“…so alone I’ll keep the wolves at bay.” - The Clash
Since the financial crisis of 2008, many investors have played the part of the forlorn character in the most awesome Clash song “Train In Vain”: standing, waiting, and hoping for interest rates to go up while opportunity speeds away down the railroad tracks. How do we know this? Fed Chairman, Ben Bernanke told us.
When the banking system and the credit markets locked up, the Fed opened up the monetary floodgates and saturated the money supply with liquidity of biblical proportions. Bond yields and other interest rates cratered. The consensus, from CNBC to the barber shop, was that rates would skyrocket in lockstep with the onset of the coming hyperinflation. An investor needs income, however, he’s too chicken to go out too far on the curve (which isn’t even THAT great). He keeps it close in and earns precisely bubkus, Richard, nil. And as rates continue to NOT go up, income investors complain about the lack of income.
So what should they do? Well, first of all, they need to accept the reality that rates are going to stay miserably low for at least the next two years. See, all of that money needs some velocity meaning that people have to want the money and the people with the money (banks) must be willing to lend it. That’s not happening and as the economy continues to bumble along, it won’t happen any time soon. You will earn very little money in conservative, fixed income investments. Accept it and if you want to earn any money, you are going to have to do something different. Yes, that may translate into owning some equities.
The smart thing to do would be to find sectors that will continue to perform decently in a low interest rate environment. One of the best and possibly most conservative places to look would be at utilities. Utilities as a group have under performed the broader market mostly due to the misplaced fear that interest rates are going up. Historically, utilities don’t do too well in rising rate environments. That’s not going to happen. The 10 year Treasury is yielding 2.21%, Yes. 2.21%. It’s not going to kill you to add a couple of big, regulated electric utilities to the mix. Duke Energy (DUK) is huge, well run and has a 5.6% dividend yield. The company is in the process of acquiring Progress Energy (PGN). The combined entity will be the largest regulated electrical utility in the U.S. of A. PGN is trading at a slight discount to the acquisition price so that might be a cheap way to buy some DUK. PGN yields 5.5%. Southern Company (SO) is a perennial favorite. The 4.8% dividend is a little thin in our opinion and the valuation is at the upper level of its range. But, it’s an incredibly well run business that you could be comfortable holding for the longer haul.
Mortgage REIT’s should also do well in the suppressed rate environment. When you can borrow at damn near zero, as long as you halfway know what you’re doing, the math should work in your favor. Our favorite idea, no surprise, in that space is Annaly Capital Management (NLY). Valuations are ridiculously, single digit low and the sick dividend yield of 14.5% make it worth a peek.
Still convinced that rates are about to scream up? Your wait may be in vain. You might want to make sure your Kindle is charged up. It’s gonna be a while before the inflation express comes barreling down track number nine. Don’t believe me? Call a retiree in Japan and ask how their fixed income choices are working out for them. Think their higher interest rate train has pulled into the station?
Well…some things you can’t explain away…like this week’s three lil’ piggies…
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Yieldpig, Copyright © 2011 All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. Yieldpig does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment Communications from Yieldpig are intended solely for informational purposes. Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of Yieldpig, and should not be construed as an endorsement by Yieldpig, either expressed or implied. Yieldpig is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results. s should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question
Since the financial crisis of 2008, many investors have played the part of the forlorn character in the most awesome Clash song “Train In Vain”: standing, waiting, and hoping for interest rates to go up while opportunity speeds away down the railroad tracks. How do we know this? Fed Chairman, Ben Bernanke told us.
When the banking system and the credit markets locked up, the Fed opened up the monetary floodgates and saturated the money supply with liquidity of biblical proportions. Bond yields and other interest rates cratered. The consensus, from CNBC to the barber shop, was that rates would skyrocket in lockstep with the onset of the coming hyperinflation. An investor needs income, however, he’s too chicken to go out too far on the curve (which isn’t even THAT great). He keeps it close in and earns precisely bubkus, Richard, nil. And as rates continue to NOT go up, income investors complain about the lack of income.
So what should they do? Well, first of all, they need to accept the reality that rates are going to stay miserably low for at least the next two years. See, all of that money needs some velocity meaning that people have to want the money and the people with the money (banks) must be willing to lend it. That’s not happening and as the economy continues to bumble along, it won’t happen any time soon. You will earn very little money in conservative, fixed income investments. Accept it and if you want to earn any money, you are going to have to do something different. Yes, that may translate into owning some equities.
The smart thing to do would be to find sectors that will continue to perform decently in a low interest rate environment. One of the best and possibly most conservative places to look would be at utilities. Utilities as a group have under performed the broader market mostly due to the misplaced fear that interest rates are going up. Historically, utilities don’t do too well in rising rate environments. That’s not going to happen. The 10 year Treasury is yielding 2.21%, Yes. 2.21%. It’s not going to kill you to add a couple of big, regulated electric utilities to the mix. Duke Energy (DUK) is huge, well run and has a 5.6% dividend yield. The company is in the process of acquiring Progress Energy (PGN). The combined entity will be the largest regulated electrical utility in the U.S. of A. PGN is trading at a slight discount to the acquisition price so that might be a cheap way to buy some DUK. PGN yields 5.5%. Southern Company (SO) is a perennial favorite. The 4.8% dividend is a little thin in our opinion and the valuation is at the upper level of its range. But, it’s an incredibly well run business that you could be comfortable holding for the longer haul.
Mortgage REIT’s should also do well in the suppressed rate environment. When you can borrow at damn near zero, as long as you halfway know what you’re doing, the math should work in your favor. Our favorite idea, no surprise, in that space is Annaly Capital Management (NLY). Valuations are ridiculously, single digit low and the sick dividend yield of 14.5% make it worth a peek.
Still convinced that rates are about to scream up? Your wait may be in vain. You might want to make sure your Kindle is charged up. It’s gonna be a while before the inflation express comes barreling down track number nine. Don’t believe me? Call a retiree in Japan and ask how their fixed income choices are working out for them. Think their higher interest rate train has pulled into the station?
Well…some things you can’t explain away…like this week’s three lil’ piggies…
Subscribe now to Yieldpig Premium. Available exclusively on Amazon Kindle. Only $1.99 a month!
http://www.amazon.com/Yieldpig-Premium/dp/B0057KR7LI/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1311531078&sr=1-1
And be sure to follow us on Twitter...@Yieldpig!
Yieldpig, Copyright © 2011 All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. Yieldpig does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment Communications from Yieldpig are intended solely for informational purposes. Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of Yieldpig, and should not be construed as an endorsement by Yieldpig, either expressed or implied. Yieldpig is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results. s should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question
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