Time to Apply the Brakes Lightly

 | Feb 27, 2014 | 11:30 AM EST
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Investing sometimes reminds me of racing around an oval track. There are times where one can put the metal to the pedal and other times the driver needs to be more cautious and even apply a bit of the brakes.

The year 2013 was like one big straightaway where investors could leave the throttle fully open. With the Federal Reserve providing $1 trillion in liquidity measures, a rapidly improving housing market and over 3% GDP growth in the back half of the year, the market consistently roared forward.

After almost two months of trading in 2014, however, it feels like we are going into a turn that requires more caution and slower speed. Some of this change in environment is a natural result of consolidating last year's huge market gains.

The economy also is providing mixed readings. Some of the results are caused by a dismal winter throughout most of the country. But some reports point to a decelerating economy after robust growth in the last half of 2013. Investors also need to get an eye on the impacts to the recent tapering by the Federal Reserve as well as increasing turmoil in the emerging markets.

I believe the market will be hard pressed to deliver double-digit returns in 2014. Therefore, my portfolio is tilting towards a more conservative stance. I am adding to my income portfolio some plays in energy that offer high yield as well as some capital appreciation potential. Dividends should provide more of the overall return during the lackluster market I foresee for the current year.

I added some shares in Transocean (RIG) recently. Like most offshore drillers, the stock has been under pressure recently. The stock looks. However, like it is trying to bounce off some longer-term technical support levels.

Transocean pays a juicy 5.2% dividend. It is also has Carl Icahn as a significant and active shareholder. It is one of the few losers the noted activist has had in the last year. I don't think that will be the case, however, by the end of the year as sentiment becomes less negative on the sector and stock.

Icahn has been successful in getting the company reduce its board seats, issue a special dividend and provide him some board representation. I believe he will remain active in agitating to increase shareholder value. Finally, the shares are cheap at 8x forward earnings. And earnings this year are projected to increase more than 20%.

Another interesting yield play in the energy space that just popped onto my radar is limited partnership Exterran Partners (EXLP). This unique entity primarily owns and operates facilities used in the natural gas compression industry. The space is growing rapidly as the domestic energy boom continues unabated. Exterran is growing revenues in the mid-teens as a result.

The company receives relatively little analyst coverage but did receive a nice upgrade to "Outperform" the other day from Credit Suisse. Exterran provides a robust distribution of over 7% and the company has been a consistent and incrementally hiker of its payout since it came public in 2006.

Neither of these selections is likely to provide the robust returns the market did in 2013.  EXLP and RIG are the type of conservative high-yield plays, however, that I believe should outperform the overall market in 2014 while providing lower volatility.

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