Got cash?
Maybe you’d love to invest it, but where?
The stock market seems pricy after a 70% rally from the March 2009 lows. And it’s been so up and down lately that it doesn’t inspire much confidence. So maybe stocks are just too risky for you. Or you’re close to retirement or those college tuition payments and can’t take a risk. Maybe you’d just like to wait. Or maybe you just need more income than most stocks pay these days.
Bonds are, well, no bargain. A three month Treasury bill pays just 0.12%. A two-year note pays just 0.79%. Inflation may not be very high at an annual rate of 2.6% for headline inflation (and 1.6% minus volatile energy and food prices) but it’s enough to eat up all the interest from those investments and more. (TIPS, Treasury Inflation-Protected Securities will protect you from inflation but the yields are really low (1.43% for a 10-year TIPS at recent auction) and they only protect you from inflation and not rising interest rates. I-Bonds, a savings bond that pays an interest rate that combines a fixed component, currently 0.3%, with an inflation-adjusted variable rate, current 3.06%, offer a higher yield but since the variable rate is pegged to inflation and not interest rates, the yield on these bonds won’t neceesarily go up if interest rates do. You also have to hold for at least 12 months. (After that and until you’ve held for 5 years you lose the last 3-months of interest when you sell.)
You could lock your money up for decades and get 4.56% in a 30-year Treasury bond but 30 years is forever. And besides interest rates have to go up from today’s lows and that means bond prices will be coming down, probably fast enough to eat up all the interest that bond pays and more.
A certificate of deposit (CD) would make sure you get your invested capital back intact but the highest rates I can find for a one-year CD are 1.88% (at Eastbank) and 1.7% (at Tennessee Commerce Bank). That doesn’t even beat headline inflation.
Might as well keep it buried in the back yard—except that loses out to inflation too.
Here’s my advice: Think short term. It’s the best way right now to maximize long-term income.
Paradoxical?
Not if you remember that interest rates are going up in most of the world (except maybe Europe and Japan) quite dramatically over the next 12 months. A year from now, perhaps sooner, you’ll be able to get yields swell north of anything you can find now.
That pretty much means that you’re guaranteed to lose money two ways by locking it up for the long term now.
You’ll lose money, first, because that 30-year Treasury with its 4.5% coupon rate of interest will look pretty pathetic if 30-year bonds are paying 6% in a year. $10,000 invested in a bond paying 4.5% throws off $450 in interest in a year. At 6% all it takes is $7500 invested in a bond to produce the same $450 in cash. Interested in exploring the misery of watching a “safe” bond lose 25% of its value in a year?
And you’ll lose money, second, because every dollar that you’ve got locked up at today’s low interest rates is one less dollar that you can put to work at tomorrow’s higher rates. Your portfolio will thank you and your household cash flow will thank you for avoiding as much of this opportunity cost as possible.
So how do you go about1) thinking short term in order to 2) maximize long-term income?
For the short term you need to put your cash into something that’s as safe as possible but that offers you as much income as possible—and that doesn’t lock up your money for very long.
My choice dividend paying stocks—if they pay a high dividend, are extremely liquid, and are battle tested. Let me use chemical maker E.I. du Pont de Nemours (DD) to show you why.
Here’s a stock that’s paying a dividend of 4.86%. That’s more than you’ll get from even a 30-year Treasury at the moment.
The shares are very liquid so you should have no trouble trading in and out when you need to. Average daily volume is more than 7 million shares traded and the company has issued 904 million shares.
And the dividend has been battle tested in the Great Recession. The annual dividend was $1.46 in 2005, $1.48 in 2006, $1.52 in 2007, $1.64 in 2008, and, most impressively, $1.64 in 2009. If du Pont didn’t cut its dividend in 2009, I think it’s pretty safe unless the economy is hit by something worse than the great depression.
Dividend stocks like du Pont also give you another kind of protection. If interest rates rise faster than anyone now expects, it will (short of a meltdown in U.S. finances, which is unlikely in the short-term) be the result of faster than expected economic growth triggering faster than now anticipated interest rate increases from the Federal Reserve. If that happens, a company like du Pont will see its revenues and earnings go up faster than is now anticipated. That should more than make up for any downward pressure on the stock price because the dividend no longer seems quite so juicy. (For what to worry about in 2010 see my post https://jubakpicks.com/2010/02/16/how-to-worry-and-when-in-2010/ .
That’s exactly what happened in 2009 as the stock market began to anticipate an economic recovery in 2009. The yield dropped from 6.48% at the end of 2008 to 4.87% at the end of 2009. But the stock’s price soared 40%.
