PDF V . 30, N . 1 January 2019 Stay Focused on Safety Two New ...

[Pages:12]Stay Focused on Safety

The stock market is down for the last three months and for the year. But it is still up from November 2016, with the S&P 500 having generated a return of 24.71% over a period when much of the positives the markets were anticipating actually came to pass.

For the months of October through December, traders and investors focused not on the economy and the underlying companies but on the belief that all that is good is past. However, little serious cause for concern is showing up in the underlying economic and business fundamentals. Sure, there are some problems, but there always are problems, even in the best of market times.

The worst risk of all is investors' belief that the best is behind us. Don't dismiss this risk--it's what's behind the selling, after all. Adding to the impact of this risk is the increasing impact of indexed investments on the general stock market and individual stocks. Indexes drop, and it results in more selling--even from good stocks that are getting tossed out with the trash.

This month, we're focusing on cash alternatives and other riskadverse income investments for the coming months to make safety a profitable word. Our positioning has been smart in 2018, with many of the sectors I've been directing you toward showing their mettle. Let's keep it up in the New Year.

Vol. 30, No. 1

January 2019

Two New Defensive Plays for Yield

Dear Friend, The closing days of 2018 aren't giving us much to celebrate as investors. The S&P 500 started a downward slide that began in "Red October"... slid

into "Negative November"... and is now in "Down December." As I write, the S&P 500 is down 14.5% from its 2018 high. But remember, the S&P 500 is a market index. Not all stocks and sectors

declined as much as the broad market. Too often, investors get caught up with the headlines of the S&P 500 going up or down and get depressed... without looking at the fortunes of their individual investments.

Here's the really good news: Many of our holdings have not only held up, but have actually climbed in price during the brutal decline. These "ports in the storm" include real estate investment trusts (REITs), utility stocks, reformed consumer goods companies, and top drug makers.

These investments and others continue to benefit from a US economy that's expanding with low core inflation. They are benefiting from low cost of credit with low interest rates. And with consumers remaining confident and spending, businesses are seeing rising revenues, which will continue into 2019... and produce profit growth. Dividends are still rising. Payouts rose by $421 billion from January through November 2018--more than in the same period in 2017, the otherwise more profitable year.

In this issue, I'm going to discuss the negatives currently impacting the market. Most importantly, I'll detail what assets will do well in 2019. I'll also deliver you a nearly completely risk-off investment with yield to park cash. We'll also cover another segment of the REIT market with more yield that's been outpacing its peers through 2018 and that I see continuing the streak in 2019.

Growth Strategies

Risks & Rewards Right Now

When will the selling stop? Red October saw the S&P 500 Index down 6.94% and Negative November, after plenty of selling, managed to eke out a positive 1.79%. But so far in December, the S&P 500 is down 7.07%, bringing the fourth quarter so far down 12.16%. That means for the year, the US market is down 4.26%, joining the rest of the markets of the world with losses for the year to date.

I could point out that since November 8, 2016, the market is still up, with a total return of 24.71%--but that doesn't ease the pains of the past months. And we have to contend with not what the market did, but what it may do as we enter 2019.

Right now, the biggest risk facing the market is risk. By that I mean that investors are lying awake at night wondering if all of the positive underpinnings of the economy and the markets are going away. They wonder if we are doomed to see companies' profits reversing, credit markets contracting, jobs turning to unemployment, consumers' spending slowing and business investment evaporating--all ending in recession.

That is, in my view, what is behind the selling, and it is getting difficult to see how pessimism can be turned around, despite plenty of good news that

(continued)

I'll get to in a moment. But let me

to a current portfolio of $4.1 billi1o0n0.

go through some of the additional

This pullback has been estimat9e7d.37to

rationales for the market's challenges. be setting a cloud over the corpor9a5te

More Than Fed Funds

Much has been taken from the Federal Reserve and its Open Market Committee (FOMC) this past year over short-term interest rate targets. The FOMC has moved to raise its target range for fed funds, which is thDeec rate that is chMaarrged by Federal Jun Reserve member banks to borrow to fund some of their needed reserves. This rate is a base case for banks to consider when they are making

bond market. Joining the Fed, the

European Central Bank has also 90

announLcifeedStotrhagaet(LiStI)hSatoscksPtroicpe ped buying

bonds at year end.

85

Could this be a harbinger of

doom for corporate and other cre8d0it

markets? Maybe. But the corporate

bond market has been quite good75 20t1h8roughoutSethp e year, fueled bDyec ample

demand by institutional investors

including pension and other funds.

