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Glenn Rogers is a longtime contributor for BuildingWealth.ca (http://www.buildingwealth.ca). His background is in Media and Publishing and has held a number of senior positions in major magazine and newspaper organizations. He has also successfully partnered with private equity firms to... More
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  • Looking for Yield 0 comments
    Nov 2, 2009 4:10 PM | about stocks: IAE, PFF, IGR
    Contributing editor Glenn Rogers joins us this week from sunny California. Glenn has had several winning picks for us in recent months but he's feeling a little nervous about the markets right now and looking to lock in some gains. Here is his report.
    Glenn Rogers writes:
    Since my last column, the Dow has finally broken through 10,000 and is fighting hard to stay there. In mid- week, the Dow recovered from a triple digit loss and moved back above 10,000 again. But a drop of 109 points on Friday took it back below the magic line to finish the week at 9,972.
    That doesn't mean it won't bounce back again. We are in the middle of earnings season and a lot can happen from one day to the next. For instance, Yahoo announced last week that it beat Street estimates and the stock experienced a nice bounce. Microsoft and Amazon followed with more good news. We still have 3M, Bristol-Myers, Caterpillar, and many other big players coming along so we should have a much better look at how companies are doing over the next few days. So far, so good, I say. With Intel and Apple smashing analysts' estimates alongside Goldman Sachs and J.P. Morgan, it appears we well are on the way to recovery.
    That said, given what we all went through last year it would still seem prudent to lock in some profits, if you have not already done so, and focus on developing an income stream in the event that we get either a major correction or double-dip recession. I'm not predicting one or the other but it is getting harder to find bargains in this market. Since most of our readers are not options traders, where would be possible to buy insurance against a catastrophic retrenchment, it seems to me to that the most promising areas worth considering are high-yield bond funds and international real estate funds, preferably with some underlying income.
    I like high-yield bond funds, even though there is concern that interest rates will rise in 2010. Most bonds don't do well in the kind of rising interest-rate environment that we are likely to experience sooner than later, given that the U.S. government has been printing money like crazy and commodity prices have been going through the roof. Surely price inflation can't be far behind. When that happens, rates will begin to rise and bonds generally will fall in price. However, high-yield bonds should become more valuable since rising interest
    rates will also signal a recovering economy and high- yield companies will be seen as less vulnerable to credit, economic, and business risk and therefore more desirable. So locking in high-yield income now makes a lot of sense.
    As for real estate funds, often they produce decent income and this is still an area that remains beaten- down when compared to other sectors. These securities have already moved up quite a bit but not as much as the financials and commodities, for instance. Real estate funds are more volatile and risky than some of the bond funds that I'm going to suggest but I think it's worth having a sprinkling of them in your portfolio because if I'm right about a resurgence in inflation, real estate offers a good hedge.
    Now, I rarely write about funds of any kind since I prefer to pick individual equities. Generally, I beat most of the fund managers out there, which probably says more about the fund industry in general than my stock picking prowess in particular. However, choosing individual high- yield bonds is a particular skill that I do not possess. So I would rather leave that to managers who specialize in the field. I would say the same for foreign real estate funds and for real estate funds in general since those companies tend to be small, volatile, and difficult to analyze. In my opinion, those securities are also best managed by specialists.
    Having said that, there are literally hundreds of funds that offer high-yield bond and/or real estate investment opportunities. I have literally spent hours combing through them and at the end of the day I think the best approach is to suggest a few and let you spend a little time on your own evaluating which ones might work best for you. Personally, I'm buying half a dozen of them and will watch them over the next several months to see how they perform. If the payouts are as advertised I will be happy with that since I'm primarily looking for income from these choices with some growth potential as a bonus. Here are my suggestions.
    ING Clarion Global Real Estate Income Fund (NYSE: IGR) This fund invests globally and currently yields 8.3% on an annualized distribution of 54c a share, based on Friday's closing price of $6.51 (figures in U.S. dollars). It holds 70 companies with half of the fund's holdings


    based in the U.S. But you have decent international exposure with holdings in Australia, Canada, and the United Kingdom, along with a small position in Asia.
    The fund is up about 80% year to date but still down 15% on an annualized basis and the holdings appear to be fairly conservative. Certainly we are not buying this one at the bottom up but I suspect it still has room to run and you are getting paid pretty well to wait.
    ING has a companion fund (NYSE: IAE) which is an Asia-Pacific high dividend equity income fund that yields over 10%. It holds a combination of Australian, Chinese, South Korean, and Indian stocks that I admire like BHP Billiton, Samsung, China Mobile, etc.
    Action now: Buy IGR.
    PIMCO Income Opportunity Fund (NYSE: PKO)
    PIMCO is one of the premier bond managers in the world. No doubt you have seen Bill Gross, the chairman of PIMCO, interviewed frequently on various financial channels as one of the most knowledgeable bond fund managers in the world. Coincidentally, PIMCO is located in Newport Beach, California and Bill Gross lives in Laguna Beach, where I am based. I can only hope that some of his expertise will rub off on me the next time we're seated next to each other in the local coffee shop.
    This closed-end fund currently pays monthly dividends of 17.7c per unit (figures in U.S. dollars) to yield close to 10% based on Friday's closing price of $21.63. It is highly rated by Morningstar and the fund is up about 18% over the past year, which is not bad for a bond fund. The fund holds a variety of bonds, mainly corporate issues ranging from U.S. giants Citicorp and American Airlines to international leasing finance companies. PIMCO is very well run and this has been a steady performer since its inception in 2007.
    Action now: Buy.
    Finally, here are two iShares funds you may want to look at. I am not formally recommending either and will not be tracking them but they may prove to be a fit with some portfolios.
    iShares S&P U.S. Preferred Stock Index Fund (NYSE: PFF) This fund focuses on U.S. preferred shares issued by companies like Ford, Wells Fargo, MetLife, etc. It offers a high monthly dividend but the payment varies significantly from one month to the next so if you need predictable cash flow, this may not be your best choice. For example, in 2009 the payments have ranged from 17.9c a unit in January to 31.4c per unit in July. The shares, which closed on Friday at $35.67, are up significantly from their March low of $15.05 but the units are far less volatile than funds that focus on common stock and of course the yield is much better.
    iShares Barclays Aggregate Bond Fund (NYSE: AGG) An analyst quoted in Barron's described this as a ““set it and forget it fund””. It has a relatively modest yield of about 4% based on a monthly variable dividend. But it appears to be rock solid, having barely moved through the worst of the meltdown last March so it's worth buying some just for stability and peace of mind. Morningstar gives it a four star rating. This may be the least exciting part of your portfolio, tracking as it does government bonds, government-sponsored bonds, and corporate bonds, but least you will be sleeping well at night. It closed on Friday at $104.34.
    There are hundreds of other listings that are similar to those I have mentioned. Other offerings you might look at include GIM, MGF, MIN, and AOD. I've never been much of a fan of bonds but given the uncertainty going forward I think you should consider having 20% to 25% of your portfolio in various types of high-yield bonds and real estate funds.
    Stocks: IAE, PFF, IGR
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