Of course, if the opposite happens and the economy tanks again, the stock price will go down for the duration of the slump, but you will still be collecting your 4.86% dividend.
You can find some other stocks that fit this profile such as American Electric Power (AEP), Potlatch (PCH), and Verizon (VZ) on my Dividend Income Portfolio https://jubakpicks.com/jubak-dividend-income-portfolio/
Okay, now let’s look at where you might be able to find the highest yields in the long run.
My bet here is the world’s emerging markets.
The odds are that countries like Brazil, India, Turkey, and even Mexico are much closer to the beginning of a series of interest rate increases than any of the developed economies are. Economic growth in these countries is already so strong that central banks there are seriously worried about inflation. It’s not a question of when they start raising interest rates but how quickly they do. And for how long.
For example, the forward futures market is pricing in an increase in interest rates in Brazil to 11.5% by the end of the year. That would be a 2.56 percentage point increase.
The futures markets are pricing in an increase of 1.86 percentage points to 9.05% in Turkey. And in India an increase of 1.19 percentage points to 4.66%.
Higher interest rates, if they work they way that central banks would like them to, would slow these economies but growth should still be stronger than in the European Union, Japan, or the U.S. and that should keep stock markets in these countries rising. Higher interest rates will push local currencies such as the Brazilian real higher against the euro and the dollar and that will offer additional profits and protection to European Union and U.S. investors.
You can execute this long-term strategy by buying stocks in emerging markets as long as you stick to utility and utility like stocks. Companies that need to raise capital frequently will try to keep their dividend yield in line with interest rates so they can compete with bonds to raise capital. Three to consider are Telkom Indonesia (TLK), a member of my Dividend Income Portfolio, and Philippine Long Distance (PHI) and Turkcell Iletisim (TKC). The latter two are both on my Jim’s Watch List https://jubakpicks.com/watch-list/ .
I’d say buying emerging market bonds would be an even better strategy toward the end of the year—if you can find an ETF or close-end emerging market bond fund that—ideally– 1) buys bonds denominated in local currencies, and 2) focuses on the right mix of markets.
That’s because buying emerging market debt directly can be just too hard and expensive for individual investors. I’m going to test exactly how difficult it is for individual investors to buy the bonds of big emerging market companies that issue lots of debt such as AmBev (ABV) and Vale (VALE) in Brazil and Cemex (CX) in Mexico. I’ll report back on what I find here.
In the meantime, although I haven’t found any that exactly match what I’m looking for, I’d certainly take a look at the closed-end funds (remember you want to buy closed-end funds at a discount to net asset value) AllianceBernstein Global High Income Fund (AWF) and Morgan Stanley Emerging Markets Debt (MSD), and among mutual funds MFS Emerging Markets Debt (MEDEX) and Fidelity New Markets Income (FNMX). Among ETFs (exchange traded funds) take a look at iShares JP Morgan USD Emerging Markets Bond Performance (EMB).
You’ve got time to research these choices: Remember that you want to buy them after emerging market interest rates have moved up some.
Full disclosure: I own shares of AmBev, Telkom Indonesia, and Vale in my personal portfolio.
Shavdog…
How long ago did you bail???
wwweng and shavdog…
I was looking for a good dividend quarterly but AOD pays monthly which to me was a no-brainer. Currently, AOD is paying me more than anything else I’ve invested in.
Please understand that I am definitely in the “learning” phase here, so I will defer to EdMcGon for the technical knowledge!!
OK- it’s the Friday Free For All or something, and I can’t resist:
How about T for a rock solid dividend [nearly 7%] and places to go…up?
Loved that post about “Marshall Law” – I believe that was what they declared in Europe at the end of WWII… maybe twice! ;]
JIM,
how do the Master Limited Partnerships set up to withstand the coming interest rate environment? I own KMP. I recall that some time back you commented that you liked PAA (I think) so long as interest rates stayed low. They pay a great dividend and I don’t want to sell unless it will take a major shellacking. Thanks for all your great advice.
I was one of the earlier investors in alpine…advdx…they lost their way and I bailed..they havent been back since…i’d stay away from them..
Ed and Seaturtlelady,
Isn’t AOD currently at 30% premium to NAV? Why do we want to buy a CEF at such a high premium? Please shed some light on it. Thanks.
sahai
I don’t think you got my points quite well. My points are (1) India is not a good place for indirect investment such as through stocks or bonds (2) nor a good place for direct investment either such as open a factory or sell products there.
