The next decade is very likely to be disappointing for a traditional 60/40 portfolio—in particular the “40” component. Almost all types of high quality/low-risk bonds are now yielding between 0.1-2.0%. If you buy and hold these bonds until maturity (assuming no defaults) you are accepting a very low nominal yield and will most likely experience a negative real return after any fees and inflation.
The benchmark bond in this space is the U.S. 10-year Treasury Note, which currently yields around 0.7% per year. This means if you buy a 10-year note today and hold it through maturity you would earn around 6.8% cumulatively in a full decade. It was only two years ago that you could buy the 10-year with a 3.2% yield, which equates to a 37% total return over a 10-year period. This difference in “risk-free” return is immense in terms of planning for investment returns, retirement, and income.
Other high-quality bonds including municipal (tax-free) bonds, investment grade corporate bonds, and TIPS, all of which also yield 2% or less. Cash and CDs offer no better option with yields between 0.1-1%.
So what should a long term investor who wants to contain overall risk but can’t accept a near 0% return on a large percent of the portfolio do? Our firm believes the answer is utilizing a spectrum of alternative/private investments that tend to have higher cash flows, low volatility, and low/no correlation to the stock market.
Below are some of the investments that our firm uses as bond replacements:
- Insurance-Linked Securities: Securities that offer long term equity-like returns with no correlation to the bond/stock markets or the overall economy. Their returns are tied to insurance premiums linked to earthquakes, hurricanes, winter storms, etc.
- Middle Market Lending: These are largely collateralized private loans to small and mid-sized companies. While the public corporate investment grade bond market yields around 2%, yields around 7-8% are common in this space.
- Alternative/Consumer Lending: These are small private loans made to consumers and small businesses across the country. The consumer loans are often used for higher rate credit card payoffs, home improvement, or special event borrowings. In one of the most prominent funds that invest in the space, the average credit rating of the underlying borrower is roughly 700. Yields here are in the 5-6% range.
- Real Estate Assets/Infrastructure: Holding a diversified portfolio of critical infrastructure (airports, pipelines, farmland, timberland, toll roads, utilities, etc.) can produce cash flows of around 3.5% and usually steady/predictable profits through an economic cycle, and inflation protection.
- Private Real Estate Credit & Equity: Private real estate (both on the equity and credit side) offers steadier returns, less leverage, and usually higher cash flows than their publicly traded counterparts. Yields on the real estate credit side can be as high as 10%, while 5% is attainable on the equity side.
- Private Municipal Bonds: These are similar to their publicly traded brethren in the sense that they are loans to support local governments or related entities across the country and offer tax-free income. Because these loans are privately negotiated they usually have no official rating and are illiquid, but they can sport yields of around 5% tax free.
The combination of the above alternative and private investments can create a “bond replacement” allocation that produces 3-5% in cash flow and offers competitive total returns over the long term. Of course, there are specific/unique risks and liquidity limitations to each one of these investments that the investor must understand. However, when combined in the aggregate, a lower volatility, high cash flow allocation that has little correlation to the stock market can be achieved.
This strategy if done with care, proper due diligence, liquidity planning, and position sizing can transform a portfolio and retirement plan.
The below graph shows a comparison of likely returns for traditional bond classes (current yields) and drawdown risk (assuming a 1% increase in rates in a 1-year period) vs. alternative/private investments.
Eric Mancini, CFA, CFP, CAIA is the director of investment research and a wealth advisor with Traphagen CPAs & Wealth Advisors (www.tfgllc.com). Traphagen is an independent fee-only fiduciary RIA located in northern NJ. He can be reached at email@example.com.
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© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
U.S. House Democrats crafting new $2.2 trillion COVID-19 relief package
By David Morgan
WASHINGTON (Reuters) – Democrats in the U.S. House of Representatives are working on a $2.2 trillion coronavirus stimulus package that could be voted on next week, a key lawmaker said on Thursday, as House Speaker Nancy Pelosi reiterated that she is ready to negotiate with the White House.
With formal COVID-19 relief talks stalled for nearly seven weeks, House Ways and Means Committee Chairman Richard Neal said new legislative efforts got under way this week after Federal Reserve Chairman Jerome Powell said in congressional testimony that lawmakers needed to provide further support for an economy reeling from the pandemic.
“The contours are already there. I think now it’s about time frame and things like that,” Neal told reporters when asked about the potential for new legislation.
He predicted a vote could come within days. “I assume, since the House is scheduled to break for the election cycle, then I think next week’s … appropriate,” said Neal, adding that Pelosi would determine when a legislative package might be introduced.
Related: U.S. House passes bill to avoid government shutdown
House Republican leader Kevin McCarthy dismissed the new initiative as partisan. Pelosi also faces pressure from moderate House Democrats who say they want to see bipartisan aid proposals that have a chance of becoming law.
“If it’s a messaging exercise, it’s worthless,” Representative Dean Phillips, a freshman Democrat from Minnesota, told CNN. He said the effort risked looking like Senate Republicans who had unsuccessfully pushed their own partisan coronavirus aid bill.
