Income Investing Strategies for an Uncertain Market
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Special Report for subscribers to Kiplinger’s Investing for Income
Income Investing Strategies
for an Uncertain Market
A
t Kiplinger we are forgiving Indeed, the stock and real estate accumulated enough savings for life,
when an otherwise triumphant rebounds of second-half 2020 and or if you are retired and do not antici-
stock, fund, or sector goes into a widespread 20% gains of 2021 have put pate earning much or any new money
tailspin. We also are not delirious over real money in your pocket. And the to replace losses, it is essential to limit
any rapid and powerful rally. Investing U.S. economy, for all the disruptions, is risk. We strive to identify and explain
hath no guarantees. Sometimes you get
lucky, but other times, an experienced
money manager or team of analysts We strive to identify and explain income ideas
and traders make a series of question-
able decisions, saddling you with an well-positioned to hold their value and
unexpected loss. And some events are
just plain impossible to trade around or
maintain (or increase) their distributions when
through. That is why we were not un- and if the economic situation deteriorates.
nerved in early 2020 when every listing
in our Kiplinger 25 for Income, and
virtually every blue-chip stock on earth, riding high compared to the rest of the income ideas well-positioned to hold
got slammed by the original COVID world. But as you read this, Wall Street their value and maintain (or increase)
outbreak and the sight of lockdowns brims with righteous concern that 2020 their distributions when and if the eco-
and business closings. Nor are we and 2021 have pilfered considerable nomic situation deteriorates. De-risk-
exceptionally bullish for 2022 after a investment gains from the next year or ing has different meanings, depending
year and a half of powerful economic two. And we should be prepared for on your personal finances. It can mean
recovery, the pandemic notwithstand- wild swings in asset prices and financial- simply cashing in profits from appreci-
ing, that keeps producing excellent market attitudes as higher-than-usual ated stocks, funds, real estate invest-
corporate earnings and high dividends. inflation and Omicron incite savers and ment trusts and other winners. It can
investors of all ages, sizes, sentiments, refer to building cash reserves instead
and political persuasions to alternately of robotically reinvesting your interest
inhale and exhale. and dividends. Most of all, if you are
Hence one of our bedrock beliefs fortunate to have enough savings to
in this newsletter is that if you have live forever, you can “take a knee” and
Copyright 2022 • The Kiplinger Washington Editors • 1100 13th Street NW • Suite 1000 • Washington, DC 20005
Income Investing Strategies for an Uncertain Market
declare victory. Game over. No more the yields on new mortgages are low, Union Pacific and Norfolk Southern.
adventures. Perhaps your final check seasoned fixed-rate loans pay more. A rule for income investing is to follow
really will bounce. Representative GNMA funds from where money is flowing fastest through
However, we are also optimists and Fidelity, Pimco, Vanguard and oth- the economy and invest to become an
presume that any investment, whether ers have variable monthly payouts owner-operator as well as a customer.
cyclical such as a pipeline, or inher- but should pass along more than BBB CORPORATE BONDS. This
ently risky like a leveraged closed-end 2%, with that climbing if mortgage category is unusual in that it scuffled
stock fund, that is surviving or thriving rates rise. The spike in the consumer in pre-coronavirus 2020 but has since
does so on merit, backstopped by the price index has opened a window for closed any return gap compared to
Federal Reserve and its effective money inflation-linked government securi- long-term Treasuries during the pan-
bombs. So another message to new demic. Most big companies balance
readers is that we are still living in an sheets are fine, and BBB bonds pay one
investor’s world. Individuals and finan- to two percentage points more interest
cial institutions have such enormous So another message than T-bonds—enough for bond man-
buying power that they effortlessly bid agers to say there are always good buys
up the values of a limited inventory to new readers despite a surge in corporate borrowing.
of time-tested quality income-paying is that we are The PIA BBB Bond Fund has returned
investments, including junk bonds, an average 7.8% the last three years and
tax-exempt debt, and shares of high-in- still living in an with a current yield of almost 3% helps
terest rate lenders. A few famous firms, investor’s world. to fight inflation.
including Boeing, Disney, and General NECESSITIES. No shock here, as
Electric, have specific management the stubbornness of COVID is less
or business issues that have hurt their of a threat to goods and services such
share prices and dividends, but they ties to pay even higher rates. Series as food, water, medicines, and e-
are outliers. Diversification remains an I savings bonds are posting a rate of commerce than it is to, say, travel and
extremely helpful remedy. 7.2% through April 2022 and will pay entertainment. This broad description
Remember, dividend cuts, bond de- nearly as much over the subsequent applies to such dividend stalwarts as
faults, and other hallmarks of danger- six months. A fund of Treasury Infla- American Water, American Electric
ous markets get headlines—but they tion Protected Securities, or TIPS, Power, Kroger, Verizon, Walmart, and
are rare. And we don’t mind it much should also serve you well. Also, for plenty of others whose products and
when the Dow Jones industrial average a back-door way to tap the Treasury’s services you have surely relied upon
falls 500 points every now and then. guarantee, federal landlord Easterly if you have been marooned at home
We get more nervous when reliable Government Properties, a real estate during the health crisis. If you are not
income investments suffer unexpected investment trust, has returned 16% a a fan of owning individual stocks,
cash squeezes. The following strategies year for three years and finished 2021 funds like Legg Mason’s LVHD,
can help you invest safely even when with a dividend yield of 4.8%. which stands for Low Volatility High
unforeseen events cause trouble. THE SUPPLY CHAIN. It is on the Dividend, own an extensive list of
FULL FAITH AND CREDIT. The news daily: delayed shipments, over- these investments. LVHD’s dividends
world loves dollars—and savers burdened warehouses, trucks parked are running close to 3%.
