Archive for the ‘Your Money – Investment Suggestions’ category

More Income-Generating Investments – Consumer Staples

August 15, 2011

I posted my first piece on income investments on this space in April 2011.  Since then, some other ideas have occurred to me and I thought I’d pass them along.  If you have not read the earlier piece, I suggest reading it after you read this one.  There is no order to the investment suggestions.  Simply, it is your money, and you should see which investments make the most sense to you.  Before I list the ideas, here are a few basic bits of advice which have survived the test of time. First, unless you need the income today, set up everything for dividend reinvestment.  Compounding of interest over time is the greatest wealth creator there is.  Keep it simple.  If you do not completely understand a company’s products or the sources of the firm’s revenues, don’t buy.  There is no shortage of excellent long term investments which are easy to understand.  Finally, don’t try for home runs; be willing to be a singles hitter.  Many times you will have a home run without trying for one.  Time, patience and dividend reinvestment can achieve that for you.  And should you have an investment double, don’t get greedy.  Sell half of the position.  You have locked in your profit, you still hold the investment, and in casino parlance, you are now playing with “house money.” It seems to me to be common sense, but I talk to so many people who are reluctant to take profits.  They moan about paying taxes on capital gains.  I have always felt that if you are paying taxes on an investment, you are making money.  That can’t be too bad.   Getting greedy will cost you at some point.

The Consumer Staples Sector

This sector has always been a favorite defensive choice.  Staples are defined as goods with a steady demand that are bought often and consumed routinely.  Consumer staples are the industries that sell food, beverages, alcohol, tobacco, prescription drugs and household products. The logic behind investing in the consumer staples sector  is that however good or bad things might get, people will eat, drink, bathe, do laundry, etc.  At the point that using toilet paper, showering with soap and shampoo and washing your clothes falls out of favor, I will look to seriously reduce my already sparse social life. There are two Consumer Staples ETFs I’m partial to which both offer good diversification, low expenses and a yield that is good, but not great.  Both had had much more enticing yields, but have increased in price as investors sought safety.  Still, if you want to buy the sector in one investment, they are good choices.

SPDR Select Sector Consumer Staples ETF– (VDC) – Selling at around $31.00 and yielding 2.67%, this ETF has an expense ratio of just .20.  I have not owned this offering.

Vanguard Consumer Staples ETF – (VDC) – Recent price around $79.00, yielding 2.64 % with an expense ratio of .24, I have owned this ETF for some time.  Recently I sold the bulk of my position for three reasons.  VDC had risen more than 50% from my purchase price bringing the yield down to its current levels, and it seemed a good point to lock in my profits.  Secondly, the ETF is currently trading at a premium to its NAV.  In layman’s terms, this means the price of the ETF is higher than the sum of the stocks held in the fund.  Buying at a discount to NAV makes sense, buying at a premium does not.  Finally, I saw much greater dividend yields available in some of the companies held in the ETF.  There is increased risk in this approach, as the investor is exposed to the individual company risk as well as the sector risk.  But the difference in the dividend yields convinced me to make the move.  Here are some of my favorites in the sector.

Unilever (UL) – Based in London, Unilever sports a 4.0% yield and is currently selling around $ 32.00.  You probably use several Unilever products every day without knowing it.  Their brands include Lipton, Hellman’s, Bertolli, Dove, Lifebuoy, AXE, Vaseline, Skippy, Ponds, Close-Up, TRESemme, Surf, Wishbone, Ragu, Breyers and Ben & Jerry’s’, to name a few.  These are just the brands familiar to Americans.  There are many more which are the leaders in their categories in Europe and other parts of the world.

H.J. Heinz (HNZ) – Known primarily for ketchup, Heinz sells for around $ 53.00 and yields 3.50%.  In addition to its market-leading ketchup, Heinz also makes pickles, gravies, vinegars, horseradish, relish, tartar sauce, marinades and baby foods.  Among its better known brands are Lea & Perrins Worcestershire sauce, Ore-Ida potatoes and HP Steak sauce.  A recent acquisition of Coniexpress S.A., one of Brazil’s biggest producers of tomato products has given HNZ a big boost in one of the world’s booming emerging markets.

Nestle’ (NSRGY) – This Swiss-based giant is one of the premier international blue chips.  At a recent price of $ 63.00 and yielding around 3.0%, Nestles’ list of global brands includes Perrier, Poland Spring, Buitoni, Stouffers, Haagen-Dazs, Purina and Gerber.  Nestles’ chocolates include Crunch, Butterfingers, Kit Kat and many more.  Name brands bring pricing power, and Nestle’ is a global leader.

