Navigating Market Uncertainty: Strategies for Income Investments

As 2018 expires, I imagine you’re resigned to negative returns on most of your bonds and perhaps unhappy that such perennial winners as real estate investment trusts, utility shares and preferred stocks are treading water. That’s understandable. But I maintain that largely standing pat with these holdings and ignoring shrill warnings about an encroaching bear market, gathering U.S. recession and global chaos is still advisable.

I refuse to call a loss of, say, 1.2% on JPMorgan preferreds or 1.5% on American Electric Power shares ter­rible or even significant because you have been paid well for years and can expect future interest and dividends to arrive in full and on time. The paucity of defaults, bankruptcies and dividend cuts separates the volatility of 2018 from past wipeouts.

Moreover, I’m not spooked by global events, such as the recent Italian bond-market plunge or the election of an unpredictable populist president in Brazil. In recent years, the Greek sovereign debt crisis, Brexit and the “taper tantrum” that pushed bond yields up after the Federal Reserve decided to wind down its bond-buying program all passed without harming portfolios much. More than a few established income-and-growth investments with unique attributes, an especially timely niche or a tech­nological advantage can extend fine 2018 returns, despite higher Treasury yields or the possibility that a struggling emerging-market economy will go belly-up. Stake your claim to sound sectors, select good names within each, and you’ll be fine.

Bucking a chaotic trend. The following fab five benefit from strong economic growth and inexpensive fixed-rate debt that does not need to be refinanced right away. They are expensive to buy at times, but in higher-yielding categories you often get what you pay for. Moreover, nothing that has happened this year or that looms over 2019 should threaten these elites.

If you appreciate the power of borrowing at low fixed rates and lending at high variable ones, you’ll like specialty finance company Ares Capital (symbol ARCC, price $16, yield 9.5%). At Ares, 91% of the credit it extends to 346 businesses is floating rate, more than 70% is secured, and much of it pays Ares more than 10%. More than half of Ares’s own borrowings are fixed-rate, and the companywide cost of credit is just 4.1%. Defaults and other impairments are less than 1%.

Exelon (EXC, $43, 3.2%) is making up for lost time. Five years have passed since the utility’s share price cratered 50% (it’s more than back), and yet some analysts still hesitate to accord it full respect. I’m not saying to avoid or dump other utilities, just noting that Exelon has been exceptional of late.

Lamar Advertising (LAMR, $72, 5.1%) is a real estate investment trust that intends to speed up its wildly successful conversion of roadside billboards from static signs to digital message boards, a business model it pioneered.

I cannot overpraise Magellan Midstream Partners (MMP, $64, 5.9%), a massive pipeline operation that carries gasoline and other refined products. This toll-road-type enterprise doesn’t benefit directly from higher oil prices, but its shares do because when oil gets rich, investors flock to broad energy-related funds that include a position in Magellan.

Quality isn’t cheap. So I am un­deterred by the high premiums commanded by shares in Pimco’s diversified closed-end credit funds over the net asset value of the secur­ities in the funds’ portfolios. Pimco Corporate & Income Strategy Fund (PCN, $17, 7.8%) trades at 19% over NAV, so maybe you ought to wait until the premium shrinks closer to 12%. But the share price is stable, net investment income covers the distributions (or comes close), and the portfolio management is splendid.