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Editor's note: So far this week, Doc has taught DailyWealth readers how to generate safe, tax-free income, where to look for stocks with growing dividends, and how to boost the income of super-safe stocks. Read on for the fourth installment in his series of income ideas.
This "No Matter What" Income Investment Just Got Even BetterBy
Friday, August 19, 2011
I sat on the trading desk at Goldman Sachs when the markets collapsed in 1987.
I saw fortunes made during those days. Too young and naïve then to make much myself, I watched the veteran traders around me. They taught me one valuable lesson: When investments go on sale at end-of-the-world prices, step up and buy.
It's vital you shake the feeling that things are getting riskier. They aren't. The drop in stock prices means things are less risky, not more risky. In fact, it's turned one of my favorite "benefit in any scenario" investments into an even better deal. Let me explain...
Two months ago, I showed you how "convertible bonds" can be a great choice no matter what you expect the market to do next.
Convertible bonds pay interest like a regular bond... And just like traditional bonds, the payments are more secure and bondholders have priority in bankruptcy proceedings. But they give the investor the right to convert his bonds to common stock – which makes the bond's value rise if the company's share price increases.
In other words, they carry the upside potential of stocks without relinquishing the safety of a bond. And that combination is even more valuable today...
You see, the "convertible" feature in a convertible bond is like a free, long-dated "call option." The more volatile stocks are, the more expensive options get. So with today's jumpy stock market, convertible bonds are worth more than they were when the sailing was smooth.
At the same time, because convertible bond investors know they'll keep collecting income, they're less nervous about hanging on through troubled times. So the fixed-income part of a convertible bond stabilizes its price. That's worth a lot when most stocks are rising and falling several percent every day.
Plus, interest rates have dropped since my last essay. With government bonds paying next to nothing, the income you're collecting from convertible bonds is all the more attractive.
And finally, when things hit a rough patch, it's even more important to have your portfolio diversified. Because a convertible bond has the characteristics of both a stock and a bond, you're spreading your money across asset categories.
In my previous essay, I told you about the Nicholas Applegate Equity and Convertible Income Fund (NIE), a collection of convertible bonds. My Retirement Millionaire readers have made more than 60% on this fund in a couple years. It pays 6.8% a year in distributions. And it holds convertible bonds from high-quality companies like Intel, McDonald's, and Apple.
You can also find individual convertible bonds trading just like stocks. My colleague Tom Dyson, who has spent years analyzing income investments, uses www.quantumonline.com to track them down. (It's free, but you'll have to register a username and password to get access.)
With the market the way it is today, you may be feeling afraid. That's normal. But at times like this, it's critical to step back and focus on time tested-methods of making money.
These include diversifying yourself, making sure you get paid, keeping your money in safe assets, and buying when the time is right.
All these are lined up for convertible bonds right now. Don't miss it.
Good investing,
Doc Eifrig
Further Reading:
A few months ago, Doc told DailyWealth readers about a way to easily diversify your wealth overseas. "All you need is an Internet connection and a regular brokerage account," he writes, "and you're ready to participate in one of the easiest, safest ways to diversify a portion of your wealth out of the depreciating dollar... and into safe, income-producing assets."
"If the inflation boogeyman has you ready to dump all your investments and head for a bomb shelter... relax." Doc is using one measure to monitor the U.S. economy and the dollar. Learn what Doc calls "one of the most useful indicators in the world" here: A Solution to the No. 1 Retirement Worry.
Market NotesTHE FOOD RIOT WARNING IS STILL ON THE TABLE We're checking in on the price action in corn today... and we're sticking by our warning to dictators.
To recap, one of the great fears of dictators around the world is a big spike in food prices. After all, the average Joe – whether he lives in Madrid, Mumbai, or Mexico City – will willingly march to war for the craziest reasons. He will endure punitive tax rates. He will cheer on the dumbest government actions. But should his food become expensive, he'll be rioting tomorrow... alongside every one of his neighbors.
That's why the giant rally in corn prices is a concern. The grain is a staple of the world's food supply. As you can see from the chart below, corn traded in the $3.50 to $4 per bushel range for much of 2009 and 2010. But bad weather, record-low inventories, rising ethanol usage, and booming demand from emerging markets (like China) have caused a 100%-plus surge in the yellow stuff.
Earlier this year, professional "ag" analysts noted that we'd need fantastic growing conditions and a bumper crop to blunt the big price spike. Instead, we're getting lots of rain when we don't need it, and lots of heat when we don't need it. Thus, corn prices remain elevated... and the possibility of worldwide food riots remains on the table.
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