Investing for Income

NOVEMBER 2020, VOL. 9, NO.11

Investing for Income

CELEBRATING 100 ISSUES

Strategies to Boost Your Cash Yield

100 Months of Great Yields and Common Sense Ideas

Behold the 100th Kiplinger's Investing for Income! Whether this is your first issue or you're an original subscriber, we're thrilled. We are even happier with the success of our foundational philosophy: With liquid, publicly traded, understandable securities, you can profitably and safely obtain excellent yields and protect (and expand) your capital. The canon of personal investing books, blogs and periodicals have long overstated the danger of such an approach. Some commentators whine that everyone "has been forced out the risk spectrum" to "reach for yield" because of "financial repression," an expression that refers to supposedly cruel low interest rates. We prefer to emphasize the opportunities, alternatives and rewards.

This letter was born in bearish times. We launched as threemonth Treasury bills paid 0.10%, a 10-year T-bond paid 1.65%, and the S&P 500 dividend yield sat at about 2%. And with the financial crisis and crash of 2007 and 2008 still fresh, the appetite for ordinary risks, let alone anything adventurous, was minimal. Worse, Wall Street wrongly expected the Federal Reserve and Treasury rescues to "end badly," with punishing inflation and higher interest rates--more reason to avoid bonds and stocks.

Well, we did not agree, for a slew of reasons--mostly our (accurate) conviction that interest rates were low for good reasons. So, eight-plus years into this enterprise, we at Kiplinger can say we were at the forefront of a

THE

100TH ISSUE

seminal change in investor thinking. "The shaming of people for searching for yield has quieted down," says Andrew Goodale, a bond portfolio manager for Eaton Vance, one of many creative investment firms we have lauded for income opportunities. Rob Spanos, who manages junk bonds

for PGIM, says, "I've been in high-yield bonds for 23 years, and this has come a long way as a mature asset class." Morningstar advisory columnist John Rekenthaler, whom we admire though with whom we sometimes disagree, now advocates for a 50-50 combination of preferred stocks and utility shares--categories long known for having more detractors than advocates. Not us: We have been unswerving boosters of both since our beginning. Your payoff has been double-digit annualized returns with low risk.

There always are hazards. COVID-19 is still beating up income sources such as energy infrastructure and commercial real estate. Warren Pierson, a bond manager for Baird Funds, worries what would happen to all markets without the Federal Reserve's protective actions. But we aver

continued on next page ...

Inside This Issue... Unless otherwise noted, prices and data are as of October 16, 2020

Who is Raising Dividends and Why?

3

Pandemic-era American business is cleav-

ing into winners and losers, but dividends

won't be going away.

Really, Really, Really Cheap Bank Stocks 4 It's time to reconsider U.S. banks' common stocks.

Timely Tactic of the Month

4

A quick look at PGIM's global dynamic

bond fund.

Kiplinger's 25 for Income

5

Something is always working in our group

of 25. This month utilities rocked.

Ask Jeff

6

Where to put cash once you've met your

objective; considering AT&T; and learning

about passive income sources.

What's New in Cash

7

How to approach the election; taxable

municipal bonds go crazy; and the signifi-

cance of $3 trillion sitting in banks.

Flashback

7

Model Portfolio: Juiced-Up Cash

8

We could leave well-enough alone, but it's

a good time to make some changes.

Copyright 2020 ? The Kiplinger Washington Editors, Inc. ? 1100 13th Street NW ? Washington, DC 20005-4051 ?

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Kiplinger's Investing for Income: Strategies to Boost Your Cash Yield

... continued from previous page

November 2020

that if you emerged from 2008 ready to look beyond CDs, money market funds and Treasury bonds, you are far ahead despite any unrealized principal losses in 2020. So, we shall prolong and perhaps harden our viewpoint that the relative outperformance of income-centric investments can continue, dare we say it, for another 100 months.

