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Bruce Vanderveen
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The Federal Reserve has pegged interest rates to all time lows. This leaves income investors in a quandary - not knowing where to invest. Bruce looks at the best income, growth, natural resource, and technology equities while taking a contrarian approach. ETFs can often be used to mitigate risk... More
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  • REITs: Investments For Deflationary Times

    Perhaps some of you, like me, watched PBS's recent and fascinating series on the Roosevelt years. In 1933 newly elected U.S. President Franklin D. Roosevelt took the helm of a depression-racked country. Instigating a 'whatever it takes" approach, president and his Democratic congress signed into law many popular measures -- collectively known as the New Deal.

    Of course America and the world are much different now than in the 1930's. While both the Great Depression and the Great Recession (as the 2008-2009 financial crisis has been dubbed) were debt crises most similarities stop there.

    Before the Roosevelt years the U.S. government did little in the way of social welfare. Now, however, many of Roosevelt's New Deal programs (social security, minimum wages, FDIC bank insurance. etc.) are firmly entrenched in the government. Almost all the developed nations in the world now have enacted similar measures.

    Another big, perhaps more important, difference is that while debt to GDP fell rapidly during the hard times of the 1930's - no such thing is happening today. While GDP has risen modestly in the last 5 years global debt, now approaching 200 trillion, has marched up tostaggering heights.

    Collapsing Commodity Prices

    Exchange Traded Funds (ETFs), due to their averaging attributes, are excellent trend indicators.

    Commodity ETFs show how prices rose modestly for the first couple years after the financial crisis but, in the last six months, have pretty much collapsed.

    (click to enlarge)

    Source: Yahoo Finance

    In the last five years agricultural commodities, as evidenced by the Power Shares Agriculture ETF (NYSE: DBA), has fallen 8.4% while base metals (aluminum, iron, copper, etc) as evidenced by the Power Shares Base Metal ETF (NYSE: DBB) has fallen 29.2%. Oil as shown by the Power Shares Oil ETF (NYSE: DBO) has fallen a whopping 45.3%. The broad-based Power Shares Commodity Tracking ETF (NYSE: DBC) has fallen 23.6%.

    How can this occur when the monetary bases of currencies across the globe have increased so dramatically since 2008? It's the exact opposite of what most predicted when the Fed (and other central banks) started massive balance sheet expansions. Shouldn't more dollars chasing the limited assets create inflation?

    Why Have Central Banks Failed To Boost Inflation And Asset Prices?

    It's a complex question, beyond the scope of this article, but here are what others more knowledgeable than I think:

    HSCB postulates that "Rather than removing deflationary trends, monetary stimulus merely allows central banks to export deflation to other parts of the world."

    Bill Gross, in a recent SeekingAlpha article, notes that demographics, technology, and globalization all tend to promote deflation and that as yields move closer and closer to zero, credit increasingly behaves like cash, losing its multiplicative power. Bill, in his article, goes on to predict: "When the year [2015] is done, there will be minus signs in front of returns for many asset classes. The good times are over."

    If, as Bill Gross believes, the good times really are over, what's an investor to do?

    Where Can Investors Look For Meaningful (and safe) Returns?

    I've noticed that REITs have done quite well in the current, low-interest rate environment. In fact, REITs may be one of the best income generating assets still available to investors. Many REITs yield 4% or more and are regularly increasing their dividends.

    Since all REITs must distribute at least 90 percent of taxable income to shareholders, management is usually focused on funds from operations (FFO), This asset sector, is the best measure of health. Also, since many REITs pay monthly dividends, one can easily match income with budgets.

    Looking once again at ETF trends, we see that while the broad-based commodity ETF DBC, as noted above, has fallen 23.6% over the last 5 years the Vanguard REIT ETF (NYSE: VNQ) is up nearly 100%. If the trend is your friend, REITs are now the place to be.

    (click to enlarge)

    One can take a no-brainer approach here and simply buy VNQ. With 145 REITs in its holdings, VNQ provides investors with a well diversified position in U.S. commercial real estate. Perhaps it isn't such a "no brainer" idea after all -- VNQ has doubled over the last five years.

    It's true, REITs often decline as interest rates rise. Yet it's worth noting that many REITs maintained, or even increased, dividends during 2008-2009 financial crisis. Below I profile three such REITs.

