Investors are skittish due to the global macroeconomic risks that are coming out of poor economic reports in the U.S. and China as well as the sovereign debt crisis in Europe. Investors have "2008 on the brain" and have bid up risk premiums on out of the money put options to protect themselves against the next black swan (read: Volatility at World's End: Deflation, Hyperinflation and the Alchemy of Risk). Investors have also flocked to government bonds driving yields to record lows. Yields on the 10-year U.S. Treasury and German Bund are below the prevailing rate of inflation. I do not believe investors are investing for the long haul but rather panicking into perceived safety. As Warren Buffet has coined it, investors should be greedy when others are fearful and fearful when others are greedy. Simply put, I believe investors are very fearful, and greed is nowhere to be found.
Long-term investors should start building their portfolios of long-standing companies that can provide yield in a tumultuous market. The developed world has years of deleveraging ahead. Years of deleveraging will mean uneven growth and a difficult market environment.
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Despite the tough environment, investors should not simply hide out in 10-year Treasuries at yields below the prevailing rate of inflation.
- Price to Earnings ratios of less than 20.0x - focused on equities with modest valuations (excluding pure "yield" playing including mortgage REITs and master limited partnerships)
- Market Capitalization of greater than $1 billion - large capitalization equities typically have better access to capital markets.
- Dividend Yields of greater than the 10-year U.S. Treasury - focused on equities that provide strong current income.
- Equity betas of less than 1.0x - focused on equities that are less volatile than the overall market.
Procter & Gamble Co. (NYSE:PG)
- Price to Earnings Ratio: 19.8x
- Market Capitalization: $177.3 billion
- Dividend Yield: 3.5%
- Beta: 0.43x
McDonald's Corp. (NYSE:MCD)
- Price to Earnings Ratio: 17.1x
- Market Capitalization: $93.0 billion
- Dividend Yield: 3.1%
- Beta: 0.43x
General Mills, Inc. (NYSE:GIS)
- Price to Earnings Ratio: 16.5x
- Market Capitalization: $25.1 billion
- Dividend Yield: 3.4%
- Beta: 0.17x
Kellogg Company (NYSE:K)
- Price to Earnings Ratio: 14.1x
- Market Capitalization: $17.0 billion
- Dividend Yield: 3.6%
- Beta: 0.54x
Annaly Capital Management, Inc. (NYSE:NLY) - Mortgage REIT
- Price to Book Value: 1.1x
- Market Capitalization: $16.7 billion
- Dividend Yield: 12.9%
- Beta: 0.28x
Boardwalk Pipeline Partners, LP (NYSE:BWP) - MLP
- Enterprise Value to EBITDA: 14.6x
- Market Capitalization: $6.0 billion
- Dividend Yield: 7.4%
- Beta: 0.23x
Mortgage Real Estate Investment Trusts and Master Limited Partnerships should be a small part of all yield focused investors. M Reits provide outsized yield in today's low rate environment. MLPs provide stable cash flow from the contractual nature of the business models.