“Many of us are getting sick of that,” Phillips said.
Stocks reacting positively to the announcements from Congress, with the S&P reaching a session high shortly after, before paring some gains.
Formal talks between Pelosi, Senate Democratic leader Chuck Schumer, Treasury Secretary Steven Mnuchin and White House Chief of Staff Mark Meadows broke down without a deal on Aug. 7, with the two sides far apart. Pelosi and Mnuchin have since spoken by phone.
“We’re ready for negotiation,” Pelosi told reporters on Thursday, saying she had last spoken to Mnuchin on Wednesday.
Pelosi and Schumer, who initially sought a $3.4 trillion relief package, have since scaled back their demands to $2.2 trillion. Neal said a new legislative package would be somewhere near $2.2 trillion. Some media reports said it could be $2.4 trillion.
But it was not clear whether the White House would agree to such a sum. Meadows has said that Trump would be willing to sign a $1.3 trillion relief package.
Meanwhile, Senate Republicans, who have not been involved directly in the negotiations, initially proposed a $1 trillion bill, which was rejected by many Republicans who thought it too large and by Senate Democrats who said it was too small.
Senate Republicans later tried and failed to bring a smaller $300 billion bill to the floor.
(Reporting by David Morgan and Susan Cornwell; Editing by Chizu Nomiyama and Daniel Wallis)
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3 ‘Strong Buy’ Stocks With Over 7% Dividend Yield
Markets are volatile, there can be no doubt. So far this month, the S&P 500 has fallen 9% from its peak. The tech-heavy NASDAQ, which had led the gainers all summer, is now leading the on the fall, having lost 11% since September 2. The three-week tumble has investors worried that we may be on the brink of another bear market.The headwinds are strong. The usual September swoon, the upcoming election, doubts about another round of economic stimulus – all are putting downward pressure on the stock markets.Which doesn’t mean that there are no opportunities. As the old saw goes, “Bulls and bears can both make money, while the pigs get slaughtered.” A falling market may worry investors, but a smart strategy can prevent the portfolio from losing too much long-term value while maintaining a steady income. Dividend stocks, which feed into the income stream, can be a key part of such a strategy.Using the data available in the TipRanks database, we’ve pulled up three stocks with high yields – from 7% to 11%, or up to 6 times the average dividend found on the S&P 500 index. Even better, these stocks are seen as Strong Buys by Wall Street’s analysts. Let’s find out why.Williams Companies (WMB)We start with Williams Companies, an Oklahoma-based energy company. Williams controls pipelines connecting Rocky Mountain natural gas fields with the Pacific Northwest region, and Appalachian and Texan fields with users in the Northeast and transport terminals on the Gulf Coast. The company’s primary operations are the processing and transport of natural gas, with additional ops in crude oil and energy generation. Williams handles nearly one-third of all US commercial and residential natural gas use.The essential nature of Williams’ business – really, modern society simply cannot get along without reliable energy sources – has insulated the company from some of the economic turndown in 1H20. Quarterly revenues slid from $2.1 billion at the end of last year to $1.9 billion in Q1 and $1.7 billion in Q2. EPS in the first half was 26 cents for Q1 and 25 cents for Q2 – but this was consistent with EPS results for the previous three quarters. The generally sound financial base supported the company’s reliable dividend. Williams has been raising that payment for the past four years, and even the corona crisis could not derail it. At 40 cents per common share, the dividend annualizes to $1.60 and yields an impressive 7.7%. The next payment is scheduled for September 28.Truist analyst Tristan Richardson sees Williams as one of the midstream sector’s best positioned companies.“We continue to look to WMB as a defensive component of midstream and favor its 2H prospects as broader midstream grasps at recovery… Beyond 2020 we see the value proposition as a stable footprint with free cash flow generation even in the current environment. We also see room for incremental leverage reduction throughout our forecast period on scaled back capital plans and even with the stable dividend. We look for modestly lower capex in 2021, however unlike more G&P oriented midstream firms, we see a project backlog in downstream that should support very modest growth,” Richardson noted.Accordingly, Richardson rates WMB shares as a Buy, and his $26 price target implies a 30% upside potential from current levels. (To watch Richardson’s track record, click here)Overall, the Strong Buy analyst consensus rating on WMB is based on 11 Buy reviews against just a single Hold. The stock’s current share price is $19.91 and the average price target is $24.58, making the one-year upside potential 23%. (See WMB stock analysis on TipRanks)Magellan Midstream (MMP)The second stock on our list is another midstream energy company, Magellan. This is another Oklahoma-based firm, with a network of assets across much of the US from the Rocky Mountains to the Mississippi Valley, and into the Southeast. Magellan’s network transports crude oil and refined products, and includes Gulf Coast export shipping terminals.Magellan’s total revenues rose sequentially to $782.8 in Q1, and EPS came in at $1.28, well above the forecast. These numbers turned down drastically in Q2, as revenue