2018 was not a particularly good year for any type of investor, but 2019 is setting up to be a good one for income seekers.
For starters, we can finally make some money in our "cash" positions. That will let us be nimble around our allocations. The SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has grown from $3.5 billion in early October to over $8.5 billion now. This fund has very little volatility (cash substitutes shouldn't) and it has an indicated yield of about 2.1%. Finally, some income on our cash.
At the start of 2017 you could get 1.2% from 2-Year Treasuries. That moved to 1.90% by the start of 2018 and is currently providing 2.5%. While we aren't going to satisfy all our income needs with these assets, it allows us to be a little more conservative as a whole without giving up much income on the portfolio level -- which is exactly what we want in our income portfolio.
High-yield bonds and leveraged loans both had negative total returns on the year but start 2019 offering better value. The closed-end funds that invest in leveraged loans or corporate bonds are at or near their biggest discount to net asset value (NAV), meaning you are buying more reasonably priced portfolios at a much larger discount. This is creating opportunities and I am buying closed end funds in the next week.
Even municipal bond closed-end funds, such as Nuveen AMT-Free Quality Municipal Income Fund (NEA) , which is almost $4 billion, are at a 15% discount to NAV -- great value -- especially when you consider that iShares National Muni Bond (MUB) , a large municipal bond ETF, returned 1.5% in December and has had inflows (it is not common to be able to buy a closed-end fund at such a deep discount to NAV, while the underlying asset class is doing relatively well).
Effectively, we are getting offered income opportunity in fixed income and we need to take advantage of that.
Business Development Companies (BDCs) are down over 8% (VanEck Vectors BDC Income ETF (BIZD) ) in the past month (we were negative on them). While there might be more downside here, it is on my radar screen as an area to re-allocate capital to.
Master limited partnerships (MLPs) are down almost 10% over the last month and 18% in the past three months (Alerian MLP ETF (AMLP) ). As the potential for a trade deal with China remains real, the entire energy sector should benefit. Any deal will include China buying oil and liquid natural gas from us, which should help this beleaguered sector. MLPs are higher on my "want to own" list than BDCs.
We need to be extremely vigilant on dividend stocks
We have seen stocks such as General Electric GE and Anheuser-Busch InBev (BUD) pummeled (-55% and -39% in 2018, respectively). We are going to see a continued shakeout of companies that took on too much leverage to support shareholders having to retrench, which will be bad for equity holders.
But all is not doom and gloom
Some top companies are already taking steps to improve their balance sheets which will be good for stockholders, especially for those who are invested for the dividends. AT&T's (T) CEO already stated on an investor call that repaying debt is good for shareholders. I agree with him.
Well-managed companies will cut stock buybacks long before they cut dividends
It has been easy to confuse Dividend Aristocrats with companies that have excessively rewarded shareholders for the past years and are now paying the price.
We, as income investors, will get to see which managements of companies truly respect investors for their loyalty and have truly sustainable dividend policies. I think companies such as AT&T will cut their buybacks long before their dividend. Yes, they have a lot of leverage, but they are in position to deleverage AND continue to pay their dividend.
There are a lot of great dividend stock ideas presented to you at Income Seeker. I don't attempt to replicate others' work and analysis, in fact I use their single stock analysis for my own investing thoughts. However, what I do, and I think you need to do with every one of your dividend holdings is assess:
Are they really Dividend Stocks, companies not only committed to dividends but with the means to make those payments? If so, allocate more. If not, sell and move on, because for the first time in years we don't have to sacrifice quality to maintain income.
(This article was originally sent Dec. 31 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 each day from Nick McCullum, Peter Tchir, Chris Versace and others.)