Rinse & Repeat

loans and managing their assets and

To my eye, what is more important

liabilities. The fed funds target rate range has gone from 1.25-1.50% to

is what is happening in the collate4r5alized loan obligation (CLO) marke4t3..12

2.00-2.25% over 2018, with the most ThLiisfe iSstorwaghee(LrSeI) Bcooomk VpaluaenPieersShoabretain loans

recent jump announced December 19. from individual or syndicated gro4u0ps

But the real challenge isn't this rate, of banks, which are then either held

but what the Fed has been doing with or pooled and in turn sold into the35

its balance sheet. The Fed stopped

market, where banks and other finan-

buying bonds in the open market

cial firms invest in them.

after its balance sheet swelled to as

CLOs are a great means for ban3k0 s

high as $4.5 trillion, although it kept to reduce credit risks in their loan

reinvesting maturities to keep its

portfolio while also providing investors

pDoecrtMfoarlioJunatStehpaDt escizMea.r BJuunt tSheips DyeecarM,arthJeun SwepitDhechiMgahreJruyn ieSledpsDaenc dMcaromJupn aSneipes with Fed stop2p01e4d that pract2i0c1e5, effectively2016 additiona2l01f7unding oppo20r1t8unities.

allowing the portfolio to roll off by

The downside is that the loans

some $50 billion per month, leading tend to be light in documentation as

CLOs Go Up...and Down

121

120

US CLO Debt Index

119 111188.11

117

116

Mar

Jun

Sep

Dec

2018

Source: Bloomberg Finance, L.P.

opposed to traditional origination of corporate bonds. The originators, eager for fee income, can push transactions that might lean on the aggressive side. And buyers of CLOs often don't or can't do their homework on what's really under the hood. And since many of the underlining loans in CLOs are subordinated to corporate bonds, there is additional credit risk if and when something goes wrong.

We saw this in action back in 20072008, principally with European banks, leading me to remember that the market often rinses and repeats for good or bad.

The CLO market was on a tear earlier this year, as companies were eager to raise funds, originators were eager for fees and buyers wanted higher yields.

But that's now in reverse. Take a look at the CLO Debt Index, which tracks the investable universe of US CLOs.

The index shows that from mid-November to date, there's been a major sell-off in CLOs, beginning a big reversal of the buoyant corporate loan market that has been underway this past year.

Much of this has come with massive pull-outs in funds that own loans, including many ETFs, causing billions of dollars' worth of redemptions. And with this sell-off, the loan market is now not accessible for many companies.

This in turn is set to slow stock buybacks. From 2009 through 2017, corporate non-financial debt, including loans, have swelled by $2.7 trillion to a record $6.2 trillion, amounting to 31% of the US GDP. And much of that additional debt has gone to stock buybacks.

In the third quarter alone, S&P 500 buybacks increased 57.7% to a record $203.8 billion. The first three quarters of 2018 almost saw the market tie the

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Profitable Investing | January 2019 | profitableinvesting.

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85

full-year buyback record set in 2007. For the third quarter, the buybacks largely focused on the largest 20 stocks in the index, accounting for 54.3% of all transactions.

This dropoff in CLOs and loan origination is impacting the demand for stocks through buybacks. The index-driven market is adding to the pessimism selling, creating the bigger drops that we have seen on many of the recent trading days.

And adding to this is the dramatic drop in hedge funds, which have seen billions pulled from the $3-trilliondollar hedge fund market. Some 580 hedge funds have closed this year, as investors are questioning the fees and expenses and lack of superior returns against index funds. So, in turn, hedge funds have needed to liquidate stock holdings, adding to the selling in the S&P 500 and related indexes.

Sentiment?

Many of the professional investors that I follow in the media remain flummoxed, given much of the other positive economic and market conditions (beyond what I see in the CLO and buyback market activities).

But for individual investors, the outlook is quite bleak. In its most recent weekly survey, the American Association of Individual Investors (AAII) found those with a bullish outlook fell to 20.90% from 37.90%, while those with a bearish outlook soared to 48.90% from 30.50%.

Investors continue to pull funds from many of the leading mutual funds and ETFs. This is showing up in mounting money market balances, which are up to over $3 trillion from the trailing-year low of $2.7 trillion in April. Again, as with buyback pullbacks, this selling and withdrawing to cash is part of the problem. Fear of fear is a real risk right now.

But as I've said time and again, many of the underlying fundamentals are working.