Proctor & Gamble (PG) – Selling at about $61.00 and yielding 3.40%. PG is the ultimate multi-national Consumer staples powerhouse.  A partial list of PG’s products include Clairol, Crest, Cover Girl, Gillette, Head & Shoulders, Ivory, Olay, Old Spice, Oral-B, Scope, Tampax, Bounty, Charmin, Comet, Duracell, Febreze, Joy, Pampers, Tide and Vicks.  It is the rare household that does not use some PG product daily.

While these are the investments I own, there are many others just as attractive.  To look at them more closely, go to Google, enter the ticker, and you will bring up many sites offering research.  I usually use Yahoo Finance, as I find it easy to negotiate, and to locate what I want.  Some that might be worth a look include:

Con Agra Foods (CAG) – Around $23.00 and yielding 4.0%.

Kimberly Clark (KMB) – @ $65.00, yielding 4.30%.

Kraft (KFT) – @ $ 35.00 and yielding 3.40%.

Diageo (DEO) – @ $ 78.00 yielding 2.60%

With the market gyrating like a bungee cord, many of these companies have been pushed down near their 52-week lows.  If you have a boatload of cash, there is probably no need to be in the market at all.  But if you are like me, and income is still a very viable concern, consumer staples are a fine place to generate consistent income.  They are certainly worth a look.

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Income-Generating Ideas for an Uncertain Market

April 7, 2011

I have not had a paycheck in two and a half years and am worth a lot more than I was when I was laid off.  Think about that.  No income for that time, but I have made a goodly sum of money and have not touched my principal.  It has only grown.  Granted, the stock market has smiled down on us.  That has been a huge help, but I have no confidence this will continue.   I cut corners on the little things in order to do the expensive things which, to me, make life worth living.  The following suggestions are good income-producers for any investor, but are primarily intended for those of us retired and living on a fixed-income.

Here are some ideas that have helped me.

ALPS Alerian MLP ETF – (AMLP) – Master Limited Partnerships own and operate pipelines to transport oil, natural gas and other commodities from one place to another.  The producer of the commodity pays the pipeline a fixed rate for access to the pipeline transport, and the fees do not fluctuate with the prices of the resource being moved.  MLP’s are set up to pay almost all their income to shareholders, much like a REIT, and as such, are subject to different taxation than ordinary investments.  If you own a single MLP, you must file a K-1 form rather than the usual 1099 income form.  AMLP seeks to get around this by creating a fund of MLPs, owning the top 10-20 MLP’s.  The yield is over 6%.

Utilities Select Sector SPDR (XLU) – This ETF gives you access to the top 30 or so Utilities in the country, companies like Con Edison. XLU is yielding 3.96% with an annual expense ratio of 0.20.  This is a fine investment for anyone long-term, but perfect for folks like us. All of the individual holdings are worth an investment on their own, and the yield may be higher, but you get them all here.  I own several of the holdings separately as well, including NuStar Energy (NS) yielding 6.30% , Xcel Energy (XEL) yielding 4.20% and Consolidated Edison (ED) yielding 4.80%.

Fidelity High Income Floating Rate Fund (FFRHX) –   A conservative play on bank loans with low costs and fine past performance.   Current yield is 3.45%.  When interest rates rise, bank loans get a boost.  This is a good play in the current environment.

Tobacco – Regardless of your personal feelings about tobacco, the industry continues to grow, particularly abroad.  Tobacco use among teenagers is increasing, as is the use of smokeless tobacco.  I own all four of the major tobacco companies and have for many years.  The tobacco lobby in Washington is among the strongest of any industry.  Altria (MO), the old Philip Morris, yields 5.90%.  Philip Morris International (PM) yields 3.90%.  Reynolds American (RAI) yields 5.90%.  Lorillard (LO) yields 5.50%.  Look at it this way; the customers are addicts, and they are not going away any more than crack addicts  abandon their dealers.  Tobacco use may make you a social pariah these days, and the product may kill you, but tobacco stocks can provide income to live.

Vanguard REIT Index (VGSIX) – You read every day about the horrendous state of the real estate industry.  Would it surprise you to know this fund is up 6.50% for 2011?  How about 24.20% for 2010 and 11.49 % for the last ten years?  Good property is always going to be a good investment, particularly Commercial real estate in big cities.  This fund yields 3.16% today with an expense ratio of 0.26%.  My favorite holding in the fund is Vornado Realty Trust (VNO) which I have owned since 1999.  In those eleven years, my return on Vornado is 127%.

GoldThere is no income here, but a great inflation hedge.  In times of uncertainty, with paper currencies losing credibility, people flock to hard assets.  I have only held gold for under two years, but have a 31% return.  I think if the market tanks, gold can reach $2000.00 an ounce.  I hold the SPDR Gold ETF (GLD), each share worth 1/10 of an ounce of gold.  The I Shares Gold Trust (IAU) gives you essentially the same thing, and the shares are much less expensive, probably worth about 1/100 of an ounce of gold.  Both hold strictly physical gold bullion.  I would only want 5% of my portfolio in gold and silver.  If you really think things are bleak, you could go to 10%.  I would not.  I like income.

