In this era of low interest rates, income investors may be considering, or already be maintaining, a higher level of equity exposure. Today’s dividends generally far exceed risk-free yield and are highly competitive, in many cases, with investment grade bond payouts. While I have mostly considered the transition to equity as a thoughtful allocation maneuver in today’s market, expanding valuations and the elevated general risks of equities should not be forgotten.
Still, assuming a placid economy and a non-volatile interest rate environment, there may be continued reason for investors to opt for equity over fixed-income. Some of the main benefits of equity dividends as opposed to bond interest may include their sometimes beneficial tax nature, the growth they show over time, as well as their usually quarterly, and sometimes monthly, payments as compared to semi-annually for most individual bonds.
When constructing an income portfolio, I feel diversification is an all-important, usually overlooked risk-mitigation tool. In picking the five equities I’ve selected for this article, I’ve made particular attempts to diversify the revenue sources that the income stream emanates from. Conservative investors should be looking for predictability and stability above all else. While you should also be mindful of valuation and try not to purchase income at overzealous market pricing, if the payout/yield at which you are purchasing is acceptable and sustainable, that should be a priority as well.
1) PPL Corporation (PPL) – An energy and utility holding company, PPL delivers and generates primarily electricity to customers across the U.S. as well as U.K. Now down about 12% from its 52 week high and yielding almost 4.5%, this may be a good time to pick up shares of this $22 billion market cap utility giant.
2) General Electric (GE) – While the best days of growth are well behind this conglomerate that is involved with everything from jet engines to lightbulbs, it yields around 3.5% and trades at a reasonable 15X this year’s earnings. It’s revenue source diversity is a positive for conservative income seekers.
3) Kinder Morgan (KMI) – The nation’s largest owner of energy pipelines, the Kinder Morgan network is composed of tens of thousands of miles of majorly natural gas related infrastructure. Less exposed to commodity pricing than many of its energy sector peers, KMI stands to benefit from continued growth in energy demand and the gravitation to natural gas as a fuel of choice. The stock yields almost 4.5% at latest trades.
4) Seagate Technology (STX) – A provider of electronic data storage products, Seagate markets disk drives for both enterprise and consumer applications. Technology is certainly a riskier investment in general, since it is such a fluid industry. Thus secular trends should be identified that have staying power. Seagate has a good business, sells at a reasonable valuation, and yields over 3.5% at latest trades.
5) Ventas Inc. (VTR) – While not a household name, Ventas is perhaps the best run of the many real estate investment trusts, or REITs, that own healthcare related properties. Ventas diversifies its portfolio amongst senior housing facilities, skilled nursing operations, medical office buildings, and other healthcare facilities. Because of its impressive track record, Ventas sells at a valuation above many of its peers and yields only a touch better than 3 percent. Still, healthcare property ownership is another of those obvious secular trends that should benefit investors over the long haul.
So there you have it – an electric company, conglomerate, pipeline owner, storage hardware provider, and healthcare facilities owner – an eclectic, yet well diversified mix of income producing companies worth considering for conservative income seekers. While it may be tempting to push all income assets over to stocks given the strength of equity markets over the past several years, do not forget that what goes up sometimes comes down. Maintain thoughtful allocations and remember that the worst performers of today can sometimes turn into the best performers of tomorrow.
Mr. Aloisi was long shares of PPL, GE, KMI, and STX at time of writing, but positions can change at any time.
About the author: Adam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to Seeking Alpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.
Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.