    Realty Income Corporation (NYSE: O) is one of the most popular, investor friendly, and fiscally sound REITs available. This REIT owns over 4,200 triple-net leased, mostly freestanding properties, Top tenants include Walgreen, FedEx, Dollar General, LA Fitness, and Family Dollar. No one tenant provides more than 6% of revenue.

    Realty Income is a dividend aristocrat having increased its dividend for over 25 consecutive years. Currently Realty Income pays a 4.4% annually and has a monthly distribution -- the company is know as "the Monthly Dividend Company." Realty Income has had 79 dividend increases since 1994. If you only buy one REIT, this is probably the top choice.

    HCP, Inc. (NYSE: HCP) invests in healthcare related properties. Holdings include senior housing, skilled nursing facilities, medical office buildings, hospitals, and other healthcare related buildings. With the baby boomers reaching retirement age HCP should do well.

    HCP is also a dividend aristocrat and has 29 consecutive years of dividend increases. Currently the company pays a quarterly 5.3% annual dividend.

    Just recently HCP's top tenant -- HCR ManorCare (29% of HCP's revenue) -- which owns post-acute skilled-nursing facilities, disclosed it is being investigated by state and federal agencies. It's possible HCR ManorCare may be subject to refunds and fines. The extent this will affect HCP, if at all, is uncertain at this point.

    W. P. Carey Inc. (NYSE: WPC) holds and manages properties in the U.S. and Europe. The firm invests in properties that are mostly triple-net leased to single corporate tenants. Holdings are highly diversified by region and property type. Holdings include office, warehouse, industrial, retail, hotel, R&D, and self-storage buildings. W. P. Carey believes that diversification is one of the best ways to mitigate risk for investors

    Carey has never cut its dividend and has increased dividends every year since the company went public in 2000. Currently Carey's quarterly dividend yields 5.4%.

    Further Research

    If you are not aware of it yet, SeekingAlpha has a prolific author and REIT expert: Brad Thomas. If you invest in REITs I strongly recommend you read Brad's articles.

    Some Cautionary Notes

    No investment is without some risk. As we saw during the 2008-2009 financial crisis REITs too can fall in value. REITs have bond like characteristics in that rising interest rates may cause principle declines.

    Perhaps Realty Income provides the best summary of REIT risks on its website where even this excellent company admits (though it has never done so) that "dividends that you thought you would get might be cut or discontinued." Give them credit for honesty.

    FDR boosted American morale and helped lead us out of the Great Depression but it still remains to be seen what or who will lead us out of the morass of this Great Recession.

    Mar 02 12:37 PM | Link | 1 Comment
  • Can Coca-Cola Come Off Its Sugar High?

    As one of the bluest of blue-chips, The Coca-Cola Company (NYSE:KO) is beloved by many investors - including the legendary Warren Buffett. The company's iconic, namesake brand is known, perhaps better than any other, throughout the world.

    But things have not gone well for Coca-cola lately. Soft drink sales are in decline and now, to make matters worse, sugary drinks are increasingly suspect in sharply rising global rates of obesity and diabetes.

    To be sure, Coca-cola is not the only company accused of selling unhealthy food and drink. Kraft Foods Group, Inc. (NASDAQ:KRFT), Pepsico, Inc. (NYSE:PEP), General Mills, Inc. (NYSE:GIS), McDonald's Corp. (NYSE:MCD) and others have all come under fire in recent years.

    I will profile Coca-cola here, not to pick on them, but because of its instant brand recognition and sheer size make the company a proxy for all sweet soft drink manufacturers. Pepsico, Inc., Dr Pepper Snapple Group, Inc. (NYSE:DPS), and others are also in the soft drink business and the gist of this article applies to varying degrees to them also. And, keep in mind, soft drink companies simply sell (helped by good advertising of course) what consumers wish to buy.

    Obesity and Diabetes Are Now Global Epidemics

    Diabetes is a terrible disease. It attacks the whole body and can lead to heart disease, cancer, stroke, kidney failure, foot amputations, blindness, and more. The cause? The increasingly common type II variety - 95% of all cases - appears to be the result of excess amounts of sugar in the diet. The disease has spread along with its handmaiden obesity like a cancer across the U.S. in recent years. Increasingly it is affecting children.

