My favorite dividend sector continues to be the MLP (master limited partnership) space. Alerian MLP ETF (AMLP) is up around 8% so far this year and has more upside.
-- Energy prices continue to rise
-- Washington is focused on energy self-sufficiency
-- Washington is reducing regulatory hurdles
-- Infrastructure spending is a real potential positive
This area is set to continue to do well even if rates rise.
I still dislike utilities -- Utilities Select Sector SPDR ETF (XLU) is now down over 8% in a month -- not only because utilities are more tied to interest rates, but the rising cost of energy prices impacts them adversely.
Keep Adding to Municipal Bonds
I already wrote that I want to own municipal bond closed-end funds, but I am now comfortable with the entire space, though I would prefer to own very long-dated municipal bonds.
There are several reasons to like municipal bonds and closed-end funds:
The market withstood incredibly huge issuance in December and is trading well. There are "crossover" buyers in the municipal bond market. These are bond investors who normally don't buy municipal bonds but currently find them attractive enough to buy -- that should help the market going forward.
There will be less issuance and it will be shorter. There will be a decrease in supply for the coming weeks or months as so much was issued ahead of tax code changes. This is supportive for prices. Tax law changes make it more difficult to pre-fund bonds, so expect issuers to start issuing shorter-dated bonds (maybe 20 years instead of 30 years) so scoop up those longer-dated bonds while you can.
Municipal bonds still pay to take credit risk. While spreads seem tight, there is so much demand that higher risk bonds should do well again. This would be the third year in a row that defied pundits. In general, I think you should look to outside managers for municipal bonds, but that is particularly true if you are going to invest in riskier credits. Put the money with a manager who has the resources to evaluate the credit risk.
Leveraged Loans Benefit From Rising Rates
I was wrong, I steered away from the high-yield market as there were significant outflows late last year and signs that with 2-year Treasuries near 2% some money would leave the high-yield market.
That reversed course very quickly this year as the high-yield market has done extremely well. Part of the explanation can be tied to a belief that the AT&T deal will go through.
M&A activity is typically very good for the high-yield market as they tend to get bought by investment-grade companies and the credit spreads rally.
While leverage loan funds won't experience quite the upside (most are callable) they will benefit as the Fed hikes interest rates as it will increase LIBOR rates. I like these in traditional mutual funds or in closed-end funds where the discount is appealing. I am not a big fan of the ETF as I don't think it offers enough diversification.
This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this from Peter Tchir, Robert Powell and others.