Protecting Portfolios From Volatility. Dividend paying stocks are historically less volatile than those that don't pay dividends. My strategy is to emphasize these stocks for a number of reasons. Unfortunately, the recent market has not worked that way. Mainly, this is due to the crisis in the financial and real estate markets. I have also said that the best strategy has been to "stay the course, " collect dividends and wait for these stocks to recover. For the most part, that strategy works; however, I know how difficult it is to tolerate large reductions in the market price of our portfolios. I have occasionally raised cash in portfolios via carefully selected sales of stocks and retention, rather than reinvestment, of dividends. That reduces volatility; however, the yield on cash is less than two per cent, a guaranteed way to lose in the current inflation environment. I continue to search for ways to get better returns with less volatility. While there is no sure-fire strategy, there are a few that I think have merit in getting somewhat higher yields without at less risk. Here are some of them.
Health Care Stocks. I recently bought Pfizer at 17.78 per share. This is a major drug company which has dropped from the 50's over the past 5 years. They have some problems in that patent protection on many of their major drugs is expiring during the next few years; however, the aging population should provide a growing market for many of their products. The dividend of 7.19% is not a barn burner but it should more than justify the risk. I will continue to seek out similar health care investments.
Preferred Stocks. These are becoming more popular as investors seek stable yields. You can find yields in the 8-10% range. While there is limited upside, you have much less worry about dividend cuts since the preferred dividend has to be paid before any dividend can be paid to common share holders. Preferred shares on real estate investment trusts appear to be particularly attractive since they are bought primarily for dividends and companies strive to maintain high dividends to keep from losing investors. An example is First Industrial Reality, a REIT that has industrial properties world wide. At present they pay a dividend of 11.68%. I wouldn't buy the common stock because of the potential for a dividend cut; however, the preferred has a yield of 9.54% and the potential for a dividend cut is greatly reduced.
Combination of Preferred and Health Care. Someone recently called to my attention is a REIT called Biomed Realty Trust. It is a company that buys properties for lease to companies in the life science industry. They currently pay a 5% dividend on their common stock. While that isn't bad, you can buy the preferred stock at a yield of 9.54% and there is little danger of a dividend cut. There are a number of similar opportunities out there which offer higher dividends combined with lower volatility. You won't double your money but you can sleep better with some of these in your portfolio.
I Have To Brag A Little. On July 13, I told you that oil prices had to come down. At that time, oil was selling for more than $140 per barrel and many were saying the next stop was $200. Today, the price is $115. There are a number of reasons this has happened to include a world-wide reduction in demand, a renewed pressure in congress to open up more areas for exploration and production, and an a heightened awareness among Americans of the magnitude of the problem and the consequences of continuing like we are. The debate rages as to how to deal with this problem. Suggested solutions run from putting more air into our tires, to batteries, to wind energy. These solutions fall into three main categories: Conservation, finding more fossil fuels, and finding alternative (mostly renewable) sources. My recommendation: All of the above. One last comment: Before you finally decide whether the fault lies with OPEC, China, India, President Bush, futures market speculators, or those evil oil companies, go down and look in the mirror. We build bigger houses than we can possibly use, buy huge cars with little regard for the energy they consume, and we borrow on our houses to buy consumer goods we really don't need (forcing the value of our dollar lower).
I will Be In Colorado For Longer Than I Had Planned. Should be here for the next two months. I am looking forward to meeting with many clients and friends during that time.
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