This starts with the consumer, as consumer spending makes up the bulk of the economy. Retail sales in the US continue to advance. In the Census

80

Department's most recent report,

still very low interest rates for consum-

November saw sales gain 4.2% on an

Dec

Mar

Jun

annual basis. That's twice the gain

November 2016 saw. And while sales

gains are off from recent highs seen

ers and businesses and inflation in75

Sep

Dec

20c1h8eck, as I detailed earlier in the issue.

So, consumer spending, business

investing, earnings growth, low interest

in July at 6.6%, they are still robust. rates and low inflation are all here. So

Forward-looking surveys confirm rather than continue to despair over the

that consumers are still confident

state of the broader market, let me show

about their spending, even during

you what's still working for us and45

the past month's market woes. The

introduce you to the two new recom43.-12

Bloomberg Consumer Comfort

meLnifedSattoiroagnes(LIS'I)mBoaokdVdaliunegPefroSrhasreafety. 40

(Comfy) Index is sitting at 59.4, which is significantly higher than where it

A Glimpse of a Silver Lining

was last December, and not all that far

For much of this year, as I repea3te5dly

off recent highs from September.

wrote to you, the S&P 500 Index was

Businesses see this and have been focused on investing in their offerings

stuck in a malaise while there were plenty of opportunities in specific 30

to meet expected consumer demand. sectors and stocks that were performing

While the recent Federal Reserve

while paying ample dividends.

BDeecigMearBJ2ou0on14kSedpidDencotMearso2J0mu1n5eSaenp eDcedcotMaalr20J1u6n reports of some companies pausing

Sep TDhecesMeabr rJiugnhtSseppoDtesc cMoanrtiJnuune Steop shine as the S&20P17500 does its2s01li8p and slide.

plans, the Federal Reserve Bank of

There are plenty of sectors that were

New York's Business Leaders Future good through much of the year and

Capital Spending survey, while off

have bucked the trend of the downturn,

from last month's recent high of 34.20, and we've been adding to most of those.

is still amply above the five-year lows of 6.20 at a current month's 24.70.

Bloomberg compiles estimates for earnings from corporation guidance and analyst projections. For this quarter, the consensus is for earnings growth

At the start of 2018, following the early surge on the back of the Tax12C1uts & Jobs Act (TCJA), the market, particularly for dividend stocks, was sol1d20off on fears of spiking interest rates. This resulted in a great buying opportu1n19ity

for the S&P 500 companies to expand by 14.10%. Looking into the first three quarters of 2019, Bloomberg estimates are for earnings growth to come in over 5%, with the complete fiscal year of

from FebUrSuCaLrOyD8ebttIhndaetx has continued up

to now.

111188.11

Utilities, given their stability and

reliable dividends, continue to perf1o1r7m.

From February to date, they've

2019 averaging 8.98%, set to increase generated a total return of 18.84%1.16

to 10.35% for fisMcaarl year 2020. Jun We also have the added benefit of

Drug maSekpers and other heDeaclthcare 2018companies also continue to capitalize

No Clouds Here

Utilities (S&P)

30

Drugs (S&P)

REITs (Bloomberg)

25

Information Technology (S&P)

Consumer Staples (S&P) 20

15

10

5

Performance since 2/8/18

Mar

Apr

May

Jun

Jul

Aug Sep

2018

0

-5

Oct

Nov Dec -10

Source: Bloomberg Finance, L.P.

Profitable Investing | January 2019 | profitableinvesting.

3

on the reliability of demand for pharmaceuticals with higher margins. They've generated a total return of 14.56%. Drug makers like our Merck (MRK) and Pfizer (PFE) in the Incredible Dividend Machine have specifically have delivered returns of 34.65% and 19.96%.

REITs with their valuable tangible assets and tax-advantaged dividends have generated a return of 11.05%.

And technology companies, principally thanks to those companies that are successfully moving to recurring income streams over unit sales, have generated a positive return of 3.88%.

As for consumer goods companies, many in this segment haven't adapted to changes in consumer tastes--but most have. The broader index of the whole lot still has a positive return of 1.04%.

The key is that there's more than just the S&P 500 Index when it comes to investing. And by focusing on the fact and not the follies of the market, we can still make money, particularly with our dividend-paying stocks.

Up With Income

A Haven With Yield

One of the challenges for 2018 has been expectations for higher interest rates. I mentioned the changes in the fed funds rate and the ongoing rollingoff of the Fed's balance sheet on p. 2.

This has come with some wild overreactions in parts of the bond market, particularly earlier in 2018. And this

also caused some similar knee-jerk reactions in dividend- and yieldfocused stocks and other investments.

The results were largely seen in the first quarter of the year, as many dividend-focused stocks and funds were pummeled, sending many sectors to lows in February. Now, many of those same sectors and the related stocks and funds have since come back and even risen during the year, including during the general stock market sell-off from October into December.

