Income Investors Should Look Beyond the Ukraine Invasion
Unless you invested in a Russian-themed ETF or an emerging markets index fund, the destruction of Moscow's capital markets is a distraction for investors.
The politico who uttered "never let a good crisis go to waste" might have been onto something. This is not to sound insensitive to Ukraine and all victims, but without an impending U.S. recession, credit crunch, dividend cuts or an explosion of bad debt, there is little reason for portfolio pessimism.
Unless you invested in a Russian-themed exchange-traded fund or maybe an emerging-markets index fund, the destruction of Moscow's capital markets is a sideshow.
True, there are other perils. Oil and grain prices are spiking, but the U.S. is the top producer of oil, as well as many of the commodities that Russia may no longer export widely. The dollar gains global trust and value with each new act of aggression. Inflation is hard and may get worse, but there are ways to shore up your investments.
On the plus side, the war and oil shock ease fears that the Federal Reserve might strangle growth by tightening credit too much. U.S. long-term interest rates are not rising much more than they already have.
So, while your bonds and bond funds are down early in 2022, they are priced to do no worse than break even now. I would channel voices like that of Baird Funds' Bull and Baird blogger Michael Antonelli, who says "the lessons of financial history are that the worst-case scenario has a funny habit of not occurring."
Below are some timely elements of an income portfolio to consider.
Oil and gas will be high and tight for a while. I have previously said to maintain exposure via pipelines and refiners, even when crude plunges. What matters is that demand is high.
Anything for which cash flow and distributions depend on volume, as with Kinder Morgan (KMI, $19, yield 5.7%), Magellan Midstream Partners (MMP, $49, 8.4%) or MPLX (MPLX, $32, 8.7%), should be a comfort.
Although apartment rents are soaring, so are jobs and incomes – and yet the average apartment real estate investment trust (REIT) is down around 10% off its high and a hair below net asset value.
No category is further removed from world turmoil than municipals. And rising inflation drives up property values and incomes that feed into state and local coffers.
Upgrades are likely, and the tax exemption is as valuable as ever. Baird Strategic Municipal Bond Fund (BSNSX) is having a fine year. Note that municipals as a class have only lost money in three calendar years since 1983.
Hikes that dwarf inflation are common of late: UPS (UPS) boosted its payout 50%; Hewlett-Packard (HPE), 29%; Best Buy (BBY), 26%; Whirlpool (WHR), 25%; Eli Lilly (LLY), 15%. And there is more to come.
Anyone with a dividend-growth portfolio should ignore the trials in broad-market indexes and smile at all this cash flow. It is not too late to accumulate dividend kings.
The U.S. Dollar
Finally, the Invesco U.S. Dollar Bullish ETF (UUP, $26) is a reasonable alternative to a money market until savings accounts pay again. The fund is an expression of the dollar's strength against a basket of currencies without the risks and costs of the exchange-rate futures markets.