Quiet Markets For Income Investors

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Day after day income investors search for reasonable sources of income as preferred stock issues and baby bonds with 6, 7 and 8% coupons are redeemed while new issues are being sold with coupons of 4, 5 and 6%.  Even the junky companies (in particular some REITs) are issuing perpetual preferreds at rates that they never ever dreamed would be available to their company.  It is highly likely that many of these issues will be truly perpetual–never to be redeemed by their issuers.

On the other hand income investors, while seeing their current yield fall on their investment portfolios, have been able to relax somewhat as interest rates have drifted lower month after month and year after year meaning their net asset value has continually risen. This has given the income investor a higher total return in the last couple years then one would have thought possible a few years back.  The one caveat to this happy story is that those investors who maintained investments in energy related securities have likely shown a smaller return than those who wisely moved to the sideline of the energy arena.

So at this point in time we have chosen to harvest a few profits here and there and purchase some reasonable issues on occasion while holding near 20% cash awaiting a better entry point.  We may well be waiting a long while as there is no obvious sign of higher interest rates (although we continue to believe that the FED should nudge rates higher) and the “panic” opportunity that we believe will happen continues to be elusive. On the other hand no one should believe that the “panics” of the past are gone for good–we do not believe that for one moment that this is the case. While we can’t predict when the panic will occur it could be as early as this week if the FED were to hike the Fed Funds rate on Wednesday when the overwhelming belief is that they couldn’t possibly hike.  We believe they badly want to hike rates as soon as possible as the Fed missed their opportunity to hike rates a year ago and if they were wise they wouldn’t let that happen again. Investors need to remember that raising the Fed Funds rate does not mean that long term rates are going to move higher.  In December when the last rate hike occurred the 10 year treasury was at 2.3% (as compared to 1.57% now).

 So what is our plan for the weeks ahead?  Generally speaking we don’t plan to do much.  Our preference is to minimize trading and the less we trade the happier we are–maybe we are just lazy? In actuality the real reason we try to minimize trading is because we seldom are successful in bettering our portfolio. Knee jerk ideas to capture a few extra cents is mostly a waste of our time since we are not retired and don’t have time to hang out on our computer all day long looking for opportunities.  The singular idea we are looking at now is the possible purchase of one of the Tortoise Advisors MLP closed end funds (CEFs).  We had been looking at Midstream MLPs recently, but did not settle on a purchase before the energy market moved higher and now that energy prices are moving lower again we may begin to leg into a new position.  We would start with a ¼ position (25% of our hoped for ultimate position) and then over the course of the next 3-6 months complete the position as we have no ability to foresee short term movements in energy prices (nor does anyone else contrary to their own beliefs).  We will let you know when we make a decision on this potential purchase.

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Bryan Perry Dividend Income Expert Bryan Perry

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