This is leading to most investors wanting and needing a refuge for some of their portfolio. But rather than just parking cash, there must be another alternative that offers more yield while also providing liquidity and top-tier safety.

I have that refuge for you. Allow me to introduce my good friend Mr. Two-Year.

The Sweet Spot

Treasuries are the benchmark for the US bond market, as well as for the global US-dollar-denominated bond market. They are issued to fund the federal government's never-ending spending as well as to serve the needs of entitlement and programs including for the US Treasury.

While there is an argument that Uncle Sam's credit isn't what it used to be and that ratings should be lower than they are, Treasuries are still considered risk?free, as the government can always run the print-

Yield Curve Ideal for Two-Year Bond

3.00

2.90 US Treasury Yield Curve

2.80

2.70

2.60

2.50

2.40

1M 6M 2Y

5Y 7Y

10Y

15Y

20Y

30Y

Source: Bloomberg Finance, L.P.

ing presses to service the debt that Treasuries represent.

Right now, the two-year Treasury is yielding 2.69%. This yield represents the bulk of the yield offered in the Treasury market--as you can see in the graph below, the three-month bill is sitting at 2.38%, the 10-year is running at 2.86% and the 30-year tops out at 3.11%.

Now, as you can see, the yield curve is not inverted. Inversion is when longer-term yields are lower than shorter-term yields--technically, when the 10-year goes lower than the two-year. And inversion doesn't cause the stock market to drop, nor does it cause the economy to slow or head into a recession, even if there are observed correlations between an inverted yield curves and weaker stock markets and economic situations.

But what an inversion does mean is that supply and demand for Treasuries sends longer-term yields lower as investors seek to lock in yields, expecting to see them drop. Shorter-term yields rise when supplies rise, and demand falls under expectations of rising rates.

But inversion tends to come from tighter money and credit conditions in the short-term and expectations for lower inflation and lower economic growth that tends to support a rise in inflation. And in recessions, inflation tends to fall, reflecting a drop in demand for goods and services, supporting lower longer-term yields.

Right now, we have low inflation, with the core personal consumption expenditure index (PCE) sitting at 1.8% and little to support arguments for it to significantly rise. And economic growth remains strong, with the three reported quarters for 2018 being well above average, with most pundits projecting growth into the next two years or more.

The yield curve shifts in 2018 came from some factors that aren't as much about inflation or growth. Instead, the Treasury had to issue more bonds in light of the impact to the federal budget following the Tax Cuts & Jobs Act of 2017 (TCJA). The Act caused some

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Profitable Investing | January 2019 | profitableinvesting.

3.00

revenue shortfalls that had to be made up with Treasury bonds, which it mostly issued in the short to intermediate area of the yield, curve driving up supply, and yields rose in the process.

And with the stock market mayhem, longer-term bonds found more buyers, driving down yields and driving up prices.

This has impacted the two-year Treasury. Yields have gone from 1.93% at the start of 2018 to a high in November of 2.97% and back down to a current 2.69%.

This has been a pretty big upward shift in yield, bringing the two-year into what I see as the sweet spot for the yield curve.

The current bias is for rates for the area of the curve above the two-year-- so, the three-year, five-year and out--to fall, so the two-year is well-defended in its current price. Moreover, as the short end of the curve is quite steep, there is plenty of room for a two-year Treasury bought now to roll down the curve, bringing its yield lower with each day owned as its maturity gets shorter over the holding period. (After all, a twoyear bond today will be a one-year bond this time next year.)

Why is this important? First, the yield offered now is good, as I discussed, and I see limited risk for higher yields for this area of the curve. Second, if and when you sell the two-year Treasury, the price risk is very limited. It has what is referred to as low duration risk.

Duration is a measurement of price to yield movements. The lower the duration, the lower the price movement will be for the same inverse yield movement. And duration increases as the maturity years increase.

And as you hold the two-year, as noted above, it will see its maturity shorten day by day with the duration falling further until it is zero at maturity. This means you'll experience very little to no price risk for this investment. That's why it's a great low-risk parking place with yield for some of the can't-lose assets in your portfolio.

How to Buy

has been real estate investment trusts

To buy a two-year, all you have to (REITs). With the S&P 500 down

do is to call or in some cases provide 12.44% from September to date,

an online query for the maturity. The brokerage will show you available Treasuries with approximate maturities of around two years.

