For years I’ve been telling people not to buy individual stocks because if that one company goes down you can lose all or most of your investment. If, instead, you invest in an index, an ETF, or a basket of related stocks, if one of the companies goes down you are only lightly impacted.
But last month I started buying individual stocks. Why? I guess I’m getting older. For whatever reason, I’m getting desperate for immediate income. I’m not willing to get that in the bond market because interest rates have no place to go but up, and when they do the value of bonds will go down. And short-term bonds, which are somewhat immune to that effect, don’t pay enough interest to be worthwhile.
So where can I get an immediate bang for my buck? Two answers: high-yield dividend stocks and sometimes a short-term investment in some company that you have reason to believe will move up for a short-term gain.
I don’t want to overstate my success on this. We just got back from our 50th law school reunion and we noticed the success of the Harvard endowment fund. And I watch Warren Buffet’s progress. Both did a lot better than I did so far this year. Of course I didn’t even begin to match the increase in the S&P index for the year. But a major reason for that is that in spite of my fears about bonds, I still keep between 30 to 40 percent of my portfolio in either cash (waiting for a big dip in the market as a buying opportunity, which has not happened this year) and short-term bond funds. I do that because it’s just good sense not to put all your investment money into equities.
So only about 65 percent of my portfolio was in equities this year, and that’s the main reason I can’t compete with the S&P index in profitability on the whole portfolio. Nevertheless, I’ve done really well this year, with nice profits on almost all of my picks. I’ve recovered my losses on Apple from last year, and my only really negative holding has been GDX, the gold mining company index. It doesn’t hurt to hold a small amount of a gold-related stock because it acts as a hedge against a major downturn. But I think silver would have been a better choice, and at some point when my gold calls expire I expect to take the loss on gold and buy silver instead. Silver has doubled in value over the past four years, but is now well below its recent high.
Many professional advisors are currently warning that the market is in a bubble, and ready for a big dip. That might be true, and I’m keeping about 20 percent of my investment portfolio in cash right now in case it’s true and a buying opportunity arises. But I want income. So here are a few of the positions I’ve taken.
TransCanada (TRP) pipelines. I’ve heard that the U.S. is going to start exporting natural gas. This should improve the position of pipeline companies. So I’ve bought into several of them, like TRP. I also plan to own some SPX, the natural gas pipeline index. TRP’s current price of $45 is right in the middle of its 52-week range, and at this price pays a 4 percent yield. In the same line of thought, I also bought TLP, a master pipeline company paying a 6 percent dividend; EPB pipelines, paying a 6.3 percent dividend; and KMP, paying 6.4 percent.
Kimberly Clark (KMB). This is a company with a lot of good brands, and with the economy picking up all around the world, especially in Europe, they should stand to benefit from this. The price of $108 is at the high end of the 52 week range, so I would buy this stock by selling naked puts below the current price, and either continue to pick up premiums if the stock stays strong, or acquire the stock in a dip.
Waste Management (WM). I’ve owned this from time to time, and in good periods, as it cycles up, I try to pick up a few dollars in short-term capital gains. At $43 a share, it pays a 3.4 percent dividend. This price is also toward the high end of the 52 week cycle, but the dividend is good, the company seems very stable and is in an area that seems to me to be pretty recession proof. I don’t see waste declining over the next few years.
So, now we’ll have some interesting positions to talk about over the next few months.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.