(12/28/11) What to Buy (and Sell) in 2012

In this important piece from one of the top income investors in the business, we hear about the important lessons to be learned from 2011 that will help make 2012 a prosperous year for savvy income investors from Roger Conrad of Utility Forecaster.

Better-than-expected US growth, the lowest corporate borrowing rates in history, and rock-bottom investor expectations are three big reasons why I expect a good first half 2012 for stocks.

For companies in capital-intensive industries like energy pipelines, I also expect to see dividend growth accelerate, as investments made the past few years start generating cash.

On the negative side, we are moving into an unusual election year, in which the Obama administration needs to both spur economic growth and deliver enough regulatory and environmental policy victories to its increasingly anti-corporate voting base.

The effective rejection of AT&T’s (T) bid to buy Deutsche Telekom’s (DTEGY) T-Mobile USA is a warning shot that the federal government will act to please the base where it can, as well as drag its feet on decisions that could divide the Democratic Party.

An example of the latter is the delay until after the November election of any decision on the Keystone XL Pipeline, which is favored by unions and opposed just as strongly by many environmentalists.

Throw in still-less than optimal economic growth globally and continuing turbulence in Europe and even the strongest-looking company is at risk to an unexpected stumble. That includes the handful of stocks that were bid to new highs in 2011 because of their perceived safety.

In 2011, diversification and balance were critical to investor success. Most stocks took big hits at some point during the year, but only a handful really melted down.

Investors who were broadly diversified across sectors and balanced between them were able to absorb the meltdowns and end the year in the black. Only those who doubled down in falling positions—or who were churned out of good ones by self-defeating strategies like setting stop losses—really finished the year underwater.

That will absolutely be the case again in 2012. Income investors should focus on holding a balanced mix of dividend paying stocks.

They should include winning sectors from 2011, such as US electric utilities like Xcel Energy (XEL), water utilities like Aqua America (WTR) and pipeline-focused master limited partnerships like Kinder Morgan Energy (KMP).

But they should also own some that didn’t fare so well, such as high-yield telecommunications stocks like Consolidated Communications (CNSL). Dividend growth is a pretty good tipoff that investors have priced in too much risk for a laggard stock.

One area I would largely avoid is fixed income. Strong companies are borrowing at their lowest rates ever and are using the money to pay off existing debt. That means more bonds and preferred stocks are going to be called away.

And the only place to get decent yields is by taking on too much credit and/or interest-rate risk. Stick to stocks.

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