REITs have only given back 2.57% in total return, as measured by the Bloomberg REIT Index (BBREIT). But since the bottom in the REIT

Some Treasuries with two years left market in February, REITs have deliv-

before maturity were issued recently, but others come from longer original issues that have been running their course in the. Instruct your brokerage to sell you a two-year with a coupon

ered a positive return of 11.92%.

3.00

The outperformance is justified for

a variety of reasons. REITs provide2.90

real assets thUSaTtremasaurkyeYiefldorCuarvehedge against financial follies of other 2.80

(stated interest rate) that is close to the current yield, which is now at 2.69%.

Nominal commission fees will make this an inexpensive transaction.

I brought the two-year Treasury into

stocks. And they generate regular-t2o.7-0 rising revenues to fund more ample dividends than the average for the 2.60 members of the S&P 500 Index. In addition, they continue to benefit 2.50

the Niche Investments in the Journal from the underlying bright spots in2.40 earlier this month. As of this issue, I'm the domestic economy and are largely

m1oMving6Mit t2oY the T5oYtal 7RY eturn10YPortfolio.15Y It should be bought in a taxable

shielded from foreign market well as t2r0aYde tensions.

woes

30Y

as

account, as Treasury interest is not

This combination makes for a more

allowed to be taxed by state and local secure store of value that's gaining

income tax authorities, making them tax-advantaged. As long as you buy one with the correct yield to maturity, the current market price is fine.

We'll move 4% of the portfolio from Intermediate Credit Bonds into

more attention from investors from

3.00

institutions to individuals. But one of the better parts of the

2.80

REIT market is in the self-storage properties. Self-storage propertie2s.6696 provide indiTvwoid-YueaarlTsreaasnurdy Ybieuldsiness2e.6s0

a new Treasury Bonds category to accommodate the new position.

Proven Growth

space where they can stash away2.40 goods that they can access with regularity, largely on their own.

2.20

From February to date, self-storage

Store Your Stuff, Grow

Your Wealth

Dec

Mar

Jun

One of the better-performing secto2r0s18

has generated a return of 18.69%2.00 against the general REIT market's

return of 1Se0p.86% and the prDiecce lo1.s8s0 of the S&P 500 of 1.60%. And from

through the latest market downturns the end of September to date, the self-

Storage Wars Win

35 Bloomberg Reit Public/Self Storage Index

Bloomberg US REITs

30

S&P 500 Index 25

20

15

10

5

0

Performance since 2/8/18

-5

Feb Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2018

Source: Bloomberg Finance, L.P.

Profitable Investing | January 2019 | profitableinvesting.

5

storage market has continued with a positive return of 2.79%.

Cash from Hoarders

One of the reasons self-storage companies are booming is because Americans are in love with more stuff. I told you earlier in the issue that retail sales have been robust, and I broke down the latest positive news from the Comfy Index. Based on these data points, more stuff will be finding its way into US households.

But US households only have so much space for more stuff. This has built the self-storage market into an industry that's topping $38 billion, with revenue gains running at an average of 7.7% from 2012 to date.

Right now, one in eleven Americans use a self-storage facility. Not only that, but 40 million people move in the US each year, equating to over 12% of the population. Besides hoarders, movers are also contributing to the market for self-storage on a temporary basis.

And self-storage facilities have additional benefits. Facilities are much like gym memberships or other subscriptions. They are often set up with regular bank debits or credit cards on file, so many customers just join and forget, allowing fees to just keep flowing. And many self-storage companies set up accounts so that the longer they are rented, the higher the rental rates rise. This is meant to make sure that customers remain focused on their contracts. And if customers skip out on payment, storage facilities are happy to cut the locks and auction off the goods seized from those units.

Self storage is also a great way to park real estate. Because storage facilities are quite simple to construct, they can be set up and torn down with relative ease. This means that in suburban or rural areas, landowners that are waiting to do something else with their property can either lease it to storage companies or set up their own storage facilities. All they need to do is clear the land, pour a concrete slab and set up modular storage units. All of this can be reversed when another use of the land is preferred.

And in urban areas, plenty of structures can be retrofitted to accommodate storage units, with similar reversibility.

This has led to a very fractured business. With so few barriers to entry, there are many mom and pop operations offering storage space facilities. In fact, right now, the majority of all storage companies are locally owned and managed.

That's starting to change. Selfstorage facilities are going through a massive consolidation. Recognizing an opportunity, bigger companies are buying up the mom and pop facilities, developing a chain of standardized facilities. They are also rolling up smaller companies into the larger public storage companies to gain scale. And when independent operators or smaller companies want to keep their land and facilities, publicly-listed storage companies offer them the ability to outsource management and marketing with national branding.