Silver – Same deal as gold, but going up faster.  Silver, unlike gold, actually has industrial and commercial uses.  I have two silver holdings, both of which have been great performers. IShares Silver Trust (SLV) has returned 106% in around a year.  Silver Wheaton Corp. (SLW) has returned 163% in the same general time period.

Water I own two water utilities and have done well with both.  Middlesex Water (MSEX) is a water utility that has served PA, DE and NJ forever and yields 3.90%.  The need for water and thus water utilities is not going away anytime soon.  Connecticut Water Service (CTWS) has served that area since 1956 and yields 3.50%.

Money Market Funds – These instruments are yielding such a pittance that I only hold cash in them that I need to pay bills.  I keep the bulk of my cash in the Vanguard Short Term Investment Grade Corporate Bond Fund (VFSTX).  Should interest rates rise, you will feel some tremors here, but nothing like intermediate and long-term bonds.  VFSTX yields 1.78% with an expense ratio of 0.24%.  For people with $50,000.00 to invest, buy the Admiral Shares (VFSUX) yielding 1.89% with an expense ratio of 0.12%.  I’m willing to take on some risk in order to have my cash earn something.  VFSUX, for all practical purposes, is my money market fund.

T. Rowe Price Emerging Markets Bond Fund (PREMX) –   This fund yields 6.78% with an expense ratio of 0.97%.  I have owned this for almost ten years and have made 19%, between capital appreciation and reinvested dividends.  If emerging markets frighten you, don’t buy this one.

Mind you, all of these suggestions except FFRHX, PREMX, GLD, IAU and SLV are considered equities.  But they are very different from owning, for example, a large-cap growth fund.  Would you agree?

The Premature Funeral for the “Buy and Hold “Investing Strategy

June 16, 2009

2008 was the worst economic collapse since the Crash of 1929 and the Great Depression of the 1930’s.  There was literally no place to hide unless you were fortunate enough to be holding 100% cash.  Bonds, normally the buffer to stock market declines, fell in concert with stocks.  This catastrophic collapse has the Wall Street “Pundits” clamoring that the “Buy and Hold” strategy of investing is no longer relevant.  To the professional Money Managers, this is now a stock picker’s market.

The irony of this situation is that actively-managed mutual funds, the “stock pickers”, have historically been unable to match the returns of the indexes.  When a Manager has an extraordinary year and does beat the index, rarely is that performance repeated the following year.  In addition, the actively-managed funds have far higher fees and expenses than the index funds, less diversification and higher turnover ratios.  Turnover ratios measure the percentage of a fund’s holdings that a fund sells in a year. High turnover results in trading costs and capital gains, the burden of which is borne by you, the investor.  All this adds up to less money in your pocket.  It makes total sense that the money managers are advocating stock-picking and trading as opposed to buying and holding an index.  They make no money with indexers who hold their index funds.  There is no monetary incentive for them to recommend them.

Index Funds Should Comprise the Bulk of Your Core Foundation Portfolio

The key to accumulating wealth over time is to buy and hold a broadly-diversified, low-cost collection of no-load stock and bond index funds and cash.  Your greatest assets are time, patience and compound interest through dividend reinvestment.  Albert Einstein supposedly referred to compound interest as “the most powerful force in the universe.”  Although there is some debate over whether Einstein actually did say this, it is difficult to argue that the compounding of interest in one of the critical factors in creating wealth over time.  By reinvesting dividends, you are buying additional shares with your income.  Your interest is added back to your principal, so from that point on, you are earning interest on interest due to the higher number of shares.  The longer your shares are permitted to compound, the greater the potential for wealth accumulation  in your portfolio.

Currently, there are three kinds of Index funds, market-capitalization based funds, fundamental-based funds and Exchange-Traded funds ( ETF’s).  Market-capitalization is determined by simply multiplying the number of outstanding shares by the current share price in order to determine a company’s weighting in the index.  As a result, many feel the market-cap based indexes are biased toward big, growth companies. The Fundamental-based funds determine a company’s weighting in the Index according to dividends and book value, thus giving them a more value-oriented approach.  ETFs, though not called index funds, are essentially index funds that trade like stocks.  Mutual fund index funds are priced once daily at the market close.  ETFs can be actively traded throughout the day.  The jury is out on performance when comparing market-cap and fundamental based indexes.  What is certain is that the expenses for the fundamental-based indexes are much higher, thus removing one of the main reasons to index; low cost.  All these products will be examined in detail, and you can determine which investment makes sense to you.

