4 Ways to Profit on Low Yields

09/21/2011 7:00 am EST

Focus: ETFS

With Treasury yields perched at low levels, dividend-paying stocks are the place to be right now, says advisor Beau Henderson. He’s putting clients into two Vanguard ETFs, as well as two REITs that are taking advantage of low interest rates to buy mortgage-backed bonds. Henderson also offers some thoughts on selecting a good financial advisor.

Kate Stalter: Today, we’re speaking with Beau Henderson of Rich Life Advisors in Gainesville, Georgia. Beau, in the face of all the market volatility that we’ve experienced lately, what are some areas of strength that investors should be taking a look at?

Beau Henderson: Well, you know it has been a very unique time, and a scary time for a lot of people. A lot of calls I’m getting on a weekly basis are asking exactly that: What can I do?

A lot of the strategies in the past, over the short term and the long term, just aren’t working in this environment. So a real big area of strength, where we are still finding value for our clients, are actually some of these dividend-paying ETFs.

Kate Stalter: What are some dividend-paying ETFs that people should look at?

Beau Henderson: Well there is a couple that we’re using a lot with clients. One is Vanguard High Dividend Yield Index (VYM).

Basically, that’s an index of high-yielding stocks, and what it’s positioning clients to do in this environment, where there is so much instability, it’s paying a good 50% higher than the average Treasury yield. So it’s giving them a place where they can do better than Treasuries, and actually get a positive return.

Another one is Vanguard Dividend Appreciation (VIG). That one focuses on companies that have a 20-plus-year track record of increasing dividends consistently.

Kate Stalter: Any particular sectors or geographic regions, or other asset classes besides equities that you believe could have potential?

Beau Henderson: Meeting with our analyst this morning, something that is showing a lot of potential but is very specific to this environment, is some mortgage REITs. What they’re doing currently is, they’re able to use leveraged buying at these ultra-low short-term rates, and they’re investing in government-backed mortgage bonds, which are the longer maturity instruments.

A couple of those companies are Annaly Capital Management (NLY) and Cypress Sharpridge Investments (CYS). Those portfolios have been yielding 15% plus, but again those are only going to work as long as we’re in an environment of low, stable interest rates.

Kate Stalter: What are some areas that you believe investors should avoid right now in this environment?

Beau Henderson: Oh, I’m sure this has been a popular answer here recently, but one is to stay away from companies with excessive exposure to Greece, Italy, Portugal...those European stocks with that instability.

And another is to stay away from growth stocks. How we define that is those stocks with high price-to-earnings ratios and no yield. We’re really shifting back to the value in those slower, dividend-paying stocks.

Kate Stalter: Should people generally be focusing on dividend payers if they are looking at equities?

Beau Henderson: Yes, absolutely, absolutely. What’s unique about this market, both for long-term appreciation and even our income clients, that’s the best place to be right now. That’s the only place we’re finding value.

Kate Stalter: How about taking a 30,000-foot view? You speak and write quite a bit about an overall strategy for individual investors. Tell us your views on that right now.

Beau Henderson: Well there are a couple of things that come to mind, Kate, when you ask me that question. One is, just like we talking about these ideas today, when I talk to investors I want investors to do things like read the blog, read books, work with advisors to educate themselves so that they understand what they’re investing in and why.

That’s a big difference from just trusting me because I have credentials and designations, because what I’ve found is, when I know that you understand what you’re going to do and why, you have piece of mind, for one.

And the other thing is: You’re going to end up being more successful in the end, because you’re going to make better decisions when it comes to how you handle this money.


Kate Stalter: So, what are a few of the steps that people can take to begin educating themselves, Beau?

Beau Henderson: Well one thing I’m really big on is: Work on building a team around you. This can be your financial advisor, this can be attorneys, accountants and your interviews.

Look for people that when you leave a meeting with them or even when you read a book, you leave there a little smarter, or you’ve learned something when you leave there. That’s a real good sign that you’re working with people that have the heart of an educator to make you a better investor, as opposed to maybe closing a transaction.

 Unfortunately, some of that goes on, and that doesn’t necessarily help investors for the most part.

Kate Stalter: Should people be a bit wary if they feel like an advisor is only trying to sell them products, for example?

Beau Henderson: Absolutely. Some rules of thumb. If you have a first meeting with an advisor, from my perspective, that should have very little to do with anything but you as the client, who you are, what you care about, what makes your heart sing, what your objectives are.

So, a good indicator: if you see an advisor that’s trying to impress you with what they know, how smart they are, their credentials and they’re trying to tell how this product is perfect for you before they have even asked the questions so you feel like they know you, I tell people to run. That’s a real bad thing. Go ahead and run because they’re obviously not concerned with what’s in their best interest.

Just a last thought to wrap up. Some of these things that we’re talking about are very unique to this environment. There are billions of dollars in these target-age retirement funds, and for years and years that felt like a safe place for people to invest.

But it doesn’t work anymore, because all that’s doing is shifting bonds to a bigger percentage as you get older, and we’re in this environment where bonds are set to actually lose value in the near future.

So, just things like that. Educate yourself specifically to not just the long term, but be aware of what’s going on today, too.

Kate Stalter: So it doesn’t really work to go on autopilot anymore?

Beau Henderson: No, it doesn’t work anymore. To me, the world is too small now. A piece of information comes out and it affects the market instantly, whereas it might have taken weeks ten years ago.

You’ve really got to do a lot of due diligence, because again, as much as it’s all about the investor, it’s also their responsibility at the end of the day to be on top of it and work with the right kind of people.

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