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3 Conservative Plays for Income Bulls

This bull market may well get a life extension. Here's how to make the most of the critical next few weeks


The stock market’s powerful and persistent rebound since October is nothing to scoff at. Around the globe, the rally has reinvigorated investors’ taste for risk.

Once awakened, “animal spirits” can drive prices higher for some time. So it’s prudent, at this point, for us to assume that the bull has won a life extension of at least several months or perhaps until late April or (less likely) mid-July — two well-worn seasonal stopping points in past market uptrends.

The main question for us, as long-term investors, is whether stocks can continue to climb through the rest of the year and end on a bright note. Or will the early energy dissipate, as it did in 2011, leading to a sharp setback and, at best, a ragged recovery?

We can’t know yet, of course. But the next five to seven weeks may give us a clue.

If some of the fundamental issues I’ve discussed earlier (European debt and higher taxes) start moving toward a favorable resolution while market values improve and speculative fervor cools, I’m prepared to add to my equity exposure.

For now, though, I’m sticking with a conservative allocation of just over half of my portfolio to stocks. A three-year-old bull can live on, but he’s due for a couple of important health checks soon. Watch and listen to the vital signs:


Stocks (51% of my portfolio) have repeatedly defied calls for a pullback in January and February. However, investor sentiment is now so lopsidedly optimistic that a brief “tummy tester” seems almost inevitable. Watch for the S&P 500 index to backtrack 5% to 8% from its recent highs before driving ahead to a new post-2008 peak — by a small margin — in late April or early May.

Strategy: With the market’s longer-term trend still unclear, it’s crucial to make sure your stocks pack maximum value. Earlier in the month, I sold defense contractor Raytheon (NYSE:RTN) to buy health insurer Wellpoint (NYSE:WLP). Government-spending patterns will no doubt affect both companies in the years ahead, but it will be easier for Washington to cut defense than health care. At today’s share price for RTN, I estimate less than 3% appreciation potential for the shares in the next 12 months — too low for my portfolio.

For income investors, Royal Dutch Shell (NYSE:RDS.B) is looking attractive again. Back in 2004, the Anglo-Dutch oil titan sullied its once-pristine reputation by overstating its hydrocarbon reserves. Seven years later, after extensive management changes, RDS has opened a new chapter. CEO Peter Voser is targeting a 25% increase in oil-and-gas production, to 4 million barrels a day by 2018.

In early February, the company also announced its first dividend hike in three years, to 86 cents quarterly. At a current 4.5%, the shares yield more than the longest-dated U.S. Treasury bond, with a built-in hedge against inflation. The London-based Class B shares are attractive, carrying no withholding tax on dividends.

Fixed income

Fixed income is 49% or my portfolio. I guess you’d have to say Ben Bernanke’s zero-rate policy is “succeeding.” Treasury yields across the maturity spectrum remain extremely low, and yields on most other kinds of IOUs (public and private) continue to shrink. Absent an unexpected economic boom, I doubt the benchmark 10-year T-note yield will budge above 2.4% for very long during the rest of this year.

Strategy: With the Federal Reserve pledging to hold money market rates down through 2014, there’s little need for you to keep buying Ally Bank’s Raise Your Rate CDs. Accordingly, for my portfolio, I’m eliminating my position in these CDs, distributing 4% to Intermediate Credit Bonds and 2% to Short-Term Bonds. If you own the Ally CDs, you may find (depending on your remaining term to maturity and the early-withdrawal penalty) that it makes more sense to let the CDs mature before swapping to my recommended bond funds.

Note that I weight my two intermediate bond funds differently. Only a quarter of my intermediate stake (5% of my portfolio) resides in DoubleLine Total Return Bond Fund (MUTF:DLTNX). DoubleLine is a mortgage fund with an aggressive strategy.

For every $1 you put into DLTNX, you should devote about $3 to Vanguard Intermediate-Term Investment Grade Fund (MUTF:VFICX). The Vanguard fund yields less (4.1%) but also focuses exclusively on better-quality paper. Proper diversification between these two funds will let you eat well and sleep well, too.

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