    At one time diabetes was relatively rare - but no longer. The American Diabetes Association says 8.3% of Americans now have the disease and an additional 25% are prediabetic - meaning they run a good chance of developing a full-blown case. What's worse, once you have it you cannot be cured. It can only - hopefully - be controlled.

    Internationally, it's mostly bad news. Diabetes has a strong genetic component and ethnic groups such as American Indians, Hispanics, Asians, and Pacific islanders seem especially susceptible. Mexican Americans are almost twice as likely as Caucasians to be diagnosed with diabetes.

    Do Coca-cola's Offerings Contribute To Obesity And Diabetes?

    Many studies, such as this one from the Harvard School of Public Health, claim sugary drinks do indeed contribute to obesity and diabetes. Coca-cola's sweet soft drinks are loaded with sugar (mostly the controversialmanufactured sweetener HFCS as it is cheaper than natural cane or beet sugar).

    A 12 ounce can of coke has about 10 teaspoons of sugar in it and many folks drink a lot more than 12 ounces of soda. 7-11's 32 oz Big Gulp contains over 21 teaspoons of sugar. There are a profusion of even bigger sizes available.

    Classic coca-cola is the number one selling soft drink in the world so you can be sure a lot of Coca-cola's beverages go into those herculean sized containers.

    With all this sugar going into the body the pancreas insulin-producing cells can be overwhelmed and the stage is set for obesity and possibly diabetes.

    No Refuge in Diet Drinks

    After Coca-cola classic, Diet Coke is the second best selling soft drink in the U.S. And, since diet drinks do not contain sugar (most are sweetened with the artificial sweetener aspartame), one might expect diet drinks to be the quick and easy switch for health conscious consumers.

    Unfortunately - though Coca-cola claims otherwise - many scientific studies such as this recent one from Purdue University show artificial sweeteners to also be deleterious to health. A simple Google search on the subject turns up dozens, if not hundreds, of links on the ill effects of artificial sweeteners.

    So there you have it. The two best selling soft drinks, Coca-cola classic and Diet Coke, when consumed in excess, may make you fat and sick. How does the company respond?

    Coca-cola's Response

    Coca-cola is well aware of the controversy, of course. The company seems to be responding in three ways: First, they downplay the issue, second they promote sugar-free beverages, and third, they are looking at alternative sweeteners such as stevia.

    The company minimizes (but doesn't deny) the danger sugary drinks may pose. In a recent press release Coca-cola pledged to offer low or no calories beverages in every market, make calorie counts more visible, support physical activity programs, and to not advertise to children under 12.

    Not surprisingly, Coca-cola claims aspartame is safe (the company has the support of the FDA with that assessment). However, the FDA's position on aspartame is irrelevant if consumers become fearful of the artificial sweetener. And, with Diet Coke sales down, consumers may be starting to do just that. Coca-cola executives are beginning to admitthings are not going well with aspartame.

    Stevia is a natural, no-calorie sweetener derived from a tropical plant in the sunflower family. Stevia does not raise blood sugar and appears to be the "rising star" of natural sweeteners. Coke is introducing Stevia on its websites and through its Coca-cola Life brand which debuted inArgentina last June. Coca-cola Life is sweetened with a mixture of sugar and stevia. The jury is still out on how well Coca-cola Life will do.

    Will A Sugar-Diabetes Link Dethrone Coca-cola?

    The sugar-diabetes link is not good news for Coca-cola of course and with soft drinks at 70% of sales one might, at first glance, expect the company to be vulnerable.

    Yet, it's highly unlikely that Coca-cola will lose its "king of soft drinks" status. It's also highly unlikely the world will stop drinking soft drinks. The company has such strong brand recognition that no matter what is offered, it will sell if the word coke is in it.

    What likely will happen is Coca-cola and other soft drink manufacturers will promote "healthy" beverages such as bottled water brands (Coca-cola has Dasani and vitamin waters) while introducing beverages such as Coca-cola LIfe into their brand mix. Companies can then claim consumers have viable healthy choices and it has done its part. Margins may even be higher for the "healthy" choices.

    Strong Fundamentals

    As noted earlier, Coca-cola enjoys brand recognition throughout the world. Also, the company has shown consistent growth and profitability over the years and, though the product mix may change, sales will likely continue to be robust as consumers will always want cold, non-alcoholic drinks.

    In recent years an investment in Coca-cola has proven to be outstanding. Stock prices have doubled over the last 5 years and the company, a dividend aristocrat, has increased the dividend an average of 8.6% annually over the last 10 years.