Let me add one more point. I would not touch any Indian companies that you mentioned in your first post with a 8-feet pole because of their family/dynasty nature. I believe most if not all the companies that you mentioned are owned and run
by one family or dynasty. I can easily see my interset as a shareholder being trumped by the family or dynasty interest. This is exactly what Jim cautioned his readers recently when he wrote about emerging dividend stocks. In India, family dynasties not only run politics, but also run business.
Additionally, Tata Motor is bleeding money like crazy. It’s roads to sell luxury cars in affluent countries are extremely rocky. What left is selling the world cheapest car in third world. I just don’t see there is a lot of profit left for me as a shareholder.
Good points YX..
I agree with most of your points. But the fact remains that India is positioned for growth because of its population! There is an ever growing population of people with good spending power (just look at the telecom boom and Airtel story). Plus the infrastructure in India needs lot of work – that means local steel and construction companies have a great chance for profit. The real-estate in India is limited so more and more suburban areas are seeing increase in land values – another avenue for profit. You are spot on to say that foreign companies face an uphill task of making money in India. Thats why I will put my money on local companies in India. That’s why I was asking Jim if there is an Indian ETF that we can count on.
YX,
at least 63 American women are trampled to death at the annual Filene’s Basement wedding dress sale.
35,650 Americans were killed during the last Denny’s free breakfast promotion (almost all casualties were bacon related)
God forbid Krispy Kreme give away donuts. They’d have to declare friggin Marshall law!
I’m still investing in India
Jim:
Is the photo in this post Shanghai, China? Wow!
Ed & “lady”:
Thanks for AOD, will look into.
“Pigs”:
I don’t like preferred, because tax treatment for preferred’s “interest” is less preferable.
sahai_venkat:
I don’t view India as an investor friendly country, because (1) both its stocks and bonds are too risky and volatile for my appetite; (2) nor India is a good place for direct investment much as opening a factory or selling products, etc, because of lack of land and extremely difficult regulatory and social environment. Many foreign companies are having extremely difficult time in India. (This kind of reports can be easily found on many business media.) The only thing left is a handful of India’s IT companies that are said employ less than 1% of India’s work force and their stock prices are in stratosphere. I always believe India is the most over-rated emerging country in the world. India is not only going to be the last in the BRIC, but also will be the last in G20. I think Indonesia, Malaysia, S. Africa, Turkey (if it maintains its political stability), Chile (despite the quake), Peru, Saudi all have better chance than India. Needless to say Taiwan, Singapore and S. Korea. I can not wait to see the tiny S. Korea taking on the elephant India. S. Korea is not willing to loose to India and Japan in GDP.
Yesterday the news of the deadly stampede in India which killed 63 people over free food affirms my belief that the ultimate drag for India is its huge and fasting growing population in a very small land. Any growth India may have can be quickly absorbed and disappeared in its vast population. The high growth number came out of India the day before the stampede news may have exited some people, but to me it’s like hearing a 10% growth from Nepal. (Note: the stampede news was reported by all major US and foreign media.)
I like India personally and wish them well, but I am not willing to throw my hard-earned money there.
Can anyone enlighten me about 7%-plus taxable Build America bonds? What am I missing?
Re: MRVL
It should be pointed out that MRVL DID beat the street. I think today’s pre-market dip was simple panic among speculators who guessed that the profits would be significantly higher. Yawn.
good point, WSM.
I strongly believe in the ‘don’t fight the Fed’ adage. US treasuries should be part of a hedge against deflation/stronger USD but the printing presses will be running wide open for as long as it takes to inflate away our debt.
consider buying more gold and baskets of foreign currency’s, short dollar and euro
“And besides interest rates have to go up from today’s lows and that means bond prices will be coming down…”
The above statement is thrown around by Jim, as well as the consensus in the markets, as a foregone conclusion. Such conditions are what create investment opportunities. I.e. there is never any money to be made by following the overwhelming consensus.
Why “must” interest rates go up (on US Treasuries) ? If one has paid any attention at all to sovereign debt markets lately, then one starts to realize that the pressure on US Treasuries, at least in the near term (1-3 years), will be up, not down. I.e. bond prices will rise, leaving interest rates about where they are. Where else can global investors go to receive a 4.5% annual return with as little risk?
Given the disaster in global sovereign governments, the end game will be a profoundly deflationary environment. Which is another view that is far from consensus currently, but is gaining some traction (see WSJ article this week).
There are very few absolutes in the investing world; it’s all relative. And over the next few years, domestic gov’t bonds are the optimal choice, RELATIVE to the risk that accompanies other alternatives.