What a Life

Life Storage (LSI) has been in the self-storage market since 1985, when it was known as Uncle Bob's Self Storage. It owns 700 facilities across 28 states, and continues to acquire properties from the fractured market that I noted above. It also provides management and branding services to local mom and pop property facilities.

It has led the way to ease of access for customers. It built out an online and app-based platform that is touchless, meaning that customers can find and contract without any hassle of dealing with brokers or salespeople. This has led to great customer approval, particularly with younger customers who are accustomed to app-based services.

The shares continue to rally from the general low of the REIT market in February, with a return of 31.71% compared to the general REIT market's return of 11.05% and the storage REIT market's return of 18.84%.

And importantly, during the market mess from October to date,

Life Storage continued to generate a positive return of 4.22% as the S&P 500 Index lost 12.63% in price.

The company's revenues are firmly on the incline, with the trailing year seeing gains of 14.50%, nearly double the average gain from the industry. This is also resulting in an attractive rate of return from its funds from operations (FFO), a measure of the return from its actual operations of its properties, currently running at 12.00%. And the administration expenses are under control at only 14.00% of general expenses. This flows down to generate a return on shareholders' equity of 6.70%.

The company is also not a credit risk, with its debt to capital ratio running at only 45.70%.

The dividend is currently at $1.00 and has been on the rise over the past five years by an average annual rate of 14.64%. And that $1.00 payout provides a current yield of 4.08%, making for a nice yield from this safe bastion in the REIT market. And note, as with all REITs held by individual investors in the US, the Tax Cuts & Jobs Act (TCJA) provides a tax deduction of 20% of the dividend, making the taxable equivalent yield even higher.

The stock is valued at 2.27 times the underlying book value of its properties and other net assets, which makes for a good value, as this is down from the 3.50 times value seen a few years ago. Much of this comes from the gain in the underlying value of the book, which has climbed 62.66% over the past five years to a current $43.12 per share.

Now, there was some management selling of some of their shares, including by Chief Operating Officer Edward Killeen, in December. But he still owns 22,063 shares of the company and is joined by the rest of the management team and board, with share ownership between the two groups representing nearly 1.20% of all shares outstanding in the market.

I am recommending buying Life Storage under $105.00 per share in

(continued on p. 8)

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Profitable Investing | January 2019 | profitableinvesting.

Stocks (56%) TOTAL RETURN PORTFOLIO

Entry

Growth & Income Plays (18%) Symbol T/TF Date

Fwd. Buy Yield Under Comments

AllianceBernstein

AB

T 11/19/18 11.06% 33.00 Great bargain buy for money manager with ample fee income

Citizens Financial

CFG

TF 9/8/17 3.74% 44.28 Banks getting more efficient and more profitable, but market ignoring facts

Compass Diversified Holdings

CODI TF 5/21/18 11.34% 15.69 Great collection of high-income producing companies with big dividend

Hercules Capital

HTGC T 6/24/18 11.67% 14.50 Great way to invest in technology with high dividend

Hormel

HRL

TF 4/17/17 1.75% 46.50 Meat products continue to find rising demand for further profits

Microsoft

MSFT TF 3/18/09 1.81% 115.00 The poster child of what's working in technology

Nestl?

NSRGY T 11/30/12 2.99% 85.00 Improving sales, better margins, cost controls make for better company

NextEra Energy

NEE

TF 9/8/08 2.54% 185.00 This is one of the best-performing utilities, in a successful market segment

Procter & Gamble

PG

TF 12/17/08 3.15% 94.00 Finally some real change at this company, with proof for shareholders

Regions Financial

RF

T 4/23/18 4.34% 20.00 Revenues are up, margins are up, but market not noticing

Viper Energy

VNOM TF 7/23/18 9.18% 38.00 Company is working on counterparty risk with leases

Indexed Equities (18%)

Energy Select SPDR ETF

XLE

TF 5/21/18 3.59% 70.00 Crude is down despite fundamentals, but natural gas is still strong

iShares Core S&P 500 ETF

IVV

TF 3/22/18 2.33% 282.00 Continue to reduce S&P 500 in favor of specific sectors

Vanguard Health Care ETF

VHT

TF 3/16/16 1.61% 174.00 Drug sector continues to rally despite general market weakness

Vanguard High Dividend Yield ETF VYM

TF 6/21/16 3.46% 83.50 Dividend focus providing some relief against down market

Vanguard Info Tech ETF

VGT

TF 8/20/18 1.56% 195.00 Technology companies with recurring income still working

Vanguard Utilities ETF

VPU

TF 9/24/18 3.37% 128.00 Utilities remain one of the better sectors through down market

Real Estate Investment Trusts (8%)

American Campus Communities ACC

T 7/12/18 4.34% 45.00 Reliable segment of REIT market--and could be takeover target

Digital Realty Trust

DLR

T 2/9/18 3.81% 125.00 Cloud data center REIT leader and a great bargain buy

Life Storage

LSI

T 12/24/18 4.19% 102.00 Self storage is a defensive market as Americans need more room for stuff

MFA Financial

MFA

T 6/24/18 11.98% 8.00 Insiders know the value of this REIT at discount to portfolio value

W.P. Carey Inc.

