See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • My plan to rescue General Motors, 12/1/2005 • Globalization isn't what's killing GM, 11/29/2005 • 5 stocks ready to ring in 2006, 11/29/2005 More... | Jubak's Journal 5 more ways to invest for income Recently, I offered five energy plays for income-oriented investors. Here are five more ways to get income from an increasingly uncertain market. By Jim Jubak I launched a new portfolio for income investors on Oct. 14 with my column "5 energy stocks for income investors" because I thought these investors could use whatever help I could offer in a very tough market environment. Yields weren't very tempting: In fact, if you looked at the 4.5% yield on the 10-year Treasury note, they were downright disappointing. And as if that weren't enough, the Federal Reserve was firmly locked into a series of interest-rate hikes well into 2006 that would knock down the price of any bond an income investor bought. Two months later, a lot has changed. But not for the better. The 10-year Treasury note still yields a low 4.5% -- 4.52% on Dec. 1, to be exact. But now there's even less reason to go long since, thanks to the Federal Reserve, short-term rates have moved up so that two-year and five-year Treasury notes yield almost as much as a 10-year issue. The Federal Reserve looks like it will raise rates two or three more times. The Wall Street consensus calls for an end to the rate hikes at 4.5% or 4.75%, up from the current 4%.
Investors face more uncertainty in 2006 But what happens after that is even more uncertain than it was two months ago. Will the Federal Reserve put its rate moves on hold after those increases for the rest of 2006? Or will it be forced to actually reverse course and cut interest rates as the economy weakens in the second half of the year? Traditionally, when the interest-rate curve inverts -- with short-term rates climbing above long-term rates -- as it is near to doing, it signals a potential economic recession. Outgoing Federal Reserve Chairman Alan Greenspan says not this time, but hey, he'll be playing tennis when this pudding gets eaten. So, right now, income investors are facing low yields, near-term rate hikes that will drive down the price of bonds and other income vehicles and increasing uncertainty about the direction of interest rates for the second half of 2006. Related news and commentary on MSN Money
Yep, I guess it's time to offer up the rest of my 10-stock portfolio for income investors. For context, here are the first five securities in the portfolio and their current yields (which may have changed since Oct. 14):
How to manage risk and get paid for it The name of the game right now, in my opinion, is: Three stocks that I think pay you reasonably well for taking limited risks are: And my two picks for income investors who would like to earn as much as they can, while waiting for better yields or less uncertainty about the direction of interest rates: Neither the 12- or 6-month CDs are completely without risk. If interest rates sink markedly by the middle or end of 2006, an investor would be left to invest after the CD matured at a lower interest rate. I don't think that's a big danger, but make up your own mind on that possibility. Why I can't say my portfolio is all-inclusive My list of eight stocks and two CDs isn't meant to be a complete portfolio for income investors. I don't do bonds -- not because I've got something against them, but because I know just enough about that side of the market to know that I don't know enough to be recommending individual bonds or bond mutual funds to you. So I've stuck with stocks -- even though some of these are pretty bond-like stocks. It's up to you to fill out your own portfolio with other fixed-income asset classes. (To research preferred stocks you might start with PreferredsOnline. The subscription site offers a one-day deal for $10.95 or a one-month subscription of $29.95. If you're interested in filling out your fixed-income portfolio with bonds, I'd recommend Marilyn Cohen's columns available at Forbes.com, or at the Web site of her own company, Envision Capital Management.) And one final, final word. Besides not doing bonds, I don't do taxes. Partly because I'm not an expert on the tax code, but mostly because I don't know the tax situation of individual readers. Please check out the tax rules for any fixed-income investment you make. For example, the tax treatment of the dividends from the energy master limited partnerships I recommended in Part 1 of this portfolio-building exercise makes them unsuitable -- most of the time -- for tax sheltered accounts such as IRAs. The tax treatment of dividends from the two preferred stocks in this column is different and they should qualify for 15% reduced taxation (subject to holding period requirements). But I'd certainly double-check with my accountant. (Remember Rule No. 1 on Jubak's Journal or any other investment advice you find on line: Do your own homework.) In my next column, I'll turn from the uncertainties of the fixed-income market to one of the big mysteries of the stock market: Why are overseas investors pouring money into U.S. stocks at the same time that Wall Street is advising U.S. investors to put their money overseas? Updates Sell Burlington Northern Santa Fe Shares of Burlington Northern Santa Fe hit my target price of $66 a share a little early -- in December 2005 instead of March 2006 -- and I'm going to take profits here. I may be early, and certainly, the railroad sector as a whole has further to run. But I'm starting to see signs that Burlington Northern is hitting up against capacity constraints in its system. Traffic growth has been so good that the railroad is starting to run out of the cars and track space to handle more traffic. When that happens, railroad performance starts to suffer. So far in the fourth quarter, train speeds are almost 12% slower, according to A.G. Edwards. That's what happens when you run the best railroad in the business: you run out of capacity while less tightly run railroads (and those less popular with customers) still have overhead room. I'll be looking for a chance to trade into one of those relative laggards in the sector in coming weeks. I'm selling Burlington Northern Santa Fe with a 43% gain since I added it to Jubak's Picks on Jan. 11, 2005. New developments on past columns 5 energy stocks for income investors In my Oct. 14 column on energy stocks for income investors, I advised investors to wait until the dust cleared before buying Canadian royalty trusts such as Fording Canadian Coal Trust From Russia, with love: $60 oil Oil companies are increasingly willing to pay higher day rates to hire an oil-and-gas drilling rig and are rushing to sign long-term contracts so that they won't find themselves unable to hire a rig in 2007 or 2008. Capacity is just about sold out for 2006. For example, on Nov. 8, Transocean Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Rayonier and Transocean. He does not own short positions in any stock mentioned in this column. | |||||||||||||||||||||||||||||
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