I remain nervously and cautiously bullish – sort of – because the bears are calling for ...
Skousen: Income and Safety
08/27/2004 12:00 am EST
"In today's market, high income investing is the way to go," says economist and financial seer Mark Skousen. "Our focus now is on finding a better way to protect ourselves as investors in these turbulent times." Here, he looks at income ideas for yield and portfolio protection.
"Bad news continues to come, whether it is the Middle East or in the economy. We seem to be hit back and froth with bad news. Of course, there will be other times when we have good news and the market will respond in a positive way— and it will probably just roar ahead. When there is any inkling of good news, the market roars ahead. But for now, that seems to last for only one day at a time. There seems to be no end in sight for these short rallies and then the rest of the time the market is meandering downward. So for now, my strategy is to hold very few stocks in my portfolio and to focus on income investments.
"My high income strategy is based on the theory that a bird in the hand is better than two in the bush. That’s my approach now in the market. Since Greenspan took over as President—I mean, as chairman of the Federal Reserve— we see a roller coaster ride with interest rates. The long-term trend is downward, as the inflation rate underlying lower interest rates, has a downward trend. But my main point over the last six months to investors has been that the Fed has reversed its policy. This means we need to change our attitude regarding interest rates. There will be a tendency for rates to rise, and for inflation to rise. We're already seeing a lot of indications for that.
"One fund we have been recommend for a while—and are still recommending— is the Oppenheimer Real Asset Fund (QRANX). Ever since 9/11, this fund has risen. Every month since, it has gone up – steadily rising. And I’m still very high on this fund. Commodity prices are going to continue to rise. That’s the earliest sign of inflation. The Fed is engineering this, to some extent. They want to see some evidence of rising inflation, because they fear Japanese style deflation. Remember, that income investing can be volatile. There’s not free lunch in this business. Nevertheless, here are some other examples of high income investments that I particularly like:
"Aberdeen Asia Pacific Income Fund (FAX ASE) is very interest story, which pays a monthly dividend. FAX is based primarily upon the value of the Australian dollar and the Australian dollar versus the US dollar has made a significant recovery along with commodity prices. We’ve been strongly recommending this fund off and on for the last ten years and we’ve made money despite its drops. There was a long period of time when the price of the fund was dropping in value. It came out at $10 a share in 1986. But if you bought FAX in 1986 and just held it and reinvested all dividends, your total return would have been 400%. That’s not bad.
"Formerly, Aberdeen Asia Pacific Income was known as the First Australia Income Fund. When Aberdeen took over, the fund had been paying part of the dividend as a return on capital. That’s always a dangerous thing for income investing, as it eventually leads to a cut in the dividend. Some 30% of the payout used to be a return of capital. Now, it’s about 6%. So they have made great progress. We continue to recommend this fund, particularly when it is selling below its net asset value. Right now it’s only about 3% below NAV, so it’s not that much of a bargain. But it is still on our buy list. The yield is about 7%. It pays 3.5 cents per share per month.
"The Van Kampen Senior Income Fund (VVR NYSE) fell when interest rates were declining. The fund is known as a prime rate fund, which means that when interest rates are declining—and the prime rate is declining—that your dividend will also be declining. So investors dumped these shares when interest rates were falling. But now that interest rates are going back up—and threatening to continue to rise— then VVR appears to be in a major bull market. We continue to recommend this fund.
"Blackrock Insured Municipal Term Trust (BMT NYSE) is one of our favorite muni-income funds, but we caution that this investment can be pretty volatile. In our view, any time it goes over $11 a share, you’re entering a more dangerous territory. Currently, it’s yielding about 5%. A muni fund can get this high return through leverage. But this is also why you want a stop loss order. If interest rates spike, this fund will drop— and drop sharply. As such, we suggest using $11 as a stop.
"Debt Strategies Fund (DSU NYSE) is a junk bond fund that seems to have bottomed out. It’s selling at a slight discount to net asset value. It’s yielding 10%. Again, they use leverage to do that. You have to be careful with a junk bond fund. We keep a $6 stop loss on this position. If it drops below that, we would sell. For now, we’re holding this fund, and we’re earnings 10%."
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