WPC

T 1/3/14 6.03% 71.00 All-weather dividend aristocrat of the REITs

Toll Takers (6%)

Buckeye Partners

BPL

T 8/21/06 10.79% 36.00 Management shows experience with changing market

Enterprise Products Partners

EPD

T 2/22/05 7.06% 30.00 Well-run pipe company, particularly with stronger gas market

Kinder Morgan Inc.

KMI

TF 11/28/14 5.14% 19.00 Cashing in on demand for natural gas with increased capacity

Pembina Pipeline

PBA

T 8/14/12 5.67% 36.50 Canadian government working to get more gas and oil pumping

Plains GP Holdings

PAGP

T 3/10/17 5.67% 26.65 This pipe company in the Permian keeps pumping cash

World Class Franchises (6%)

Apple

AAPL TF 12/29/15 1.86% Hold Troubled company, still with cult-like following from investors

Schlumberger

SLB

TF 5/23/13 5.52% Hold The go-to company for field development tech, but hit by petrol prices

Starbucks

SBUX TF 2/8/18 2.32% 69.00 Someone woke up and smelled the coffee as growth comes back

United Technologies

UTX

TF 8/6/14 2.68% 130.00 Unlocking the divisions in breakup will bring gains for shareholders

Walgreens Boots Alliance

WBA

TF 4/7/17 2.53% 84.00 Defensive consumer company trading at discount to rising sales

Fixed Income (44%)

Cash (12%)

Synchrony Bank high-yield savings account

7/31/15

Multisector Bonds (8%)

Osterweis Strategic Income Fund OSTIX TF 4/19/18

Intermediate Credit Bonds (7%, down from 11%)

DoubleLine Total Return Bond Fund DLTNX TF 7/22/14

SPDR Interm-Term Corp. Bond ETF SPIB

TF 4/21/17

Preferred Stocks (7%)

Flaherty & Crumrine Pref. Opp. Fund PFO

TF 7/23/18

iShares US Preferred Stock ETF

PFF

TF 3/9/17

Municipal Bonds (4%)

BlackRock Municipal Inc Trust II BLE

T 4/23/18

Nuveen AMT-Free Muni Credit

NVG

T 4/23/18

Nuveen Muni Credit Income

NZF

T 4/23/18

Treasury Bonds (4%, new position)

Two-year Treasury bond

T 12/24/18

2.05%

5.24%

3.62% 3.44%

8.02% 9.15%

5.55% 5.84% 5.97%

Market Call 866/226-5638 to order

11.67 Collection of well-curated bonds keeps outperforming

10.55 Dull bond fund with potential, working for now 33.00 While it could be better diversified, this bond index is working

11.51 Now at big discount as investors sold needlessly, making for great buy 38.00 Preferred stocks with dividends are working in troubled market

14.58 15.15 15.00

Over 10% discount to NAV w/ bonus dividend; 8.52% tax-equiv. yield Over 12% discount to NAV, monthly dividends; 9.02% tax-equiv. yield Over 12% discount while munis are set for rally; 9.23% tax-equiv. yield

Market Buy US Treasury with current coupon (interest rate) near 2.69% at market price

At least 10% below buy-below price as of the publication of this issue

T: Buy in taxable account for best results

TF: Buy in tax-advantaged account (IRA, etc.) for best results

Profitable Investing | January 2019 | profitableinvesting.

7

a taxable account. I'm adding it to the Total Return Portfolio in the Real Estate Investment Trusts section.

Total Return Portfolio

I broke down our general pockets of strength here in Profitable Investing on p. 3. Despite that, there are plenty of good companies with good profits from substantial assets paying ample dividends that have sold off. I'll point out some of them that we're carrying in our portfolio in a moment.

But first, I want to point out some of the individual stocks that are not only bucking the down market, but thriving. Many of these fit into the sectors in the chart on p. 3.