Asset Allocation

Asset Allocation is simply the percentage of your portfolio you choose to put in stocks, bonds and cash.  There is no correct allocation, as it is a very personal choice.  Your allocation parameters should be determined by your age, financial condition and risk tolerance.  We will offer several Model portfolios as well as options that may be substituted.  Many investment professionals feel that your asset allocation is as important, if not more important, than the actual investment vehicles you choose to invest in.

Actively-Managed Mutual Funds

Despite my strong inclination to make Index funds the foundation of your portfolio, there are still a handful of actively-managed funds out there which I would endorse as part of your core investment portfolio.  These are funds with long-term performance by Managers I greatly admire.  I will provide these funds and my reasons for liking them.

Cash

In the current precarious economic climate with rampant unemployment, putting aside six months to a year’s living expenses would be an astute plan.  But Certificates of Deposit tie up your cash when it might be needed.  Money Market funds, historically the parking place for extra cash, are currently paying such pathetic yields that this is virtually dead money.  But I have found a solid, safe alternative which is yielding nearly 4.0%.  I have all of my cash here, with a small amount in the Money Market fund for everyday expenses.

Individual and Speculative Stocks

It may surprise you to learn that I feel there is a place for these kinds of investments.  Individual and speculative stocks perform an important function in that they keep you interested and involved.  They can be a lot of fun, and sometimes quite profitable.  My feeling is that these securities should be held in a separate account at a discount brokerage, and funded with cash you can afford to lose.  This serves to create both a psychological and physical separation from your core foundation portfolio.  The two should never be confused

 

 

 

About William Judson

I have worked in the Asset Management arena for twenty years with JP Morgan Chase, Bear Stearns and Credit Suisse  Let me emphasize upfront that the only money I have ever managed is my own. But I have significantly outperformed the major indexes in my own portfolio for many years, as well as many of the portfolio managers I have supported.  It is only fair to note that I had none of the restrictions that portfolio managers have to operate under. I could change my asset allocation at will, as circumstances dictated. They could not. I was downsized from Bear Stearns after their acquisition by JP Morgan Chase, and I lost access to my portfolio performance for quite some time due to a “blackout” period.  2008 was a terrible year, as bonds got hammered along with cash.  But for 2007, my portfolio returned 15.75% to 3.53% for the S&P.  In 2006, my portfolio returned 6.50%, lagging the S%P return of 13.62%.  In 2005, my portfolio returned 10.46% compared to a 3.00% return in the S&P.  In 2004, my portfolio returned 26.72% compared to 8.99% for the S&P.  In 2003, my portfolio returned 40.33% compared to 26.38% for the S&P.  Again, it must be noted that my portfolio held stocks, bonds and cash every year, while the S%P 500 Index could hold only stocks.  But look at the returns, and judge for yourself.  I had superior returns, more diversification, lower risk, and still significantly outperformed.  My performance speaks for itself.

When I suggest an investment for your core portfolio, I will strive for plain vanilla, boring investments. In my investment world, boring is beautiful. I will seek to avoid leverage, swaps, shorting and most of the other more exotic investment vehicles.  I realize these are valuable investment tools for many people in the market. They are just not for me. When occasionally one of my suggestions deviates from this objective, I will duly note that fact.  Finally, I will seek to find the lowest possible expenses and fees for the best mutual funds so the investor keeps more of his investment.  I believe we will emerge from this dark financial tunnel, although the time frame is anybody’s guess.  But when this emergence occurs, there will be investment opportunities that we may never encounter again in our lifetimes.  Indeed, there are some fantastic opportunities out there right now.  Further, I believe the intelligent investor can flourish the old-fashioned way, namely by investing in stocks of fundamentally sound companies at discounted prices and in investment-grade bonds.  I’m putting cash to work today, as turmoil always creates opportunities for the educated investor.  So should you.

Get Bill Gross For Less

November 12, 2008

Pimco’s Bill Gross is arguably the best bond manager that has ever lived.  His Pimco Total Return Fund sports returns since inception that look like they should be equities, not bonds.  But Bill Gross’ expertise comes at a price.  The Class A shares of Total Return (PTTAX) have a 3.75% front-end load, a 1.0% back-end load and annual expenses of .96, which includes a .25 12b-1 fee.  Pretty steep price of admission, although having Bill Gross manage the bond portion of your portfolio is a dream scenario.  But what if you could get Bill Gross managing a no-load fund with identical portfolio composition and performance to Pimco Total Return? No front-end load, no back-end load, no 12b-1 fee and annual operating expenses of only .57. And he has managed this fund since the late 1980’s.  Wouldn’t you love to own this fund?  Well, you can.  Look at the Harbor Bond Fund (HABDX).