A Market Lesson from the Frog and the Ox

The market is swelling...here are tips on how to prepare

   
A Market Lesson from the Frog and the Ox

Sure, I’m paying attention.  How could anybody not be paying attention when the Dow scored (as it did Thursday) its 50th all-time closing high for 2013?  Frankly, though, I’m paying far more attention to the eye-popping bargains I’m finding in the fixed-income space.

The stock market, at this point, is like the bullfrog in Aesop’s old fable, who tried to inflate himself to the size of an ox.  He puffs himself up bigger and bigger until his pride makes him burst.  (Check out this great illustration from 1857, courtesy of Wikipedia.)

Bernanke/Yellen are still pumping air in, so the green amphibian may be able to swell even further than the astounding 29% he has already grown this year (basis the S&P 500 index).  However, I’m not interested in buying the broad stock market indexes at these levels.  When the frog pops, I don’t care to be sprayed with the mess that comes out.

Instead, I’m focusing intently on cash yield, which I can earn, conveniently and safely, with good-quality preferred stocks.  By my estimates, an S&P index fund—because of the huge run-up this year—will generate a total return of only 3%-5% annually over the next 10 years.

Investment-grade preferreds are yielding 6%-7%.  Even if interest rates climb somewhat in coming years, putting a damper on preferred prices, I figure my preferreds will deliver at least the same return over the next decade as a stock-index fund (with far less risk).  Should a recession intervene somewhere along the line and rates drop back toward their 2012 lows, my preferreds could go through the roof.

Best buy right now is the Wells Fargo Series O (WFC.P.O).  Current yield: 6.5%, plus tax-favored dividends.

If you’re willing to venture into somewhat smaller companies, you can nail down even fatter payouts.  San Francisco-based First Republic Bank (FRC) shepherds $41 billion of assets and does a brilliant job of it.  As of September 30, nonperforming assets represented a microscopic 0.13% of the total.

This is an outfit you can trust to keep paying its preferred dividends without missing a beat.  Yet the First Republic Series B preferred (FRC.P.B) is yielding a sweet 7.2%.

Elsewhere I’m looking at some emerging-markets picks.  PowerShares India Portfolio (PIN) has staged a nice 28% rally off its summer low.  However, the Indian stock market now appears to be running into overhead resistance, at least for the near term. Accordingly, I’m a bit cautious on PIN.  If you own it, you can keep it.

For the next three to six months, though, I favor WisdomTree Emerging Markets Income Fund (DEM) for less risk and equal reward. Current yield: 4.2%.


Article printed from InvestorPlace Media, http://investorplace.com/2013/12/preferred-stocks-dem-frc-pin-market/.

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