Hormel (HRL), in the Growth & Income plays, has turned around its packaged foods business and has leveraged its command of its meat offerings to drive more revenue. The dependability of the revenue with good margins aided by cost controls continues to make this stock work, and it's delivered us a 23.05% total return for the year to date. Continue to buy it under $46.50 in a tax-free account.

Then we have Microsoft (MSFT), up 26.58%. This company continues to impress me with its performance as the poster child for how to transform a technology company from a focus on volatile and risky unit sales to dependable recurring revenues. There is still more to be made with this company, and its stock is a buy under $115.00 in a tax-free account.

One of the stars of the portfolio continues to be NextEra Energy (NEE), up 26.58% this year. With its great balance between dependable regulated businesses and higher-growth unregulated green energy businesses, this power utility continues to deliver power for everyone's portfolios. While I'd like more of a dividend, it still works for growth. Buy it under $185.00 in a tax-free account.

Procter & Gamble (PG), up 4.81%, is finally following through on its promises to overhaul its brands, cut

costs and raise prices. Revenues still aren't firing on all cylinders, but they have turned back up into the black. Margins are getting thicker, delivering returns for investors. Yes, I'd like higher dividends, but with recovery underway at the company, the stock is a buy under $94.00.

Real estate investment trusts (REITs), like utilities, have become a haven segment for the troubled general stock market. From my first article, in the April 2018 issue of Profitable Investing, I've been pushing you to buy into this segment, particularly on the tax cut benefit from last year's legislation. Two of our REITs in particular are worth noting.

American Campus Communities (ACC), the last publicly traded REIT in the student housing market, is being recognized for the dependable demand for its properties, with its stock up 9.44% this year. It is a great buy under $45.00 in a taxable account.

WP Carey (WPC), up 5.35%, continues to be one of my favorite

REITs, with a huge and diversified portfolio of properties in varied sectors. It is also a certified Dividend Aristocrat thanks to its record of regularly increased dividend distributions, with a current yield just shy of 6%. Buy WPC under $71.00 for your taxable account.

The Toll Takers is a tougher market. While revenues are solidly supported, the petroleum market is being taken out and shot, which I'll address in a moment. The key for the pipelines is controlling and maximizing pipeline throughput while managing counterparty risk on both ends of the pipe. Two of our pipes stand out. The first, Enterprise Products Partners (EPD), up 1.98%, transports a mix of gas and other petrol products. It's a buy under $30.00 in a taxable account. The second is Plains GP Holdings (PAGP), up 5.84% with its increasing capacity bringing more revenues, and a good buy under $26.65 in a taxable account.

Our World-Class Franchises holdings are where well-managed consumer goods companies are paying off during

The Incredible Dividend Machine

Cycle A (January, April, July, October)

T/TF

BCE Inc. (NYSE: BCE, 5.5%)

TF

Cisco Systems (NASDAQ: CSCO, 3.1%)

TF

Merck (NYSE: MRK, 3.0%)

TF

Mondelez International (NASDAQ: MDLZ, 2.5%)

TF

Northern Trust (NASDAQ: NTRS, 2.7%)

TF

PPL Corp. (NYSE: PPL, 5.8%)

TF

South Jersey Industries (NYSE: SJI, 4.0%)

TF

Cycle B (February, May, August, November)

AT&T (NYSE: T, 6.7%)

TF

Colgate-Palmolive (NYSE: CL, 2.7%)

TF

General Mills (NYSE: GIS, 5.1%)

TF

Magellan Midstream Partners (NYSE: MMP, 6.9%)

T

ONEOK Inc. (NYSE: OKE, 6.1%)

TF

Realty Income Corp. (NYSE: O, 4.1%)*

T

Verizon (NYSE: VZ, 4.3%)

TF

Cycle C (March, June, September, December)

Dominion Energy (NYSE: D, 4.5%)

TF

Easterly Gov't Properties (NYSE: DEA, 6.3)

T

Main Street Capital (NYSE: MAIN, 6.6%)*

T

Marathon Petroleum (NYSE: MPC, 3.1%)

TF

Pfizer (NYSE: PFE, 3.2%)

TF

Public Svc. Enterprise Group (NYSE: PEG, 3.4%)

TF

Ventas (NYSE: VTR, 5.2%)

T

*Monthly dividend payer

Buy Under $42.31 $50.00 $75.00 $46.00 $98.00 $33.00 $36.00

$37.00 $64.00 Hold $65.00 $64.30 $68.98 $62.50

$78.00 $21.54 $42.00 $74.27 $45.00 $56.00 $61.00

8

Profitable Investing | January 2019 | profitableinvesting.

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