We’ve seen a lot happen over the summer, but hopefully we can start to re-focus on the big picture: long-term investing, notes Bryan Perry of Cash Machine.
There are few more beautiful places to enjoy the fall than in the Blue Ridge Mountains of Virginia. What better way to renew the mind and soul than with a long hike on the Appalachian Trail? Especially after the long summer of "tough love" that investors just endured.
Sometimes, the best remedy for stress is to simply step away from the all the noise that keeps us up at night, and get out in nature and walk out the anxiety that comes with the investing territory. It’s more medicinal than any prescription your doctor can write.
As we’ve seen these past few months, and especially in August, investors’ uncertainty about America’s economic future has given rise to extreme volatility in the market.
Stocks have been in a state of tug-of-war all summer, propelled by:
- doomsday headlines;
- a lack of political will in the United States and abroad to address major structural fiscal problems;
- a market dominated by short-term, high velocity day trading;
- fears of a double-dip recession;
- and uncertainty on how to rebuild America’s nest egg after home equity has been eviscerated and pension plans earned next to nothing during the past decade.
But let’s not dwell on the past, which is just that. If we can instead accept the fact that we are entering a new investing landscape, and adjust our expectations accordingly, then we can turn the last lemon of a decade of investing into lemonade.
By staying invested in high-income assets, where steady progress toward growing our portfolios comes in the form of steady dividends and interest that carry a blended yield of 8% to 10%, we’ll be prepared to face any market headwinds that come our way.
Using the compounding Rule of 72, a method of estimating an investment’s doubling time, we can double the value of our portfolio in just eight years, provided that we can generate a 9% income stream and maintain base capital with the use of hedging tools like the bearish ETFs and gold that have served us so well. (Take 72 and divide it by the rate of return (9%) = years to double initial capital (8)).
I find this to be an excellent way to focus on the bigger, long-term picture in a world of instant gratification and program trading.
If you need the income, you’re getting 9%, or about three times what the 30-year Treasury Bond is paying. If you reinvest that 9% and let the Rule of 72 work for you, then your annual return is 12.50%. (Since you are doubling your money in 8 years, take 100% and divide it by 8 = 12.5%. That’s the power of compound interest.)
The following Watch List is a collection of interesting possibilities, and invariably helps us filter out the "real deals" from the "wannabes" and the "also-rans” (these are very popular and useful high-yield ideas that have lost their following due to a breakdown in fundamentals).
NEXT: The Picks
|pagebreak|My personal watch list contains around 50 stocks, but below are some highlights that deserve mention:
Terra Nitrogen L.P. (TNH)
Dividend Yield 9.07%
TNH was a recent big winner for us, and I’ve got one hand on the trigger if this stock can trade back down to the $165 or $170 level over the near term.
It got ahead of itself as investors were chasing yield in the commodity space, but being that it is thinly traded, we should get a shot to buy it 20 points below where we sold it. [The floor dropped out from under the stock last week, and it fell as low as $128 before rebounding on heavy volume—Editor.]
Mesabi Trust (MSB)
Dividend Yield 11.02%
Steel stocks have sold off with the lowered forecast for the US economy. But if China’s data continues to show firm GDP growth, then this iron ore trust that feeds into the export market to steel-hungry Asia might be a great buy at current levels.
Morgan Stanley Emerging Markets Domestic Debt Fund (EDD)
Dividend Yield 7.76%
If the Fed doesn’t launch QE3 soon, the dollar will react by posting a strong rally and other currencies of emerging markets will come in a bit from present levels. [Again, this also came to pass just after this story was published—Editor.]
I really like the blend of holdings as well as the high creditworthiness of those holdings, and the fund is a pure play on the local currencies. EDD makes a lot of sense on the next big dollar rally that should coincide with a blow off in emerging market currencies.
Prospect Capital (PSEC)
Dividend Yield 13.84%
This business development company (BDC) targets lending to small- and medium-sized companies primarily in the energy sector…everything from exploration to storage and transfer. The company once again missed earnings, this time by 13 cents in the second quarter, but reaffirmed its outlook for the rest of 2012.
Its 14% yield is hugely tempting, but I’ve got to see the company hit estimates on a consistent basis before I move forward with a buy recommendation.
Alliance Resource Partners, L.P. (ARLP)
Dividend Yield 5.44%
We made over 119%, including dividends, in ARLP during 2009 and 2010, and I’m chomping at the bit to re-enter this name on any kind of correction in the coal sector.
This is an amazingly well-managed operation that is situated in some of the best burning and cleanest coal veins in the world. The stock trades at $72 and I’m looking for prices under $65. [It’s getting pretty close, finishing under $68 on Tuesday—Editor.]
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