With yields lower, good bonds are getting scarcer – and stocks will become the go-to segment for the dividend herd.
by Neil George
I love bonds. I’ve always loved bonds. And the bonds I love most have the two core necessities for any investor – high cashflows and gains over time.
Now, for all too many investors, bonds aren’t thought of in those terms. That’s because the bonds Wall Street pushes tend to pay little and never seem to do much in terms of price gains.
But for those following my Pay Me Strategy – our bonds have of course been successful at ditching that common misperception.
Our 4 core closed-end investment funds have collectively delivered an average return for yet another year of more than 15.7 percent. And with these four global bond funds paying us a current average dividend yield running at 7.6 percent, getting high income and price gains from bonds doesn’t seem like such a hard concept to grasp.
But these funds that focus on markets and nations who continue to improve their credibility and creditworthiness are just the beginning base of our Pay Me Strategy’s bond collection.
Our minibond collection has been just as impressive as our global funds. The dozen minibonds in our model portfolio have continued to gain ground in price – so much so that many are bumping up against my recommended “buy up to” prices that reflect the risk of being called away.
And all the while, these continue to pay ample dividends, running at a current average of nearly 7 percent.
But while the bond market has been good to us for yet another year – there are some limitations facing us for the next 12 months. The market is taking away some good deals for retirement investors.
The supply of attractive minibonds is contracting – with fewer credible new issues and more of the quality older issues either set to be called or at prices that don’t make sense to buy in case of a call.
The most recent call in our minibond collection was the Valero issue (PJZ). This mini performed well for us, gaining in price alone some 43 percent, while paying us originally more than a 10 percent dividend yield.
Now, there are still plenty of our minibonds to buy and re-invest cashflows into. Beyond the Valero issue, there are 11 other minis. And I’m continuing to look around the dark and dusty corners of the New York Stock Exchange’s annex – “The Garage” – for other attractive minis, which I’ll discuss in a future issue, after finishing my stress-tests on the issuers.
But while bonds have been and will continue to be the foundation of the Cash Cows of our Pay Me Strategy – the changes in the minibond market have led me to spend more and more attention on higher-dividend stocks – in markets that are much like what the minibond market was years ago.
Few mainstream analysts have noticed the great deals that are just sitting in dusty corners of the market. But for us, the abundance of quality higher-dividend paying stocks is going to be a greater source of cashflows and gains for the coming 12 months.
This is where the newer Pay Me Strategy portfolio members are coming from.
Stocks You Can Count On
In the “Cash Cow” income section of The Pay Me Strategy there are six common stocks and one preferred. The six common stocks are paying an average dividend yield of nearly 7 percent – and the preferred issue is paying more than 8.7 percent.
But the future as I see it will be stocks from faster-growing economies and markets – where there are still multitudes of quality companies with stocks that few in the mainstream have taken the time to figure out.
They pay their shareholders well – and have done so for many years – including times of market woes and economic downturns.
We’ve begun by adding several of these high dividend stocks to the Nibblers section of our Pay Me Strategy – but look for them to most likely prove themselves out and make the cut to become Cash Cows.
Right now, our new mix of dividend payers includes seven stocks paying, collectively, more than 8.3 percent – and already the gains are beginning to emerge, reflecting buying from at least a few other investors out there who are doing research similar to mine.
The key is focusing on higher-growth markets with higher performing currencies against the US dollar. And in coming months – look for more of these higher-paying stocks that, as with our minibonds – few have heard about until they’ve become too expensive.