Need your money to work for you but concerned about China? Neil George has two sectors for new dollars today
As soon as “investing” came up, she scowled.
“Everything looks scary right now,” she said, no longer looking at me. “But we’re behind — we have to do something with our money.”
Over the weekend, I was killing time at a restaurant bar, waiting on a friend who was running late for dinner. The couple beside me were in a similar situation, so we began chatting to pass the time.
At first there were the general pleasantries. They were visiting Los Angeles from the east coast, meeting their new grandchild for the first time. They spoke with all the enthusiasm you’d expect from excited, new grandparents. But when the conversation turned toward my career in investments, things changed. He grew quiet … she became unsettled.
“We lost a lot in 2009 and sold at the wrong time. Then we missed a lot of the last ten years. Now we’re behind in terms of retirement,” she continued. “We’re saving money each month and putting it into the market, but we don’t know what to do now. We can’t lose this money.”
She was smart, and seemed to know more about investing than many — though she appeared to focus on the worst possible outcome. Given their experience in 2009, that’s not a surprise.
Her concerns focused on one thing — trade war contagion that would set off a broad bear market. She feared that the escalation of the U.S./China conflict would spread, dragging down any investment with even peripheral exposure to China. That would lead to broader kneejerk selling, which would set off a domino effect, leading to a real bear … which would gut their retirement nest egg, jeopardizing their Golden Years.
She’s not the only one with these concerns. That’s why I’m glad to be writing today’s Digest, which tackles this fear head-on, with help from Neil George, editor of Profitable Investing.
Neil is a master income investor, helping his subscribers navigate challenging markets while finding quality, high-yielding income investments whether through stocks, bonds, MLPs, REITs, you name it.
In Neil’s June issue, he addresses fears of a market meltdown, brought about by the trade war. He then points toward two sectors that are wise choices for new investment dollars today while we wait for a trade war resolution.
So, in this Digest, let’s dig into the details. For anyone nervous about the market today, yet needing to keep your money invested and working for you, this is the issue for you.
***The way to insulate your portfolio from trade war escalation
In Neil’s June issue, he begins by establishing some macro context. The reality is growth in the U.S. economy remains strong. The first quarter’s gain was an impressive 3.20%. Inflation for the quarter, as measured by the core personal consumption expenditure (PCE) index, was a meager 1.30%. Overall, the U.S. economy and markets are in good shape.
But that doesn’t mean people feel secure about the markets.
All of this is good, but with trade war troubles, the markets are being jostled. I expect this will be settled sooner rather than later. But the safest way through this environment is to continue to buy and own U.S.-based, domestic focused stocks, bonds and funds that are more insulated from U.S.-China tensions.
So, for investors needing to protect their capital from China-related sell-offs, “Buy America” is the general game plan. But what are the details?
***Neil starts his recommendations by focusing on the municipal bond market
To make sure we’re all on the same page, let’s briefly go over the features and benefits of municipal bonds.
Municipal bonds — often calls “munis” — are issued by state and local governments rather than the federal government. They’re often a way for the municipality to raise money for public works. Think “a new bridge” or “a new wing to a public hospital,” something along those lines. Munis are considered safer than most corporate bonds, while offering higher yields than Treasury bonds.
Now, when you’re investing in bonds, you’re generally doing so for the income. And that points us toward perhaps the biggest benefit of munis — their interest payments are generally exempt from federal income tax, and usually excused from state and local taxes too (usually when the investor lives in the municipality where the bond was issued).
Back to Neil now:
“Munis” are a great source of both domestic income and growth … The muni market is gaining steam from several factors, too. The U.S. economy is growing, resulting in more tax revenues. And the cap on tax deductions from payments of state and local taxes (SALT) is bringing in even more state and local tax revenues, thanks to changes in the Tax Cuts and Jobs Act (TCJA) of 2017.
Neil goes on to highlight three closed-end funds from his Total Return Portfolio. They’re still trading at discounts to their net asset values Meanwhile, on a taxable basis, they pay a taxable equivalent dividend yield averaging 7.69%.
Out of fairness to Neil’s subscribers, I won’t reveal all of them. But one which you might want to consider is the Nuveen AMT-Free Municipal Credit Income Fund (NVG). At the time of this writing, its distribution rate is over 5% and its discount to its net asset value is over 6%.
***For even more China-protected income, Neil recommends looking at REITs
Real estate investment trusts (REITs) have been a foundation for Neil’s model portfolios. That’s because REITs’ combination of quality real assets with ample cash flows and higher tax-advantaged dividend payments continue to make for dependable growth and income — especially in challenging markets like right now. But, as Neil tell us, REITs aren’t just a defensive play — the returns have been impressive.
For the past year, REITs as tracked by the Bloomberg REIT Index have earned a return of 17.9% which is significantly higher than the return for the S&P 500 Index at 7.1%.
In addition, during the big sell-off in stocks during the fourth quarter of last year, REITs did drop by 6.1%. However, that was way better than the drop in the S&P 500 Index of 13.5%.
One REIT to watch is WP Carey. It’s a large, diversified REIT with assets around the U.S. Its focus is sale-lease-back transactions, where owners and occupiers sell their properties to WPC, then lease them back from WPC.
For more on why WPC is attractive, here’s Neil:
The return over the past trailing year is a whopping 29.6%, and while revenues have slowed a bit recently to a gain of 4.4%, the FFO (funds from operations) return is better at 10.6%.
It is also a bargain at only 1.9 times its book value. And the dividend which keeps rising every quarter by policy is even more attractive at 5.4%.
***As we wrap up, it’s important to be objective about the trade war and its long-term effects on your portfolio
It’s easy to become scared, like the grandparents with whom I shared a conversation over the weekend.
But remember, there’s always something to fear. And while China does have the ability to roil our markets, it’s important to view everything in context.
Here’s Neil, on that note:
There is the potential that this trade war could reduce the rate of growth in the U.S. economy, including a reduction in consumer spending, if the prices of retail imported goods climb too swiftly. But the U.S. economy is significantly larger and broader than just the sectors that are wrapped up in this fight. And the U.S. stock and bond markets are still viewed by the globe as among the best in the world, driving more inbound investment.
Meanwhile, inflation remains low while yields and borrowing costs for companies and households are also low, which is providing an additional boost for the economy.
So, while being cautious is wise, being fearful is counterproductive. A focus on quality assets in sectors with limited exposure to the trade war should help any portfolio weather this market volatility.
Have a good evening,