Exciting Income Opportunities

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The S&P 500 index, representing the 500 largest publicly traded U.S. companies, is up over 12% year-to-date. However, nearly all of this growth was driven by a select few stocks dubbed the “Magnificent Seven”: Meta (formerly Facebook), Alphabet (formerly Google), Apple, Amazon, Microsoft, Nvidia, and Tesla. While the growth possibilities for these companies are both exciting and viable, they are trading near record high valuations.

The Magnificent Seven are touching record highs, but so are yields from prudent income generating investments! At Karel Capital, we are most excited about these opportunities for income streams exceeding 5%. These yields have not been available for over 15 years from either dividend paying stocks, or fixed income investments (treasuries included).

Highly regarded as the most secure investment possible, there is an exciting opportunity in U.S. treasuries issued and backed by the full faith and credit of the United States Government. The only risk with this investment is if the United States of America defaults on its debt. We view this as highly unlikely and had little fear regarding the recent debt ceiling concerns. Candidly, if the U.S. were to default on its debt, we would all have much bigger problems to worry about. Barring default, you can be certain you will recoup your investment in U.S. Treasuries. As of this writing, the yield on 1-yr treasuries is 5.22%. The last time there was such a yield was 2006/2007, and before that, not since 2000! If you are more interested in locking in solid rates for many years to come, there are longer duration treasuries with 10-yrs yielding 3.72%, and 20-yrs yielding 4.09%

Another area paying exceptionally high dividends are Real Estate Investment Trusts (REITs). These trusts invest in real estate ranging from apartment buildings and hotels, to office complexes and warehouses. There are a number of REITs currently paying 6%, 7%, even 8% annual dividend yields. As rising interest rates put pressure on the real estate market, it is especially important to know what kind of REIT you are investing in. Dependable cash flow and well managed debt are some qualities we look for in REITs, in this market environment.

“Dividend Aristocrats” is a phrase used to describe companies having raised their annual dividend payment consistently for at least 25 years. While this definition is somewhat stringent, there are many companies well positioned to keep up (or raise) their dividend payments of over 5%! As long-term investors, short-term fluctuations in the market don’t concern us as long as the companies we hold maintain strong business plans that effectively profit enough to pay their dividends.

Mutual Funds are baskets of different stocks and/or bonds grouped together. There are many Mutual Funds whose primary goal is producing income. These funds may contain some high yielding stocks, and often hold fixed income securities. One can certainly find income opportunities in Mutual Funds, but with so much uncertainty in the market, now is a time to know what you own and even more importantly — be in control of what you own! After purchasing a share of a Mutual Fund, the buying and selling of the securities that make up that basket is up to the fund manager. That is why we currently favor owning these income opportunities directly.

While we are strong proponents of the move to clean energy, there are still excellent opportunities in legacy energy companies. On an aggregate, oil and gas companies are extremely resilient, and often produce high yields. With the amount of market gyration that has occurred  relative to the stability of this sector’s dividend payments, they have proven to be a safe harbor for investors seeking reliable cash flow. Certain companies operating in renewable energies – wind, solar, hydro, and thermal – are beginning to offer higher dividend yields as they establish more long-term contracts with electricity companies providing more dependable cash flow.

With current economic conditions pointing towards interest rates persisting in the near-term, the market is ripe with opportunities for reliable income. If any of the investments described above pique your interest, we would enjoy discussing how they could work within your portfolio. As always, Karel Capital offers complimentary portfolio reviews. Give us a call at 509-838-9900, or email me directly at cole@karelcapital.com.

-Cole Thompson

 Portfolio Associate

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