Oops…I just saw a BOO-BOO on my earlier post!!
Alpine is AOD, I repeat…AOD…sorry Marsdon1201
I also like CPL and have owned it for a few years. It pays over 7% at the moment, seems a very stable and growing Brazilian company, and has had strong stock movement. The only downfall is it pays the dividend only twice a year.
marsdon1201…
Do look at Alpine (AODO), I’ve very happy with my buy into this dividend stock!!
EdMcGon…
I can’t pat you on the back since I bought some of the MRVL. Do I just ride the tsunami out at this point and consider MRVL to be long-term for me as in a year or more???
Ed, 16% on AOD? sounds too good to be true!
Even Madof paid less than 12%.
Jim, seems to me that you are collaborating with MSN again.
Please, don’t drop your own post!
Jim,
What about real estate? Some homes in FL are selling at $16/sq.ft. OK, so maybe a south florida condo doesn’t fit on your Picks but what about a REIT like Rayonier? (disclaimer: I own RYN in my port.)
More generally though, I read that the entire concept of the Victorian hauted house sprang from the abandoned houses left over from the boom-bust years of the late 1800s. That is what you call a lasting cultural impact of a finacial crisis. So do I tell my father to sit on his stinking pile of dividends or go ahead and do what he did in 1982– buy another piece of property?
Jim,
How about Ferrel Gas Partners? Current dividend yield is 8.5% and they haven’t changed their dividend through the recession yet either.
FYI to any of you palladium traders: I sold my palladium ETF (PALL) at $47 today. I expect it to drop in the near future as it’s nearing it’s peak. I have already put out a buy order for it at $43.
If you prefer mining stocks to physical ETF’s, look at PAL, although I personally am not fond of it yet. Like a lot of mining stocks, it’s a cash bleeder.
great post, Jim.
I’ve been buying EMB over last 6 months as hedge against weaker dollar/euro (also nice yields). I’m planning on buying PCY as a parralell emerging market debt play, waiting for price to drop a bit.
I also feel pretty good about the corporate debt etf LQD and junk bond etf JNK and am hedged against dollar strength with US treasury etf’s TIP and TLT.
All of these trade decent volumes so putting in conservative stop orders is a reasonable exit strategy if/when the bond bubble starts to blow up.
What about preferred stocks? Those have some pretty decent yields… or are do they act too much like a bond when interest rates rise?
Good post Jim. That is EXACTLY why I bought Alpine Total Dynamic Dividend Fund
(AOD). Even at it’s currently elevated price, it’s dividend yield is still over 16%. With the dividend paid monthly, it’s the perfect investment for extra cash.
Morgan Stanley Emerging Markets Domestic Debt (EDD) is another closed-end fund worth considering. Those currencies should do well in coming years. The discount is now 11%, the yield 8%. It’s history is short, and expenses are high, but perhaps justified. Identifying and buying emerging-market bonds must be costly.
And MRVL drops on disappointing earnings plus a warning of a competitive environment:
http://www.marketwatch.com/story/marvell-tech-profits-may-highlight-after-hours-2010-03-04?dist=afterbell
You can pat me on the back later. 🙂
Having said that, I was frankly impressed they showed a profit. Was the company positioned in such a way that a profit was a foregone conclusion? Or to steal the Geico line, “so easy a caveman could do it”?
Jim: I agree completely. In fact, I have been doing this for some time. Bonds are not going to be the save play as in the past. What I haven’t done…which your comments reminded me to do…is to move the bonds that I do have, into shorter term so they won’t take quite the hit the longer term bonds will take.
Nice post Jim, and some really good Stock suggestions.
I am wondering why you didnt recommend any Indian stock in this post. There are obviously some big and great companies like Reliance, ICICI, Bharti Airtel, Tata Motors that everyone knows of. I am wondering if you have any insight into companies that are up and coming but not so well known? Also what do you think of WisdomTree India (EPI) ETF?
I like getting my interest and dividends everymonth…currently I own mo 6.9 kmr 7.4 oks 7.3 pff 6.3 hcs 7.6 wfcpj 7.6 and bac bond 7 and ge 6.125 and dow 7.375…my avg yield is 6.7% and I feel pretty spread out…it can be done
Jim,
great post. I’m retired and obviously interested in increasing my income via dividend stocks. Like the emerging market angle. What about Brazil, utility stock, CPL, good dividend. Also, any thoughts on a ETF or mutual fund of emerging markets with dividend paying stocks. Thanks