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Thursday February 25, 2010
Wellington: In the 'Vanguard'
by Philip Springer, contributing editor Stephen Leeb's Income Performance Report
In general, these companies offer the best values in both the stock and bond markets, in the wake of 2009's exuberance. And this category will hold up better than most when the markets undergo their long overdue price corrections. It looks like the U.S. economy is heading for a slow recovery in 2010. Jobs are the biggest issue. The official unemployment rate is 10 percent and the real one much higher. Jobs are still being lost even though the economy is rebounding-sort of. Nobody wants a jobless recovery. 
But for investors, corporate profits and financial strength are more important. These don't go hand in hand with job growth. Rightly or wrongly, many multinational companies are cutting jobs in the U.S. while they benefit from better growth in other parts of the world. These companies have boosted productivity, increased cash flow and strengthened their balance sheets. And they have full access to the credit markets, where demand for their debt issues is strong.In fact, many companies have actually improved their financial strength in recent years, unlike government and consumers. First, buy corporate bonds. We prefer issues with investment-grade credit ratings (BBB or higher). Average current yields run from 2.4 percent for AA bonds to 3.9 percent for BBB bonds maturing in three years; 3.5-4.8 percent at five years; and 4.4-5.9 percent at seven years. That's as far out as we'd go for individual bonds. Second, buy the shares of financially strong companies with dominant global businesses that pay good dividends As growth increases in 2010, our recommended stocks should provide you with good ongoing total returns-regardless of a potentially weak recovery in the U.S. Will these stocks lead the market in 2010's likely lower-return investment environment, lag it as they did in easy-money 2009 or something in between? Impossible to say for sure. But they 're well positioned to do what they're supposed to: provide you with respectable current income and conservative price-appreciation potential. If we had to choose just one vehicle for 2010 that invests in these two attractive areas, it would be Vanguard Wellington (VWELX).It's 65 percent invested in large-company dividend stocks and 35 percent in high-quality bonds, mostly corporates. This fund has stood the test of time by any measure, and its management expenses are a rock-bottom 0.35 percent. We hope the U.S. economy will prove stronger than we currently expect. If so, corporate-earnings growth will accelerate. The Federal Reserve will move away faster from its zero interest-rate policy. And banks will lend more to business and consumers. All of these factors would further reduce demand for government bonds, pushing their yields even higher, while stimulating more demand for stocks. Either way, dividend stocks and high-quality corporate bonds look good for 2010. Learn more about this financial newsletter at Stephen Leeb's The Income and Performance Report. |
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How can you get the income and growth you need while keeping your risk down? The two areas of the financial markets we would emphasize now are the stocks and bonds of financially strong companies with dominant global businesses.