and investors also love government- for want of drivers. But if you literally HEAVY TRADING. Investors of all
guaranteed debt. If you suspect that put yourself in the driver’s seat and buy strains, from day traders to massive
mortgage and rent delinquencies trucking stocks or invest in firms that banks, are busier than ever. The opera-
might spike, start with a fund that own distribution centers and other tions of the financial markets adjusted
owns pools of U.S.-backed mortgages, critical property, you can benefit from quickly and smoothly to remote work,
commonly known as GNMAs or this business. Among REITs, supply- while stock and bond trading volume
Ginnie Maes. If a borrower skips a chain specialists include Duke Realty, and traffic in exchange-traded funds
payment, the Treasury ensures that Prologis, Americold, and of course are soaring. That is great news for the
investors collect “timely payment of Amazon, though it pays no dividend. investment business, which includes
principal and interest.” And although But UPS does, and so do railroads like Wall Street leaders like BlackRock
Copyright 2022 • The Kiplinger Washington Editors • 1100 13th Street NW • Suite 1000 • Washington, DC 20005Income Investing Strategies for an Uncertain Market
and Goldman Sachs as well as regular
banks, whose profit margins and divi- Timely Tactic
dends are extraordinarily strong.
There is nothing to equal the 7.2% tag on Series I savings bonds—although they have
This is not to say all the above are
sure things now that stock indexes a minimum holding period and a $10,000 limit, and they will be a repriced in April. But
have reached records and interest an unorthodox idea for storing cash and angling for a high return is riding the dollar’s
rates on bonds and bond alternatives global strength with UUP, the Invesco DB U.S. Dollar Bullish ETF. This is a direct wager
are still low despite the pressure on on whether the dollar will gain or lose exchange value against a basket of major Western
inflation. That is why we think senti- currencies and the yen, as measured by a Deutsche Bank index that determines the
ment will bop around sharply and fund’s share price. As the U.S. puts more economic distance between itself and the rest
share prices and funds’ net asset values of the world, prospects are high that UUP will approach or match its 2021 return of 6.5%.
will alternate hot streaks with sharp
The fund last paid a dividend in 2019, and no return is guaranteed, but risk is low, and the
declines. But as the disparate effects of
Federal Reserve is apt to bolster the buck whenever it hikes rates.
the pandemic and the public’s changes
in behavior become permanent, pro-
fessional investors will successfully fil-
ter the adapters and the beneficiaries. higher interest coupons to compen- index of toll-road bonds has a three-year
Get on the right side of the struggle sate) is crazy high, and the supply of annualized return of 5.6%, although the
against COVID rather than let it scare new debt is limited. So muni trading bonds current yield 2.8% to maturity,
you from participating. volume is at its highest since 2008 and so you’ve actually enjoyed some capital
active bond-fund managers and trad- appreciation. Partly, that’s low interest
Risks Versus Values in ers continue to unearth “mispriced” rates, but it is also investor recogni-
bonds. And many of the issues that did tion that turnpikes can and do raise
Tax-Exempt Bonds suffer trading setbacks during the early tolls faster than inflation and benefit
Once again in 2021, municipal bonds days of COVID have recovered value from surging truck traffic. We found
made money, despite headwinds from and are once again solid investments. a Central Texas Turnpike bond with a
inflation, economic stress, and the An illustration: The New York 3% coupon, due in 2040, whose price
earlier assumptions that unemployment Metropolitan Transit Authority, a state sank from 110 before COVID to 85 in
and other effects of COVID would agency, owns New York City’s bridges, March 2020, sending the current yield
leave state and local budgets in tat- tunnels, subways, and commuter rail- briefly above 4%. Just before Christmas
ters. There was serious talk of airports, roads. When traffic and ridership dried the bond changed hands for 109, a
colleges, public transit and even water up, the value of MTA bonds fell 20% current yield of 2.1% but a fat gain for
and sewer systems have trouble pay- or so—but have now recovered all the those who saw the opportunity early
ing their bills, let alone the interest on paper losses. The MTA, though—and in the economic recovery and stability
their bonds. Then came help from the this is most important—never had to for those who bought the bond when
federal government and a promise of skip or postpone or renegotiate any originally issued. Airport bonds have
support from the Federal Reserve, and payments to its bondholders, as ana- a similar story and a three-year average
the gradual economic recovery that has lysts accurately regarded the authority return of 5.0%, nearly a full percentage
rescue property values and income-tax as “too big to fail.” It did not lose its point per year above the typical state
receipts. States and counties are now in investment-grade credit rating. Besides, general obligation bond.
