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Income and Growth Strategies for Today
09/10/2012 8:30 am EST
There are some simple strategies that you can still execute that will keep your portfolio successfully moving in the direction you want says Dean Zayed, CEO of Brookstone Capital Management.
Gregg Early: I'm here with Dean Zayed, who is the CEO of Brookstone Capital Management, and Dean, I thought that today it might be appropriate for us to discuss how you manage income portfolios in this type of environment.
Dean Zayed: It's a great question, especially given the low-interest-rate environment that we are in, that we've been in for a while, and that-if we believe the Fed-we're going to be in for at least a few more years. Income becomes a really interesting topic, especially again demographically with baby boomers retiring.
We have used several asset classes, or investment classes, very successfully on the income side. I'll give you a couple of ideas. One of which is Master Limited Partnerships, or MLPs for short. It's a relatively unknown asset class that seems to be coming into its own and becoming more mainstream.
Gregg Early: Especially in the energy sector, right?
Dean Zayed: Absolutely.
Gregg Early: In developing the new domestic energy sector?
Dean Zayed: That's right, exactly. So, on the energy side, these are companies that are in the distribution, transport, and storage of energy, like you said-oil and gas. They essentially are the tollways or the pipelines.
A lot of these companies have monopoly-like status. They generate a lot of cash flow, and for tax reasons they have to distribute that to their shareholders.
So, it results in pretty high dividend payouts and stock prices that have been relatively resilient and not so correlated with regular stocks, like S&P 500-type stocks. A pretty interesting play both on income and growth, frankly.
We've used high yield bonds very successfully. They tend to correlate somewhat with stocks, but have coupons nowadays anywhere between 6% and 8%. A pretty good income play for those seeking monthly income. Those are two ideas that work pretty well in most environments when you are trying to derive maximum income.
Gregg Early: And I guess on the high-yield bond side, too, that's advantageous when inflation comes back as well, correct? That way, you get an income play now and then they [bond prices] get stronger. So you get the capital gains side of it when, if there's inflation-which everybody anticipates after all this, and these low yields then go away-that we might end up accelerating into an inflationary period faster than people can stop it.
Dean Zayed: Absolutely. I agree with that and I'll throw one more idea your way in bringing up inflation. Another type of bond that we have been using are floating-rate notes, senior floating-rate notes. These are notes that tend to actually do very well as interest rates rise, because the underlying notes get reset every three or six months to LIBOR.
Floating-rate notes typically actually pay out more interest. So another idea to piggy back on the high-yield bond side in an environment where we think, of course, at some point rates are going to go higher. Those floating-rate notes, we think, are going to actually do very well in that environment.
Gregg Early: So, it sounds like you have some interesting alternative investments for the traditional income sector. What about on the growth side? Where do you see the ability to put your portfolio in the growth perspective?
Dean Zayed: That's a great question, as well. Growth, you know, being something that's somewhat tough to come by. Even though the market is doubled since the March 2009 low, we have had some corrections along the way, a couple of near-20% ones, and it tends to have scared away some of the average investors who still have the memory of 2008.
Because of all that, and because we've had two major market crashes in the last decade or so, starting with the dot.com bust, we operate and run a hedged equity strategy and an idea that we will throw out here. We long the S&P 500 for most of the client's money, and we then use put contracts, longer-term put options, to hedge on the down side, to give us downside protection.
And we help pay for that by engaging in a monthly options trading strategy. We're selling covered calls and puts on the S&P 500 monthly to get that extra premium or income that actually helps with the overall returns, and also helps pay for that longer-term insurance or put that we are going to buy.
I think it's a really relevant topic when you talk about growth to have a hedged growth approach, something that can actually protect capital during a down market-especially given the decade or so that we've had, which has been very painful for a lot of people.
Gregg Early: Absolutely, and it cuts out some of that speculative risk by using that hedged option strategy.
Dean Zayed: It cuts that out, my friend, and it also eliminates the need to be right about your asset allocation. You know what area that you want to be overweight or underweight in and, more importantly, it takes out the idea of market timing. We don't need to market time with this strategy whatsoever. You're always invested because you always have protection built-in via the put options.
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