If you're an income investor, you probably feel like you're in one of those nightmares where you're trying to run like hell – but aren't getting anywhere.
Martin Hutchinson and I were talking about this predicament last week.
As editor of the Permanent Wealth Investor, Martin is our income guru here at Money Map Press. His advice on how to thrive in this lousy-income environment was so good that I had to pass it along to you – along with one of his favorite income plays.
Traditionally, bonds – especially U.S. Treasury bonds – are the favored holding of income-seekers. But bonds face two big challenges right now – and we have the U.S. Federal Reserve to thank for both of them.
First, thanks to the ultra-low-interest-rate policies of the nation's central bank, Treasury bonds are yielding next to nothing. When I looked Friday afternoon, the 10-year was yielding 1.94% and the 30-year 3.12%.
Now, according to the latest federal figures, the U.S. consumer price index (CPI) fell to 2.7% in March from 2.9% in February. The CPI is the "official" gauge of U.S. inflation. But as we explained back on March 2, this is a bogus number.
The American Institute for Economic Research (AIER) says everyday prices – the ones that matter most to working Americans – are up a good 8% over the past year.
So income investors who stick to traditional tactics are actually losing ground to inflation. And you absolutely don't want to outlive your money.
If that were the only problem, it would be pretty bad. But there's a second challenge – and it's a doozy.
You see, the central bank's Federal Funds rate – the benchmark that helps determine most borrowing rates that American consumers and businesses pay – remains down near zero. And while no one can predict with certainty when rates will change, there is one thing you can bank on: When rates do change, they can only go up.
And since bond prices move opposite interest rates (bond prices fall when rates rise, and vice versa), those fixed-income securities will take a beating when rates increase.
And so will the investors who hold them.
How to Beat the Trouble in the Bond Market
To avoid the pounding of this inevitable "Whac-a-Mole" bond market, Martin suggests that income investors use higher-yielding dividend stocks as a partial replacement for bonds.
However, don't necessarily pursue the "blue chips" that are yielding 2.5% to 3.5%. Martin cautions that those shares have already been bid up by other income-seekers and now trade at expensive premiums. That means these stocks are trading at pretty high valuations, and are inherently more risky as a result.
Instead, go for the next tier – the shares of companies with dividend yields high enough to make a real difference in your pocket.
One such play that Martin has recommended both to Permanent Wealth Investor and Private Briefing subscribers: Safe Bulkers Inc. (NYSE: SB), a global shipper with a 9.12% dividend yield.
As the company's name tells us, Safe Bulkers is a player in the international dry-shipping market. That market has been struggling – in fact, it has suffered through the biggest slump in rates in more than a decade.
But here's the great part: In response to that slump, ship owners are now anchoring the most commodity carriers since 2008. That should lead to the biggest jump in shipping rates in three years – which could send Safe Bulkers shares up more than 30%.
"Bill, this stock is cheap," Martin told me in a private briefing this week. "Safe Bulkers has a trailing P/E of 4.9 and forward P/E of 4.3, and trades at a modest premium to book value. The yield is significant, but the dividend being more than twice covered, based on trailing earnings. The combination of price, earnings and the high-dividend yield makes this an exceptional value in these markets."
With his 24/7 access to stock market gurus like Martin Hutchinson, Keith Fitz-Gerald, Shah GilaniandDr. Kent Moors, Bill is able to provide Private Briefing subscribers with an inside look at some of their key recommendations.
To learn more about Private Briefing,click here.]
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- Money Morning:
Investing in Bonds: How to Build a Bond Ladder
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.