Look for High Yields and Low Volatility

 | Feb 10, 2014 | 10:30 AM EST  | Comments
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Trading in the equity markets last week was a perfect microcosm for how different the market is in early 2014 than it was in 2013. Investors got the best of both worlds last year, a consistently-rising market with little volatility. Things are sure different in the New Year.

Monday saw a better than two percent plunge in the indices. By Thursday and Friday, the market was ripping up despite a worse-than-expected jobs report for the second month in a row. The overall result of the week was that indices ended the week slightly up despite the significantly volatility in daily results.

Economic reports are starting to come in a bit mixed recently. I believe the market needs to get some confirmation that the economy is growing at the 3% level it was in the last half of 2013. And it needs to see that the economy is not decelerating to the 2% level that has been the norm in the five years of the weakest post war recovery on record.

I also believe investors are unsure whether the 'taper' will continue under new Federal Reserve leadership if the economy does lose steam. Finally, turmoil in emerging markets is proving to be a stubborn concern in the New Year.

Until these issues get resolved, the market should continue to be volatile. I think we will have a lot of weeks in equities like last week. I continue to buy or add to stakes in low-volatility, high-dividend stocks with reasonable valuations when the market has selloffs. These types of stocks underperformed in 2013 as the market staged a 30% rally. However, they are outperforming so far in a more volatile 2014.

Magellan Midstream Partners (MMP) is just the type of stock I want to add here on any market pullback. This is a limited partnership that provides transportation, storage and distribution facilities in the United States. This pipeline company is benefitting greatly by the huge energy production boom in the Eagle Ford and other shale regions.

The shares yield 3.4% and payouts have quadrupled over the past dozen years as Magellan has been a consistent grower and creator of value throughout its history. The company delivered strong results the last time it reported earnings early this month. Magellan was also just upgraded at Wells Fargo and consistently delivers revenue growth in the high mid-digits and earning gains around 10% annually. I am a buyer on any significant pull back in the overall market.

In my two years writing for TheStreet.com, this may be the first time that AT&T (T) is starting to look attractive. The stock has pulled back more than 15% from its highs in May before then Fed Chairman Ben Bernanke started to broach the topic of the "taper". On a forward price-to-earnings basis, it sells for a 25% discount to the overall market multiple and a 10% discount to its own five year average.

AT&T is the classic 'Dogs of the Dow' stock right now with a 5.7% dividend yield. Free cash flow should improve nicely next year once the company's 4G network is built out. Revenues are only increasing 1% to 2% annually but I think it can recover by year end half of its decline since May. Combined with the dividend yield, this would provide an overall total return in the low teens. Not stellar but a good return from this low beta stock.

During Monday's decline I picked up a position in Physicians Realty Trust (DOC). This is a self-managed healthcare real estate investment trust (REIT) organized to acquire, selectively develop, own and manage healthcare properties that are leased to physicians, hospitals and healthcare delivery systems.

Physicians Realty Trust reminds me of a younger, faster growing and smaller version of Healthcare Trust of America (HTA) which is a core part of my income portfolio and that I recently profiled. The REIT just came public in July 2013 but has a seasoned management team. The shares yield 7.2% and it recently received upgrades from Compass Point and Wunderlich.

These are the type of safe dividend payers I am putting my 'dry powder' into during market pullbacks. None of them are going to provide the returns investors became accustomed to in 2013. However, they are strong ports in the storm until the market gets some clarity on the direction of the domestic and global economies.

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