This has been a bad two weeks for stocks in the U.S. The S&P 500 Index dropped 4.55% from this year’s high on April 30 to a low on May 13. And while it is still up in price for the year to date by 15%, many investors are worried that the trade negotiations are not going swimmingly between the U.S. and China, at least in the short-term. That has led to more selling.
But while the drama continues with China, trade issues with the European Union and Japan got a break last week as automobile tariffs were put on hold. Hopefully that’s some consolation for investors.
One of the best antidotes for choppy stock markets — or worse — is to make sure that your portfolio has plenty of big, income-producing investments. Income does a few significant things for a portfolio. First, it provides a return that’s independent from stock price gains and losses. Second, it pays you to be patient in unsettled markets. And third, it builds up a portfolio’s value by either stacking up the cash or by re-investing those dividends.
Dividend Stocks Aren’t the Only Key
Income investments start with stock dividends, but they are just one side of the coin. The other is found in interest and coupons from the fixed income market.
Fixed income provides not only reliable income from bonds, preferred stocks and related funds — but it can further balance out a portfolio providing a cushion when the stock market takes a pause or goes through a bit of selling.
Income-generating investments have always been at the core of my research and recommendations. And I’ve had decades of experience in the bond markets, from trading to asset management. This has continued in my writings and newsletter recommendations, including for Profitable Investing.
I view bonds and related investments not just as a shock-absorber for stocks, but as opportunities for income and growth. I continue to analyze credit conditions, supply-and-demand for issues and inflation and monetary policies to come up with strategies that will capitalize on obtaining risk-controlled higher yield with opportunities for underlying appreciation. And I also work just as I do for stocks — to limit threats as they begin to emerge.
And over the last year (and so far this year), I’ve been seeing the developments in the bond market which continue to favor corporate bonds and preferred stocks as well as the more buoyant and more credible municipal tax-free market. And with inflation as measured by the broad Core Personal Consumption Expenditure Index (PCE) remaining subdued the Federal Reserve and its Open Market Committee (FOMC) should remain neutral in policy — which is good for fixed-income. And add-in the potential of easing by the FOMC to help off-set trade tensions — it makes it even more supportive for the domestic US bond markets.
The U.S. economy expanded at a great overall pace last year. And this year, the economy is also off to a great start, with first-quarter GDP up 3.2%. This means more spending by consumers which turns into more revenue for companies. And in turn, this means better corporate credit, which drives higher appreciation for corporate bonds by investors.
I like corporate bonds, as they act like stocks. As underlying conditions improve, they improve in price. And along the way they pay more income. And given the outlook for the markets, I have allocations inside the model portfolios of Profitable Investing in this segment.
One of the best means to get great exposure to the corporate bond market is via one of the best-researched-backed mutual funds run by Osterweis with its Osterweis Strategic Income Fund (MUTF:OSTIX).
Osterweis Strategic Income Fund Total Return Source Bloomberg
The fund has a great collection of corporate bonds that are right in the middle of the successes in this segment. Year to date, the fund has generated a return of 4.29% and currently provides a yield of 4.37%.
Preferred stock, also known as preferreds, are another form of corporate bonds. They look and trade like stocks, but they come with a call on assets just after bonds if something goes wrong. And they also come with reliable dividend flows that are typically fixed for investors. I like preferreds as a good blend of equity participation with improving credit and ample dividends.
The one downside to preferreds is that they don’t trade as often and with as much volume as common stocks. This makes mutual funds and ETFs ideal to gain access to good collections or representations for individual investors. I have allocations to preferreds inside the model portfolios of Profitable Investing.
Like for corporate bonds, the fund market provides an easy means to invest as noted above. A great example to get started with can be found with the Flaherty & Crumrine Preferred Income Fund (NYSE:PFD).
Flaherty & Crumrine Preferred Income Fund Total Return Source Bloomberg
This is a closed-end fund that is currently trading on the stock exchange at a discount to its portfolio of preferred stock and other assets. This means that you buy cheaper than if you bought the underlying assets. Year to date, the fund has generated a return of 17.5% and provides a yield of 6.7%.
Who doesn’t like to get paid by their investments with either less or no taxes owed? The municipal bond market, or munis, provide great tax-advantaged income for investors. And last year and this year, the underlying market for munis has been getting better and better. The economy is growing, resulting in more tax and other revenues for muni issuers, which makes them more credible in the bond market. This, in turn, is bringing muni prices higher. With low inflation, the payouts are less threatened for over the coming years.
And while taxes are down for lower-to-middle-income wage earners — for investors and higher-income earners – tax rates are still high – making for munis to be even more advantageous. This in turn is driving more demand. And with less need to issue more – supply favors bond prices adding to the attraction of munis. I have allocations to this important market inside the model portfolios of Profitable Investing.
Like for the preferred stocks, I like the closed-end funds for munis when they are trading at a discount to their underlying muni bonds. One of the best is the Nuveen Municipal Credit Income Fund (NYSE:NZF).
Nuveen Municipal Credit Income Fund Total Return Source Bloomberg
The fund has generated a total return year to date of 17.9% and pays a yield of 5.1% which equates to a taxable equivalent yield of 7.85%. And the dividends are paid monthly as well.
For more of my all-weather growth and income investments — please take a look at my Profitable Investing which is now in its 30th year of publication. Click here to learn more: https://profitableinvesting.investorplace.com/
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.