To Buy or Not to Buy

07/30/2008 12:00 am EST

Focus: STOCKS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of High Monthly Income Alert, says investors should stay away from financials but look to buy Canadian royalty trusts.

The big news for the markets during the past week or so has been the huge rally in financial stocks. Stocks in the sector have enjoyed a sharp move higher from their recent lows, primarily due to some better-than-expected earnings announcements from major players. 

Of course, the federal government's assurance that ailing lenders Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) won't be allowed to go down in flames certainly helped, as did the US Securities and Exchange Commission's (SEC) decision to freeze so-called "naked short selling" in 19 top financial institutions-including Fannie and Freddie.

Financial stocks comprise some of the biggest dividend-oriented companies around, and one might be tempted here to take a look at financials and their related dividend-paying sectors. Well, to that I say-steer clear of temptation. 

In my opinion, the latest flurry in financials is likely to fizzle.

I still think we are in a bear market, and when you have a bear market you have the inevitable bear-market rally. These rallies usually are fast and furious, and they usually take place in the most beaten-up market sectors. Unfortunately, these rallies usually fizzle as fast as they foam up.

The prudent course of action is to wait and see what transpires before putting any money to work in this tricky bear market. The last thing you want to do is get fooled by a soon-to-fizzle flurry in financials.

One area of the market that is setting us up nicely for a new buy is Canadian royalty trusts, or CanRoys.

CanRoys are one of my favorite income-generating vehicles. These are oil and gas companies that enjoy a special tax status granted to them from the Canadian government which allows them to pay out a large percentage of their cash flow to shareholders (known as unit holders) in the form of monthly dividend distributions. Aside from their structure, what I really love about CanRoys is the very high yields you get in the form of monthly dividends or distributions. (Favorable tax treatment of these royalty trusts may expire by 2011-Editor.)

Until last month, the surge in oil prices had caused the value of many CanRoys to rise significantly. But a sharp pullback in crude prices caused a significant selloff in the sector in late June and early July.

CanRoys now are well off their highs of the year, which in my opinion is a very healthy development the pullback in the sector is making both of these funds-along with several other CanRoys-look like very attractive buying opportunities.

Over the long term, I think oil prices will rise. That rise likely will bring about a concomitant rise in the value of CanRoys. If we see a bit more selling in the sector, and then start to see a rise in either oil prices or the value of CanRoys themselves, we won't hesitate to start building positions in these dividend divas.

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