The winners' names do change. Some of our original selections from 2012 are already merged or liquidated. There will be opportunities to rotate in and out of sectors and benefits for doing so. We formerly recommended oil-related cash cows such as BP Prudhoe Bay Royalty Trust and Occidental Petroleum; we no longer do. We may also temper our

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Kiplinger's Investing for Income is carefully checked financial journalism; it is not personalized counsel on investing, taxes and law. We suggest that you consult with qualified professionals in those fields for advice tailored to your individual needs.

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preference for U.S. investments over foreign ones--although our domestic focus has been correct. We also advise our most fortunate or wealthy readers that if you are set for life, quit risks and "take a knee." However, the multiyear income and total-return advantage from diversifying, compared with a crash diet of CDs and Treasury bills, will stay sizable. Here's a summary of what we have learned and how to apply it:

The power of crowds. The "global search for yield" means high demand and upward price pressure on everything in limited supply. Hence, we continue to recommend triple-B-rated corporate bonds, taxable municipals, utility stocks and real estate investment trusts in high-growth sectors, such as cell-phone towers.

Something always works. We cover 20 asset classes and urge any dedicated income investor to use half of them. If you follow Eaton Vance's Monthly Market Monitor at , or the Callan Periodic Table of Investment Returns at www ., you'll see how the leaders rotate.

Active management. In 2012, the fully indexed passive approach was at its peak of popularity. Vanguard founder Jack Bogle popularized low-cost, shareholder-friendly mutual and exchange-traded funds. But many of Vanguard's best offerings are its actively managed bond funds. We have spent enough time with fixed-income managers and traders to know that they are worth their moderate fees.

Municipal bonds, the gold medalists. If investing were an Olympic sport, U.S. tax-exempt bonds-- something the rest of the world lacks--would take gold. Not only do munis pay fine after-tax income, but they are safe and now easy to buy and follow. The strong returns of our favorite categories, e.g., toll-road and hospital bonds, reflect U.S. dollar prosperity.

Product innovation is overrated. We've watched investment firms create silly trading gadgets, such as inverse ETFs, narrow stock funds tied to headlines, and illiquid "private" or "nontraded" real estate and energy trusts. The truth is that old-school utility and REIT shares, municipal and other bonds, and dividend-growth stocks are more than adequate 95% of the time. We sometimes discuss spicier, higher-yielding securities, but only if the sponsor and manager are proven entities and you can figure out the investments. The idea that some outsider operating out of a home office can easily make you 10% in a 2% world is nuts.

Our economic viewpoint. One of our convictions is that a 2-2-2 world is ideal for most of the investments we like. This refers to 2% inflation, 2% economic growth and 2% long-term interest rates. Any prolonged deviation in either direction will be either inflationary, which harms bonds and bond alternatives, or deflationary, which is bad news for everything besides cash. If you prize stability and predictability, you shouldn't pine for the faster growth that politicians and pundits constantly promote.

CELEBRATING 100 ISSUES Copyright 2020 ? The Kiplinger Washington Editors, Inc. ? 1100 13th Street NW ? Washington, DC 20005-4051 ?

November 2020

Kiplinger's Investing for Income: Strategies to Boost Your Cash Yield

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Who is Raising Dividends and Why?

Readers constantly wonder about the near future (and long-term safety) of their dividendpaying stocks and funds. We understand. The pandemic and economic collapse led hundreds of corporations, partnerships, trusts and funds to reduce, suspend, or eliminate cash payments. Sometimes, this is desperation, as with airlines and hotel chains. Refiners and pipelines have decent cash flow but are retrenching by canceling construction projects, reducing stock buybacks, laying off workers and divesting, as well as by lowering dividends. Bank regulators have frozen most dividend increases--although, unlike in 2008, they did not order reductions. And there are special cases like Disney. With its theme parks deserted, sports telecasts canceled and cinemas dark, Disney suspended its first-half dividends, which had been 88 cents a quarter. Disney's bosses are now under attack from old-fashioned hostile raiders who are demanding that the company zero out dividends and use the cash to go all-digital.

