| Bonds Online |
 |
|
| 5/10/2013Market Performance |
| Municipal Bonds |
|---|
|
S&P National Bond Index
|
3.00% |
|
|
S&P California Bond Index
|
2.96% |
|
|
S&P New York Bond Index
|
3.13% |
|
|
S&P National 0-5 Year Municipal Bond Index
|
0.70% |
|
|
| S&P/BGCantor US Treasury Bond |
400.09 |
|
| More |
|
| Income Equities: |
|---|
| Preferred Stocks |
|---|
|
S&P U.S. Preferred Stock Index
|
848.03 |
|
|
S&P U.S. Preferred Stock Index (CAD)
|
636.26 |
|
|
S&P U.S. Preferred Stock Index (TR)
|
1,701.05 |
|
|
S&P U.S. Preferred Stock Index (TR) (CAD)
|
1,276.26 |
|
|
| REITs |
|---|
|
S&P REIT Index
|
174.07 |
|
|
S&P REIT Index (TR)
|
425.30 |
|
|
| MLPs |
|---|
|
S&P MLP Index
|
2,469.58 |
|
|
S&P MLP Index (TR)
|
5,428.50 |
|
|
See Data
|
|
|
|
 |
|
|
|
|
|
|
Bonds Are Not Your Best Fixed-Income Bets |
Forbes.com - March 18, 2010 - by David Serchuk
Master limited partnerships and Canadian royalty trusts give you a juicier yield and capital appreciation than many bonds.
As baby boomers head toward retirement, investing for income--not primarily for stock appreciation--has come to the fore. Having seen their 401(k) balances plummet in value while invested in stocks, the boomers are seeking steady, reliable income. For the "Woodstock generation," being held captive to the whims of the market at this point in their saving and earning cycle is about as appealing as a bad acid trip.
If you're a boomer or if you're drawn to income investing to tamp down the volatility in your portfolio, you need to spread your risk among a wide variety of instruments, including corporate bonds and convertible securities, as well as a wide variety of income producing energy trusts, master limited partnerships, real estate investment trusts and exchange listed debt offerings. The well-heeled should also avail themselves of the tax savings of municipal bonds, even if they won't be wooed by the low level of absolute returns you'll find in municipals--as well as potential risk.
Richard Lehmann, editor of the Forbes-Lehmann Income Securities Investor newsletter and a Miami Lakes, Fla., fixed-income money manager, says he's generating income right now via convertible securities, both bonds and preferreds. Convertibles are securities that can be converted into common stock, typically at the owner's discretion. This means you get the benefits of a bond while stock prices remain depressed but when stocks rise you can convert to reap the benefits by changing into equity.
Right now Lehmann has a 20% allocation to convertibles. He likes these because they generate income while staying tied to the stock market. He says with convertibles you get less than the normal rate of return as compared with typical securities, but if the stock market bounces you can ride it. "You give up income to have capital gains potential."
Lehmann specifically likes convertibles in the financial area. He likes the preferreds from Wells Fargo ( WFC - news - people ) and Bank of America ( BAC - news - people ). These convertibles have a 7% coupon, high for institutions deemed too big to fail. Both sell at discounts to par value. "If the stocks double we will see a significant jump in the price of those securities," he says.
Lehmann also likes the energy sector. Specifically he points to decades of revenue from master limited partnerships and Canadian trusts, both of which regularly produce 8% to 10% tax-advantaged yields. Starting next year Canadian trusts will be taxed as corporations, but offsets ensure no immediate impact on dividends.
master limited partnership is, as the name implies, a limited partnership that trades like a security. These do not pay taxes from their profits-- the money is only taxed when unitholders receive distributions. Canadian trusts are similar, but are more like actual operating companies than most MLPs, plus some of the payout is considered qualified dividend income and part is a return of principal. They typically buy Canadian oil or gas reserves and when those are depleted they buy new ones.
One Canadian trust recommended by Lehmann is the Provident Energy Trust ( PVX - news - people ), with a 10% yield. Another is Enerplus Resources ( ERF - news - people ), with a 9% yield.
Lehmann also recommends adjustable rate bonds and preferreds to fight oncoming inflation. Specifically he likes high-yield closed end funds, which garner income from corporate dividends. Here some names he recommends include the BlackRock Global Opportunities Equity Trust ( BOE - news - people ), yielding 12%, and the Gabelli Global Gold ( GBGD.OB - news - people ), Natural Resources & Income Trust, yielding 10.2%.
Marilyn Cohen, president of Envision Capital Management and editor of the Forbes Tax-Advantaged Investor, stands by decent quality corporate bonds. One name she likes is Ford Motor Credit ( FCJ - news - people ) with a 5.5% yield, "a great rate of return in this environment," she says. Another is Alcoa ( AA - news - people ), though she recommends putting no more than three to 5% of your portfolio in the aluminum company. Alcoa yields 5.5%, and has a BBB- rating from Standard & Poor's. She also recommends Crown America, which now yields 7.75% and is rated BB- by S&P.
On the downside be wary of corporations that blow their dough on share buyback and mergers. "Corporate America pisses away cash," Cohen says.
Both Cohen and Lehmann are wary of muni bonds as towns and cities nationwide face astonishing budget shortfalls. Shortfalls that are expected to get worse as baby boomer civil servants start to collect pensions. The problem is there is no money to fund these obligations, meaning either these promises won't be kept or municipalities will spend their reserves.
Lehmann says muni markets faces higher risks within the next decade than they had in the 50 years prior. For some the only answer will be to either be bailed out by the states or the federal government or declare bankruptcy.
This would be calamitous, especially because muni bonds have historically been safe as milk. In November 2008 the Schwab Center for Financial Research issued a research paper called "Are California State Muni Bonds Secure?" Schwab reported that investment-grade munis have had a default rate of just 0.1% since 1970.
Partly due to this perceived safety investors have flocked to muni funds. In 2009 these funds gathered $72 billion in assets, according to Morningstar. This blows away the prior record of $21 billion in 2006.
Staying in short-term investments is another way to circumvent what John Osbon, head of Osbon Capital Management, calls an income famine. "We believe the risk in fixed income far outweighs the rewards," he says. "Accordingly we are staying short (two to four years) at the highest quality level (government guaranteed or essential services/taxing authority for muni bond)." He adds the bond market has become an artificial one due to Federal Reserve and Treasury intervention, so the best plan is to stay safe until bond markets become more normalized.
For those looking for the simple answer dividend producing stocks will always hold appeal. As such consider AT&T ( T - news - people ), with a 6.7% yield, Verizon ( VZ - news - people ) Communication at 6.55% or Altria Group ( MO - news - people ) at 6.75%. All three have upped their dividends in the past 12 months.
|
|
|
|
|
|
| Partner Market Place |
|
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
|
|
| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
Unsubscribe here [+] |
|
|
|
|
