As we enter the fourth quarter with the myriad concerns for the rest of the year (Europe, the presidential election, the fiscal cliff, etc.), I am assessing the overall composition of my portfolio and how it is likely to perform for what I see coming in the year ahead.
Given the continuing extremely loose Federal Reserve policies that continue to pump liquidity into the markets, anemic job growth and an economy that is barely able to maintain slightly higher than stall speed, there is a high probability of much higher inflation and possibly even stagflation in the years ahead. In this sort of scenario, investors should direct their attention to hard assets (real estate, energy master limited partnerships, etc.) that throw off yield and increase their payouts in a consistent manner.
I am planning to add to two core positions in my income portfolio that should continue to perform well in an environment of increasing inflation.
Chatham Lodging Trust (CLDT) is a REIT that owns 18 hotels with an aggregate of over 2,400 rooms and suites in 10 states. It also holds a minority investment in a joint venture that owns 64 hotels that have over 8,000 rooms and suites.
Here are four reasons Chatham Lodging is a solid play for income investors at $14 a share:
- The company has more than tripled operating cash flow in the past three years and yields 5.7%. The hotel sector is also experiencing growth in average daily rates and higher occupancy rates, and this is a positive tailwind.
- The mean analyst price target on Chatham Lodging's stock price is $17.50. Price targets range between $16 and $20.
- The stock is cheap at 91% of book value, especially considering that the company has successfully executed a renovation program for the majority of hotels it owns.
- Insiders have been net buyers of the stock over the last six months, and earnings are ramping up nicely. Chatham Lodging made $0.89 a share in fiscal 2011 but is on track to make more than $1.30 a share in fiscal 2012. Analysts project over $1.60 in earnings in fiscal 2013. This bodes well for dividend increases in the future.
Linn Energy (LINE) is an independent oil and natural gas company. The company's properties are primarily located in the mid-Continent, the Permian Basin and the Williston Basin in the U.S.
Here are four reasons why Linn Energy is a good core part of an income portfolio at $41 a share:
- Linn yields 7% and has doubled its payout over the last six years through consistent increases.
- Revenue is growing rapidly through strategic acquisitions and expanding production. The company should clock in with a 50% revenue gain in fiscal 2012, and analysts expect a sales increase of over 30% in fiscal 2013.
- It recently increased quarterly and full-year guidance as production from its wells is coming in higher than expected.
- LINE is a best-in-class upstream MLP that is well positioned to complete a number of large accretive acquisitions in this environment of low natural gas prices in the years ahead. It has already completed almost $3 billion in acquisitions year to date. As such, it is a good proxy for this expanding energy-producing sector.