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MAKING CENTS OUT OF THE NEWS
Blog #41
(December 8th, 2011)
Crisis-Insulation for Your Income
By Tom McAllister, CFP®
The European crisis, I’ve little doubt, will ultimately be solved. On the other hand, I’m not holding my breath expecting seventeen separate countries to arrive at a consensus in short order. I expect a slowdown while the process is going on, but nothing on the magnitude of a worldwide recession. However, with so much uncertainty in the air, and with U.S. government bonds offering such low yields, it becomes important to do some astute “shopping” in investment markets in order to meet the need for income.
Although U.S. government bonds are offering historically low yields, that is not the case for U.S. municipal obligations. Because of investor fears, many well rated general obligation bonds offer relatively generous yields. Investors must be careful, but fears of looming bankruptcy for states and municipalities appear to be exaggerated. Remember that headlines highlight the unusual and sensational. Actual defaults in the area of municipal bonds are rare.
Avoiding bonds from states running huge deficits (California, New York, New Jersey, and Michigan, for example) would be a good idea, along with nearly all revenue bonds. The best bets are general obligation issues rated A or better. Longer term yields of 4% or more, tax-free, look good, particularly when compared to U. S. taxable issues.
In recent blog posts, we’ve discussed income options such as preferred stocks, pipeline master partnerships, REITs, and commodity-related Exchange Trades Notes (ETNs). All have their place, but it is probably best to limit exposure in each to 5-10%.
I repeat myself, but the best alternative for the major part of an income portfolios are high yielding blue chip stocks.
Since the Federal Reserve has promised to maintain low interest rates for the next two years, income securities have become a much more attractive option. The portfolios we are developing for our clients provide competitive returns with the potential for significant capital gains once the market returns to a more stable climate.
For now, volatility is likely to remain. That is precisely why we need to keep in mind that income investments are purchased for stable dividends and/or interest, not for sale. After all, we do not check the prices of the individual bonds we hold daily or weekly! Income stocks should be treated the same way.
As always, specific personal recommendations are available by calling or emailing. We remain eager to take on new clients looking to take advantage of these attractive stock prices and dividends. The number is 317-571-1112.
Have you given thought to insulating your income?
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