their strongest positions in years. So, the markets are tolerant when public Our longtime belief is that tax-
starting in April 2000, and continuing agencies do discuss ways to work out exempt bonds are essential to everyday
to the present, municipal bonds have temporary budgeting gimmicks, such life and commerce. Unless you get
been one of the best places to put your as withdrawing from rainy day funds. greedy, or are the recipient of terrible
savings. Demand for tax-exempt debt This experience suggests that you advice, and buy a bond backed by a
and taxable municipal bonds (with should snap up and hold onto all A-list vanity project or something out of
transportation bonds, such as those favor like a for-profit prison, your odds
from the Atlanta and Dallas-Fort of getting stiffed are minuscule. Even
Worth airports and our forever favor- bonds issued to build and run sports
ites, toll roads. The Standard & Poor’s stadiums and convention centers sur-
Copyright 2022 • The Kiplinger Washington Editors • 1100 13th Street NW • Suite 1000 • Washington, DC 20005Income Investing Strategies for an Uncertain Market
vived their year of cancelled events and November 30 (December’s poor arrived. Companies move mountains
zeroed out parking and food-service market results will trim the final score). to stay on this list once they have made
income, helped by their share of local These dividend aces had more than it. But in May 2020, the discount-
sales tax revenue and cash reserves. proven their value anyway, especially if clothing retail chain Ross Stores sus-
Bond experts tell us almost all tax- you keep the shares for years and watch pended its dividends despite knowing
exempt borrowers with a public-service dividends mount as a percentage of it would be excommunicated. (Ross
mission can last two or three years and has now reinstated dividends at the
few are on the cusp of failing due to same rate it paid until 2020, but it is off
Omicron. We would always be wary of the roster).
buying individual bonds from poor cit- To mangle a cliché, So, prospects looked bleak. But in
ies and towns or anywhere that popula- dividends are 2021, not only did the most downtrod-
tion and real estate values are falling, den sectors from the previous year
even if they offer a sky-high interest too vital to fail. bounce back, but we have seen a general
payment. But those dicey issuers make rebirth of dividend boosts, including
up a tiny slice of the indefatigable $4 gigantic raises such as 33% by Lowe’s,
trillion municipal universe. Also, if you original cost. That is inevitable if you 23.5% by Nucor, and 23.1% from
are worried that interest rates will take get dividend growth, and that is what Sherwin-Williams. Dividends are thriv-
off and undermine the value of bonds, the Aristocrats stand for: those S&P ing again, and so we envision the list of
municipals are much less interest-sensi- 500 members that have raised divi- Aristocrats growing rather than shrink-
tive than other kinds of long-term debt, dends 25 consecutive years. ing. We suggest you grab a piece of the
especially Treasuries. That is because The largest cohort is big traditional entire pie with the exchange-traded
there is much less trading. So buy, and industrial champions: Caterpillar, fund whose fitting symbol is NOBL,
hold, with confidence. Chevron, General Dynamics, 3M, and the ProShares S&P 500 Dividend Aris-
PPG Industries. There are a bunch of tocrats ETF. NOBL looked on track to
The Aristocrats Lose— banks and financial companies, several end 2021 with around a 25% gain—and
real estate investment trusts, a few na- a dividend yield of about 2%. Dividends
and Regain—Their Luster tional retailers, and famous consumer are also still apt to be “qualified,” or
Here is a stunner. Despite the puny brands such as Procter & Gamble and lightly taxed. The relatively superior
and falling savings rates that promote Sherwin-Williams. The onset of the performance of preferred stock, most
the appeal of cash dividends, the pandemic did challenge some mem- real estate trusts, and taxable municipal
65 stocks known as the Standard & bers, such as banks, which were banned bonds shows that the quest for yield is
Poor’s Dividend Aristocrats barely for a while from raising dividends unabated. To mangle a cliché, dividends
broke even for 2020, even as the until further notice—which has now are too vital to fail.
broader blue-chip market indexes
recovered from the COVID crash
and finished 2020 with double-
figure gains. This pratfall, which in
Timely Tactic
hindsight had much to do with the As Americans crowd highways and airports after grumpily spending last Christmas
(temporary) collapse of oil prices and and New Year’s at home, and with the return of international visitors, travel-related
bank profits, prompted us to ask if investments are timely. Dividends are still scarce, but analysts expect that 2022 will
the Aristocrats’ profitable reign were see hotel companies return to profitability and that 2023 will be grand. It may be
done with and it would be silly to early, but hotel-owning REITs will eventually be able (and likely obligated) to resume
look to this small group for high yield and then gradually raise their quarterly cash payouts. There are 15 lodging REITs, so
and dividend growth.
choosing is a bit of a guess, but the group is still priced at 12% below net asset value.
Well, as we said years ago, we do not
Throw darts, or pair a luxury REIT like Host Hotels (HST, no yield) with a family-
quit on a successful investment idea
or strategy because of an occasional and weekend-oriented group such as Chatham Lodging Trust (CLDT, no yield). Both
stumble. The Aristocrats are back previously paid good dividends; they will again.
with a 29% return for 2021 through
KIISUM14
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