fell to $460.4 million and EPS collapsed to 65 cents. The outlook for Q3 predicts a modest recovery, with EPS forecast at 85 cents. The company strengthened its position in the second quarter with an issue of 10-year senior notes, totaling $500 million, at 3.25%. This reduced the company’s debt service payments, and shored up liquidity, making possible the maintenance of the dividend.The dividend was kept steady at $1.0275 per common share quarterly. Annualized, this comes to $4.11, a good absolute return, and gives a yield of 11.1%, giving MMP a far higher return than Treasury bonds or the average S&P-listed stock.Well Fargo analyst Praneeth Satish believes that MMP has strong prospects for recovery. “[We] view near-term weakness in refined products demand as temporary and recovering. In the interim, MMP remains well positioned given its strong balance sheet and liquidity position, and ratable cash flow stream…” Satish goes on to note that the dividend appears secure for the near-term: “The company plans to maintain the current quarterly distribution for the rest of the year.”In line with this generally upbeat outlook, Satish gives MMP an Overweight (i.e. Buy) rating, and a $54 price target that implies 57% growth in the coming year. (To watch Satish’s track record, click here)Net net, MMP shares have a unanimous Strong Buy analyst consensus rating, a show of confidence by Wall Street’s analyst corps. The stock is selling for $33.44, and the average price target of $51.13 implies 53% growth in the year ahead. (See MMP stock analysis on TipRanks)Ready Capital Corporation (RC)The second stock on our list is a real estate investment trust. No surprise finding one of these in a list of strong dividend payers – REITs have long been known for their high dividend payments. Ready Capital, which focuses on the commercial mortgage niche of the REIT sector, has a portfolio of loans in real estate securities and multi-family dwellings. RC has provided more than $3 billion in capital to its loan customers.In the first quarter of this year, when the coronavirus hit, the economy turned south, and business came to a standstill, Ready Capital took a heavy blow. Revenues fell by 58%, and Q1 EPS came in at just one penny. Things turned around in Q2, however, after the company took measures – including increasing liquidity, reducing liabilities, and increasing involvement in government-sponsored lending – to shore up business. Revenues rose to $87 million and EPS rebounded to 70 cents.In the wake of the strong Q2 results, RC also started restoring its dividend. In Q1 the company had slashed the payment from 40 cents to 25 cents; in the most recent declaration, for an October 30 payment, the new dividend is set at 30 cents per share. This annualizes to $1.20 and gives a strong yield of 9.9%.Crispin Love, writing from Piper Sandler, notes the company’s success in getting back on track.“Given low interest rates, Ready Capital had a record $1.2B in residential mortgage originations versus our $1.1B estimate. Gain on sale margins were also at record levels. We are calculating gain on sale margins of 3.7%, up from 2.4% in 1Q20,” Love wrote.In a separate note, written after the dividend declaration, Love added, “We believe that the Board’s actions show an increased confidence for the company to get back to its pre-pandemic $0.40 dividend. In recent earnings calls, management has commented that its goal is to get back to stabilized earnings above $0.40, which would support a dividend more in-line with pre-pandemic levels.”To this end, Love rates RC an Overweight (i.e. Buy) along with a $12 price target, suggesting an upside of 14%. (To watch Love’s track record, click here)All in all, Ready Capital has a unanimous Strong Buy analyst consensus rating, based on 4 recent positive reviews. The stock has an average price target of $11.50, which gives a 9% upside from the current share price of $10.51. (See RC stock analysis on TipRanks)To find good ideas for dividend stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Trump claims first presidential debate will be ‘unfair’
Donald Trump has claimed the first presidential debate next week will be “unfair.”
Mr Trump said in a radio interview that veteran moderator Chris Wallace was “controlled by the radical left” and would not ask Joe Biden tough questions.
“Chris is good, but I would be willing to bet that he won’t ask Biden tough questions,” the president told Brian Kilmeade on Fox News Radio.
“He will ask tough questions of me and it will be unfair, I have no doubt about it. He will be controlled by the radical left.”
Trump insisted he had “a lot of respect” for Wallace and a good relationship with his father, Mike Wallace.
Mr Kilmeade was quick to push back against Mr Trump’s accusations about his Fox News colleague.
“Mr President, I will tell you for sure, he is not controlled by anyone,” said Mr Kilmeade.
“We’ll see. Then he’s got to ask tough questions of Biden,” Trump said.
Mr Wallace will moderate the first presidential debate in Cleveland, Ohio, on Tuesday.
Both candidates will be asked questions on their records, the coronavirus, the Supreme Court, the economy, race and violence in US cities, and election integrity.
Trump appeared to try and lower expectations of his performance, insisting that Mr Biden had a significant advantage.
“No, I think I am the one without experience. I have just been doing this for a few years. He has been doing this for 47 years plus,” said Mr Trump.
“I mean, he has a tremendous advantageous really, if you think about it, but I have a much better record than he does.”
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