Pay Attention to the Kings By Chad Shoop, Editor of Pure Income Dear Sovereign Investor, For decades now, yields on government bonds have been the lifeblood in portfolios for retirees and those seeking a safe yield.
But in the time since the great recession, relying on yield has not been such a "go to" investment strategy for those hoping to support a certain standard of living.
Retirees and those seeking a safe income stream are left to fend for themselves and it doesn't look to change any time soon.
Even though the so-called kings of the bond market — PIMCO, who manages the world's largest bond fund, and BlackRock, who is the world's largest money manager — have been rushing into Treasury notes, it doesn't mean it is time for those of us seeking yield to jump in. And here's why … See You In Panama?
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To see what's on the schedule and reserve your seat now, click here. For starters, by gobbling up these Treasury notes, PIMCO and BlackRock have sent the yield on these 10-year notes into a downward spiral, pushing them to an 11-month low of 2.42% last week.
Despite the drop in yields this year, PIMCO and BlackRock remain heavily bullish on the 5-year and 10-year notes, respectively.
These companies have been pouring money into U.S. Treasurys because they believe the yields on them will remain low through the near future. This benefits them since there's an inverse correlation between the bond's price and its yield. In other words, the price of the bonds will stay high and they can sell these bonds at a nice return as the yield falls even more.
But if you're looking to get in for the yield, you're stuck with minimal returns. Treasury Rates Must Stay Low Rick Rieder, one of the Chief Investment Officers (CIO) of BlackRock, explained on Bloomberg Radio that even in this low-rate environment U.S. Treasurys, relative to the rest of the world, still hold significant value, despite dropping to an 11-month low.
Bill Gross — founder, managing director and CIO of PIMCO — takes a different approach, which is why he's investing in the 5-year notes. He wrote in a market report from May that in this "levered" economy, interest rates must be kept low. Otherwise, debtors won't be able to survive, debt won't be reduced and economies could fall into recessions or depressions.
While I couldn't agree more with Bill Gross, I'd say he has sugar coated the situation. Our executive editor, Jeff Opdyke, puts it a little more direct in one of his recent articles regarding interest rates: "With higher rates, America would crumble like an upside-down homeowner." This is not a difficult conclusion to come to, either.
Our government is sitting with roughly $17.5 trillion of on-the-books debt. Counting all of its unfunded liabilities and promises for future payments, we are on the hook for nearly $130 trillion.
If you do a little math, you quickly find out the kind of impacts even a one-percentage-point increase can make. If interest rates rise one percentage point, then our government forks over an extra $176 billion, 70% more than we are paying today.
If we see interest rates move to the historical normal of 5%, we would have to pay nearly $1 trillion a year in interest payments — which could easily cause our empire to crumble. How to Win in the Low-Rate Environment The reality is that our government simply cannot allow rates to rise by any significant measure.
PIMCO knows this. BlackRock knows this. You and I know this. The only problem is that it leaves traditional yields at depressingly low rates.
The great news is that there is still hope for yield seekers in this low-rate environment.
While interest rates are subdued and will remain relatively stable for some time to come, REITs provide a unique opportunity to take advantage of with their significantly higher yields.
One particular REIT I have been eyeing is Senior Housing Properties Trust (NYSE: SNH).
The Massachusetts-based REIT owns various properties throughout the U.S., such as nursing homes, assisted living and independent living facilities, as well as a couple of hospitals. Each of these properties represents extremely stable tenants, reducing the risk of a default that you might have to deal with in many other REITs.
Also, Senior Housing Properties Trust is sitting at 70% leverage, making it a conservative risk-conscious investment when compared to the industry average of 184%.
REITs have a tendency to be extremely sensitive to interest rates. But keep in mind that when rates move higher, they can edge up only marginally. SNH is appealing with a 6.5% yield, more than doubling the yield of a 10-year Treasury note.
The final selling point on the company is that SNH has maintained or increased its dividends per share every year since 1999, including the years of the collapse in the housing market during 2008-2009.
In this era of low rates, owning high-quality dividend stock like SNH that has a long history of returning increasing amounts of cash to shareholders is how you can come out on top. Regards,
Chad Shoop
Editor, Pure Income P.S. With the government piling up more and more debt, it has become critical that you know the best ways to protect your assets from potential wealth confiscation. Bob Bauman has written a book on the best ways to legally stash your cash, protecting yourself and your family. To learn more about this unique book, click here. | |
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