    According to Yahoo Finance, the company has over $20 billion in cash on the books and strong free cash flow. Additionally, it boasts an unrivaled distribution network across the world and is seeing rapid sales growth inAfrica, Asia, and Eastern Europe.

    Coca-cola is currently priced at $40 a share, has a P/E of 20, and the stock is on an upswing after faltering over the summer. At 7% off it's 52 week high it is not in the bargain bin though. I feel that, despite the sugar issue, the company will continue to do well.

    Conclusion And Summary

    Will Coca-cola ever be looked on as a sin stock? Probably not, but even "sin stocks" (think tobacco, gambling, alcohol, and firearms) have never let their reputations get in the way of profitability - some say it even adds to the allure.

    People the world over will always look forward to relaxing with a refreshing cold drink and Coca-cola will be there to give it to them. Sugary drinks may or may not keep their current popularity but Coca-cola will likely be the King in beverages for a long time.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: KO
    Nov 18 9:52 AM | Link | Comment!
  • Coffee And Chocolate: Gratifying Investments?

    Aside from a few puritanical malcontents, we all love coffee and chocolate. I know many of my friends prefer coffee over just about anything. The same, pretty much might be said for chocolate. You might call them recession proof necessities

    Surprisingly, both coffee and chocolate are actually good for you (in moderation of course). They may even help you live longer.

    Coffee (Coffea arabica)

    The coffee story, shrouded in myths and legends, claims an Ethiopian sheep herder named Kaldi noticed his sheep getting hyperactive after eating some red berries. Trying some himself, he soon found himself in a frenzy. Local monks disapproved - at least until they found it kept them awake longer for prayers. Things have been astir ever since.

    Turn of the Century Nicaraguan Coffee PickersCoffee bean picking is mostly by hand and the industry provides over 20 million jobs worldwide - a real boost for local economies.

    Three Publicly Traded Coffee Companies

    Starbucks (NASDAQ:SBUX) is a $42 billion corporation. Perking along nicely, the company is near its 52 week high. Its stock, however, may now be somewhat frothy and ripe for a spill.

    Green Mountain (NASDAQ:GMCR) is a $7.2 billion roasting company which is currently under SEC investigation for accounting irregularities. It's in a brew of trouble right now. The stock is down over the last 6 months. Is it a bargain? Possibly.

    Caribou (NASDAQ:CBOU), the smallest of the three companies mentioned here - market cap $390 million - is arguably the best investment. The company has $2 cash per share, no debt, and has shown steady growth.

    Chocolate (Theobroma cacao)

    Chocolate has been synonymous with romance since the 16th century. Europeans added cane sugar and milk to the bitter, fermented beans. The result has been pure delight. Saint Valentine's Day, actually just about any day, is a splendid time for chocolate.

    Originally from tropical America, 2/3 of cacao plantations are in Africa. Ivory Coast and Ghana lead in exports.

    Two Established "Chocolate Companies"

    Hershey (NYSE:HSY) and Tootsie Roll Industries (NYSE:TR) are both well established publicly traded companies. I love Hershey's Special Dark Chocolate with Almonds - delightful. Tootsie, a conservatively run company with practically no debt, has been around since 1896. The company has been paying dividends since 1943 (current yield 1.34%) and Forbes has a recent favorable write-up on it.

    Pure Commodity Investments

    You can invest in the pure commodities through ETNs. Coffee is tracked with iPath's (NYSEARCA:JO) and (NYSEARCA:CAFE), chocolate with iPath's (NYSEARCA:NIB) and (NYSEARCA:CHOC). Keep in mind, however that these ETNs are thinly traded. Coffee futures are down 30% in the past year, cocoa's is down 25% (see here).

    Is Anything More Reliable Than Coffee or Chocolate?

    Are you worried about paper money becoming worthless? Here's an idea: Stock up on coffee or cacao beans. Both have been used as currencies in the past. No inflationary debasement. An added bonus: You can eat or drink them - try that with gold or silver.

    Deflation make strike. Central Bank printing presses may roar. Inflation may rage. Nations may totter. It doesn't matter: We will still be drinking coffee and indulging chocolate. Enjoy!

    Disclaimer: This article is informative only - not personalized advice. Do your own research and due diligence before investing

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 01 8:20 AM | Link | Comment!
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