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The Trifecta of What’s Working

February 20, 2020

With the COVID-19 virus causing a widening spread of economic damage, including shipping of input and finished goods rapidly being curtailed, there is at least a near-term threat to economic recovery around the globe.

And while the US economy remains the global haven, there are challenges that are upsetting some of the engines for further growth, particularly in the petroleum industry as a surge in environmental, social and governance (ESG) causes is attacking stock prices.

But there are three distinct markets that are working and have the underpinnings to keep their performance going. Together, they form a trifecta that should be represented in your portfolio right now.

Gold

Gold has been one of the better market performers over the trailing year and has been following the general rally in the S&P 500 Index.

In fact, since I added Franco-Nevada (FNV) into the model portfolios of Profitable Investing in June to date, the gold royalty company has generated a total return, including dividends, of 39.29%.

That’s more than double the return of the S&P 500 Index for the same period of time.

Total Return for Franco-Nevada (White) & S&P 500 Index (Orange)—Source: Bloomberg Finance L.P.

The key drivers remain in place for sustained higher gold prices, including low to lower short-term US interest rates and a generally softer (even with some recent recovery) US dollar since September of 2019 to date.

Lower interest rates reduce the opportunity costs of holding gold, and a softer dollar makes gold worth more in dollar terms.

Add in the global uncertainty, and gold also gains more buyers.

And while gold doesn’t naturally generate dividends or interest and also incurs storage costs, Franco-Nevada pays a dividend from its cashflows from ongoing gold royalties and gold production sales.

It remains a buy in a taxable account with the added benefit of being a hedge in the event of a US stock market drop.

Clean Energy

ESG-themed investing is not new, but it is gaining prominence and attention as fund managers are at least in public statements advocating cleaner energy and spurning petroleum companies.

In turn, investments in clean energy continue to surge around the globe, particularly in the US.

According to Bloomberg New Energy Finance (BNEF), investment in US clean energy hit a record high in 2019 at $55.5 billion.

This comes as more and more state and local authorities are mandating a larger portion of power be generated by clean or renewable sources, including Arizona Public Service, which has announced the goal of ending the use of fossil fuel for power by 2050.

NASDAQ Clean Edge Green Energy Index—Source: NASDAQ & Bloomberg Finance L.P.

This continues to provide opportunities for investors to cash in. We’ve had NextEra Energy (NEE) in the model portfolios of Profitable Investing, which beyond its base of regulated power generation and distribution in Florida, is one of the nation’s largest wind and solar power generators.

The shares have returned 599.72% since being added to the portfolio and should be bought in a tax-free account.

Then, we also have Covanta Holdings (CVA), which is a more recent addition.

This company is cashing in on clean energy generation while also addressing the growing trash crisis in the US and beyond. Its clean-burn incinerators earn fees from trash disposal and income from power generation.

With a yield of 6.49%, the shares are a bargain, as they are priced at a mere 1.1 times the trailing revenue, which has been climbing over the trailing year by 6.6%. CVA should be bought in a tax-free account.

Then, rounding out the clean energy companies is another newer addition—Hannon Armstrong Sustainable Infrastructure Capital (HASI).

This investment company, which finances clean energy projects (often with government financial guarantees), is structured as a real estate investment trust (REIT).

That provides tax advantages for the company as well as for shareholders. Yielding 3.92% and already generating gains so far in 2020, the shares should be bought in a taxable account for the dividend tax advantages.

US Bonds

With stocks seeing some volatility surrounding the COVID-19 virus, US bonds continue to perform for investors.

The US bond market is continuing where it left off in 2019, with further growth and income. The overall US Aggregate Bond Market Index by Bloomberg and Barclays has generated a total return for the trailing 12 months of 9.56%.

Bloomberg Barclays US Aggregate Bond Market Index—Source: Bloomberg Finance L.P. & Barclays

One of my favorite US taxable bond investments is the closed-end BlackRock Credit Allocation Income Trust (BTZ).

Since being added to the model portfolios of Profitable Investing late last July, the fund has generated a total return of 15.41%.

Yielding 6.85%, the fund is quite attractive and made more so as it still trades at a discount to its net asset value (NAV) by 4.36%.

This is a prime investment that you should make in the US bond market. It is a buy in a tax-free account for more income and further growth.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life