Income Panel Picks

08/29/2002 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

In a definite sign of the times, while many investors shunned the high-tech panels at The Money Show, the “Income and Safety” panel, moderated by CNN's Kathleen Hays, was packed.  During the panel, the business news anchor asked several leading advisors for their market outlook and their favorite vehicles for generating returns.  Here are highlights from Roger Conrad and Jay Leupp…

Roger Conrad, money manager, author, and editor of The Utility Forecaster, says, “This is a great opportunity to be an income investor. We’ve seen a lot of sectors, particularly in the utility sector that have gotten really smashed down. However, you do have to think outside the box a little bit and be a little unconventional with your choices.  I think Treasury bonds and money markets are almost guaranteed money-losers going forward. Steer clear of the more conventional stuff.”

“Second, you need to diversify. We’ve seen what can happen to individual stocks or companies over the past couple of years. If you have all your eggs in one basket or in one type of income product, you can find yourself in a lot of trouble. In addition, income investors need to focus on potential inflation. Although official inflation has not been high over the past few years, you need to keep inflation in mind.”

“For my current favorite income picks I want to focus on less-conventional utility ideas.  We’ve had a tremendous shakeout in the industry. One thing that has become clear is that not all assets in the industry were created equal in their ability to generate a viable stream of income. As an income investor, you should focus on transmission and distribution. Basically, this is the business of running wires and pipes. Limited partnerships that hold transmission and distribution assets are interesting vechiles. Some major energy companies have decided that they can make more money from these assets by putting them in a partnership and instead of taking the profits in post-tax earnings, taking profits in pre-tax cash flow. As an investor you get the benefit of a higher dividend yield paid for out of pre-tax cash.  (Editor's Notes;  Investors in limited partnerships are required to file a K-1; we suggest consulting your own tax advisor.) A lot of the dividend is a return of capital, so you have an actual tax advantage in addition to the higher yield.”

“One favorite such partnership is Teppco (TPP NYSE), which is a Duke Energy affiliate in association with Phillips Petroleum. They have a number of safeguards built in to prevent abuses. It’s an excellent, conservative investment. Another is El Paso Energy Partners (EPN NYSE), which is affiliated with El Paso Energy. Like many other companies that were involved in the merchant area of the business, El Paso is selling assets to try and bring its debt down.

"I wouldn’t make these the sole holdings in a portfolio, but with their dividend yields of 7%-8% - which in many cases are being increased by 10%-15% a year - you have inflation protection and a pretty cheap investment in an industry that’s been pummeled. Overall, I think these are pretty good additional vehicles for good total return as well as income.”

Panelist Jay Leupp, head of real estate equity research for Robertson Stpehens, adds his favorites:

“We’re taking a contrarian approach to REIT investing today. We’re looking closer at two areas where the fundamentals are depressed right now – the office area and the apartment sector. Our lead recommendation in the office sector is Equity Office Properties (EOP NYSE). The stock has traded down because office real estate conditions in many large markets - such as here in San Francisco - are depressed.   Equity Office has almost an 8% yield and trades at just over eight times current funds from operations, which is the REIT definition of earnings. We think that’s a good value.  This is a company that has excellent dividend coverage and is investment grade-rated.”

“On the apartment side, we’re partial to Apartment Investment & Management Co. (AIV NYSE), which is the largest owner of apartments in the country. We’re also looking at an 8% dividend here, trading at about eight-and-a-half times current earnings.  The apartment market has been slow the last year or so due to the fact that interest rates have been low and many people on the margin as to renting or purchasing a home have opted to buy and take advantage of low interest rates. We think Apartment Investment also could be a good hedge against interest rates rising later in the year or the first part of next year.”

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