3 Buys to Escape the Agony of Low Treasury Yields

by Richard Band | February 18, 2012 7:00 am

Will marvels never cease? France, Germany and Japan are in recession. China is slowing abruptly. But the good ol’ USA is trucking along just fine. With initial jobless claims hitting their lowest reading in nearly four years, the Dow jumped 123 points on Thursday for its best close since May 19, 2008. It then added another 47 points on Friday to seal that best close since 2008.

For the sake of America’s 13.5 million unemployed, I’m happy to see the definite signs of strengthening in the job market. The private sector is adapting, in amazing ways, to the tough economic climate we’ve been in. Entrepreneurs are overcoming a host of obstacles (including some thrown up by our own government), and businesses are hiring again.

Kudos to them!

As investors, our challenge is to figure out how much to pay for this somewhat improved state of affairs. It would be a lot easier to know what stocks are really worth if the Federal Reserve allowed interest rates to seek a normal level.

Instead, we’re left to compare stock P/Es and dividend yields against artificially depressed bond and money market yields. Maybe equities, on the whole, are fairly valued. If, however, Bernanke’s “quantitative easing” has created the economic equivalent of a sugar high, many stocks — particularly in the market’s riskier sectors — could be quite seriously overvalued at today’s prices.

How do you protect yourself from making a major miscalculation? First, of course, by maintaining a balanced portfolio, with an ample fixed-income component. A fund like DoubleLine Total Return Bond (MUTF:DLTNX[1]) can help you escape the agony of extremely low Treasury yields, while giving you a cushion should the stock market stumble.

Current yield: 7.87%

In the stock market itself, you should focus your buying on the very few situations that still offer great value — even after the monster rally of the past four-plus months.

I include PepsiCo (NYSE:PEP[2]) in that select list. Over the long haul, the company’s latest organizational shake-up, with $600 million to be spent on North American marketing this year, should pay handsome dividends (literally).  Meanwhile, you’re collecting a safe 3.3% dividend.

For income seekers, I’m also finding renewed value in Buckeye Partners (NYSE:BPL[3]). Some analysts and investors panicked after the pipeline partnership reported lackluster Q4 earnings last Friday.

However, BPL went through a similar earnings slowdown in 2006, when the partnership was financing another hefty expansion program like today’s.

Back then, Buckeye’s investments paid off. Not only did the partnership keep its distribution intact but it also continued to raise its cash payout — and has now done so, without fail, for 31 quarters in a row. Current yield: 6.9%, largely tax-deferred. Please note that because BPL went ex-dividend yesterday, your first cash distribution will arrive in late May. It’s also important to note special tax rules applicable to master limited partnerships make Buckeye unsuitable for retirement accounts.

  1. DLTNX: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLTNX
  2. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  3. BPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=BPL

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