It seems like everyone on the planet is chasing yield these days, and it’s perfectly understandable. After all, the world’s central banks are continuing their relentless campaigns of investor repression.
The U.S. Federal Reserve has been at it for years. Then in recent weeks, Japan’s new Prime Minister Shinzo Abe has ratcheted up the pressure on the Bank of Japan to go “all in.” He wants the BOJ to print unlimited amounts of yen in order to buy unlimited amounts of assets in order to drive inflation towards 2 percent. He also wants to use that cheap, central bank liquidity to give him cover for his own reckless borrow-and-spend stimulus programs.
So in this environment, where governments and central bankers the world over are clearly pursuing unsustainable policies that raise the risk of more sovereign debt defaults, where can you find some yield SAFELY?
What kinds of investments offer better prospects for income generation than government bonds issued by countries where policy is running amok?
Here’s my take on your best bets …
MLPs, Stable Dividend-Payers,
Safe, Short-Term Securities!
I’m a sucker for safety. By that, I mean I’m always cognizant of the risks involved in the purchase of any stock, bond, ETF, or mutual fund. That’s especially true when it comes to generating income in this environment!
Junk bonds are the most wildly inflated I’ve ever seen. Many emerging market bonds are fraught with risk. Long-term government bonds both here and abroad in countries like Japan look dangerous.
So I’m turning instead to select vehicles that still offer a decent combination of value, safety, and yield. They include the following:
Income Vehicle #1:
Master Limited Partnerships (MLPs)
MLPs are companies that store and transport natural gas, oil, and derivative products like gasoline. They generate significant amounts of cash from those businesses, and use it to pay out handsome dividends.
MLPs enjoy a stable and profitable business, because, in most cases,
their fees are based on the volume of product transported, not on the
price of oil or natural gas.
Yields in the 5 percent to 7 percent range are not uncommon. Moreover, MLPs don’t have the risk of oil producers, whose profits fluctuate wildly with the price of crude. After all, the energy industry still needs to get a gallon of gas from Point A to Point B whether it sells for $2 or $4 — and that’s where MLPs come in!
Income Vehicle #2:
Dividend-Paying Stocks in Safe Sectors
Too many investors make the mistake of just looking at a stock’s yield, and then buying it. But many times, yields are high because the underlying company’s business is volatile, the ability of the company to pay that dividend is questionable, and other risks abound.
So I’d rather focus on dividend-paying stocks in relatively safe sectors. Food and beverage companies. Utilities. These are the kinds of companies that can make money in almost any economic environment, and they tend to pay handsome yields to boot!
Electric utilities should remain a safe sector.
Income Vehicle #3:
Safer Fixed Income Securities
It’s no secret that I believe many bond ETFs, mutual funds, and individual securities are risky right here. But that doesn’t mean you can’t find safe havens for your fixed income money.
Very short-term Treasuries, such as three-month bills, are a much, much safer alternative to something like 30-year bonds. That’s because of the way bond math works. The shorter a bond’s maturity, the less price risk it has in the event of a bond market rout and surge in interest rates.
As for corporate bonds, the higher the credit rating of the underlying company, the better the chance of it making good on its debts. So even today, I believe there are a select few ETFs and funds that have BOTH things going for them (short maturities and high ratings), and that are a worthy alternative for your fixed income funds.
What to Watch in the Months Ahead …
The markets have fared rather well since the start of the year to be sure. But we’re facing a number of important deadlines in the next several weeks.
The Treasury Department will run out of “extraordinary measures” to keep us under the debt ceiling sometime in late February or early March. That means we’re either going to have to default or prioritize our bill payments, or Congress will have to raise the limit.
The 60-day “punt” on the domestic and defense spending cuts — the cuts that were part of the “sequester” — expires around the same time. So policymakers will need to deal with those, too.
Then in late March, the temporary budget resolution runs out. That’s when Congress and the President will likely need to haggle AGAIN over funding the government through the end of the fiscal year in September.
If the President and Congress can’t come to a quick agreement
on the debt limit, our nation’s credit rating could fall.
Any or all of these battles could get extremely ugly, leading to credit ratings downgrades, stock market volatility, and more. And the risks aren’t confined to the U.S., either. Japan is in even worse fiscal shape than us — and therefore in NO position to whip out the credit card again!
Indeed, the Japanese government is on track to spend more than 100 trillion yen this year, financed by total debt issuance of more than 180 trillion yen. That will push the government’s debt load to an unbelievable 237 percent of GDP, according to estimates from the International Monetary Fund.
Could the bond market selloff we’re seeing over there turn into a bond market rout? One that spills over into the global markets like the European crisis already has? It’s a distinct possibility. So I still believe it makes sense to have some hedges in place, even as I’m seeking out opportunities like those I highlighted above.
That’s my roadmap for 2013! I hope you find it helpful. For more details and specific names, by the way, consider giving my Safe Money Report a try. You can do so for just 12 cents a day by clicking here.
Until next time,