than 1.0.

For more in-depth research and coverage of yield and income securities, including REITS, MLPs, CANROYS and preferred securities, please go to PreferredsOnline and subscribe to the monthly research.

© 2006 BondsOnline Group, Inc.