by Bryan Perry | November 8, 2012 12:15 pm
Same administration, same problems.
Investors (especially retirees) still need income to live on, Treasuries aren’t cutting it and the fiscal cliff still looms large for dividend investors. What else is new?
It just cements in my mind the value of high-yield stocks. The obvious winners for a second Obama term include healthcare, master limited partnerships, municipal bonds and corporate debt.
A couple things come to mind about the macroeconomic picture. Higher taxes in one form or another are on the way — and with the Dow down 313 points yesterday, the market is sending a clear message: If we set aside business interests in favor of social interests, then capital formation, lending and GDP growth will be stifled.
Another consideration is that stocks are initially worth less if dividend and capital gains rates are set higher. Given that most dividend-paying stocks are sheltered in retirement plans, the effect on income is zero, but that doesn’t remove the risk of stock devaluation for the implied adjustment for cash accounts.
In this scenario, corporations would hold back on increased capital spending and hiring without knowing where taxes and healthcare costs lie. If nothing gets done and we do go over the fiscal cliff, layoffs will spike, as will the unemployment rate — both of which would be irrational for Obama and Congress to condone in such a fragile recovery.
Once the market prices in whatever compromise Congress settles on, the indices will then begin to trend higher based on earnings and future dividend increases, as has been the case for the past 50 years. Here are four names to buy on weakness to take advantage of that situation.
An obvious winner in this administration is the healthcare sector. With the certainty of the implementation of the Affordable Care Act and the wave of baby boomers hitting retirement, Senior Housing Properties (NYSE:SNH) is a great pick.
Senior Housing owns independent living and assisted-living communities, continuing-care retirement communities, nursing homes, medical offices and biotech laboratory buildings located throughout the U.S. The majority of SNH’s properties are “triple net leased,” meaning each tenant pays SNH rent and also is responsible to pay all operating costs, taxes, insurance and maintenance costs that arise from the use of the property.
From a landlord’s perspective, it doesn’t get much sweeter than that. From an income perspective, a yield near 7% is nothing to complain about, either.
MLPs are already the best-performing sector in the past decade and will continue to lead going into 2013. MLPs pay tax-advantaged income, act as an excellent hedge against inflation and because they’re commodity-based, are best to own when risk of currency devaluation is high.
My MLP recommendation is Teekay LNG Partners (NYSE:TGP), the leading transport shipping company that delivers liquefied natural gas (LNG) to global end markets and yields 7%. It’s the purest play in the future of LNG transport, with its strategy to expand its operations in both the LNG and the liquefied petroleum gas (LPG) shipping sectors.
As I’ve said before, state government general obligation bonds are bunker money. If you don’t live in one of the handful of fiscally stout states, Dreyfus Strategic Municipals (NYSE:LEO) is a muni bond ETF with a yield of about 6% that I would recommend for purchase because of its portfolio of widely diversified national investment-grade bonds.
I’m seeing a lot of buyers right now in corporate bond funds like Franklin Templeton Limited Duration Income Trust (NYSE:FTF). This would suggest that certain income assets that are already taxed at ordinary income tax rates — like high-yield corporate debt — have priced in much of the fear of higher tax rates going forward.
Now, these four recommendations aren’t necessarily immediate buys. With the fiscal framework up in the air, the best thing to do may be to sit tight and see how the status quo sinks in over the next couple days. It remains to be seen if perceptions will become reality, but the four names above belong in any income portfolio.
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