Concerned about Trade Talks? Here’s the Alternative for Income
May 09, 2019
So far this week, the S&P 500 Index is down 2.65%. And while it is still up 14.39% year to date, fears of the US-China trade negotiations coming unglued have hurt stocks.
Fixed income provides not only reliable income from bonds, preferred stocks and related funds but can balance out a portfolio and provide a cushion when the stock market takes a pause or goes through a bit of tumult.
In my previous life, I was an international bond trader, and each of my picks for Profitable Investing are thoroughly vetted for their ability to pay in good times and bad, just like my bond portfolios of old.
Bonds and related investments are opportunities for income and growth, just like stocks.
Right now, the best choices out there are corporate bonds and preferred stocks as well as the more buoyant and more credible municipal tax-free market. And with inflation remaining subdued, fixed income is something you need in your arsenal.
The US economy is off to a great start this year, with the first quarter GDP reading coming in at 3.2%. This means more spending by consumers, which turns into more revenue for companies. In turn, this means better corporate credit, which drives higher appreciation for corporate bonds by investors.
I like corporate bonds because they act like stocks. As underlying economic conditions improve, they improve in price. And they pay more income along the way.
One of the best ways to get exposure to the corporate bond market is via one of the best, researched-backed mutual funds, the Osterweis Strategic Income Fund (OSTIX).
Osterweis Strategic Income Fund Total Return—Source: Bloomberg Finance, L.P.
The fund has a great collection of corporate bonds that will continue to enjoy more success. Year to date, the fund has generated a return of 4.48% and currently provides a yield of 4.37%.
Preferred stocks, or “preferreds,” are another form of corporate bonds. They look and trade like stocks but have bond-quality protections. They also come with reliable dividend flows. 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 the best way for individual investors to take advantage of this asset class.
I have allocations to preferreds inside the model portfolios of Profitable Investing. A great example is the Flaherty & Crumrine Preferred Income Fund (PFD).
Flaherty & Crumrine Preferred Income Fund Total Return—Source: Bloomberg Finance, L.P.
This is a closed-end fund that is currently trading at a discount to its portfolio of preferred stocks and other assets. This means that you buy them cheaper than if you bought the underlying assets. Year to date, the fund has generated a return of 18.11% and provides a yield of 6.75%.
The municipal bond market provides great tax-advantaged income for investors. 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 is sending muni prices higher. And with low inflation, the payouts are less threatened over the coming years.
For investors and higher-income earners, tax rates are still high and that makes munis even more advantageous. This is driving more demand. And with less need to issue more munis, supply favors bond prices, adding to the attraction of munis. I have allocations in this important market inside the model portfolios of Profitable Investing.
I also like closed-end funds for munis when they’re trading at a discount to their underlying muni bonds. One of the best is the Nuveen Municipal Credit Income Fund (NZF).
Nuveen Municipal Credit Income Fund Total Return—Source: Bloomberg Finance, L.P.
While it has been narrowing, it’s still trading at a big discount. The fund has generated a total return year to date of 17.74% and pays a yield of 5.10%, which represents a taxable equivalent yield of 7.85%. Even better—the dividends are paid monthly.
While I’ve identified a collection of income-generating investments in this Digest beyond the regular stock market, I have additional opportunities for even more income that you can read about in my Profitable Investing advisory.