And yet, as we have written many times, dividends are such a tradition and a habit that it is unimaginable they will go away. Many prominent companies will not let 2020 change their ways, even when their business is clearly impaired. Starbucks, where the queues of briefcase-toting commuters are gone and you still cannot hang out all day with your laptop, boosted its payout 9.8%, effective this month, for a yield of 2.1%. "They have really big free cash flow and the balance sheet to lean on," says Aaron Clark, who manages dividend portfolios for GW&K Investment Management. Clark also expects AT&T, despite its fallen share price and other questions, to grant another increase in the upcoming weeks. Why? Ample cash flow and an urgency to keep shareholders' loyalty despite a share price that has fallen to a 10-year low.

Other companies that have boosted their payouts 10% or more during the pandemic include Accenture (a global IT and consulting firm); homebuilder Lennar; Microsoft; chicken producer Sanderson Farms; Texas Instruments; and, believe it or not, several retailers, including Camping World, Tractor Supply and Williams-Sonoma. In September, the Schwab US Dividend Equity ETF (SCHD, yield 3.2%) distributed 54.3 cents a share, its highest quarterly cash payout ever, dating to 2011, and up from 44 cents in each of the two preceding quarters. SCHD has a five-year

annualized total return of 12.2% and is likely the best of the high-dividend exchange-traded funds, a group we profiled approvingly in February 2017. Our other current all-star from that list is Vanguard Dividend Growth ETF (VIG, yield 1.7%), whose total annualized return for five years is 13.6%. Both SCHD and VIG have been red hot since July. And although the Legg Mason Low Volatility High Dividend ETF (LVHD, yield 2.6%) has lagged in 2020 because it is full of out-of-favor value stocks, the fund holds many reliable, high-yielding names we've frequently favored, including real estate investment trusts and utilities.

If it seems counterintuitive that dividends can fight off COVID-19, the reality is that pandemic-era American business is cleaving into winners and losers. Procter & Gamble (PG) had been in a deep business slump. But helped by booming sales of cleaning supplies, it is doing so well this year that it kicked up dividends 6% in April, compared with 4% the two previous years and 3% the year before that. We now expect the likes of McCormick (MKC), which is rolling in profits and keeps raising its forecasts because of the (forced) boom in home cooking, to be generous with its next dividend raise. The same goes for shipping and delivery firms. Indeed, you ought to be able to smell the industries that might lavish their stockholders with cash in 2021 and the ones that will continue to act like Scrooge. (Hint: If a company asks for a huge government rescue package, its dividends are toast.)

We have said much of this before, but it always bears repeating: Dividends are nothing but durable. As part of this 100th edition lookback, we pulled from the files a 2011 Deutsche Bank paper arguing for a greater emphasis on dividends in income portfolios. Bond yields were low then, but stocks were only freshly reviving after that crushing 2007 and 2008 collapse. Skepticism about earnings and economic growth ran deep. However, the DB authors wrote that "today's demographics of older, more conservative investors seeking income" mean dividend-paying stocks will return to focus. We could not say it any better. From 1802 to 2002, 73% of the return from owning stocks derived from dividends and dividend growth. Your ancestors who owned cash-generating stocks endured wars, recessions, the flu of 1918 and political controversies, yet all turned out well in the end. We prefer to look ahead, but here is a backward view that makes us all more confident.

CELEBRATING 100 ISSUES Copyright 2020 ? The Kiplinger Washington Editors, Inc. ? 1100 13th Street NW ? Washington, DC 20005-4051 ?

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Kiplinger's Investing for Income: Strategies to Boost Your Cash Yield

November 2020

Really, Really, Really Cheap Bank Stocks

If you accept the doctrine that the time to test a distressed or out-of-favor investment category is when the news is bad but not as terrible as it just was, it's time to reconsider U.S. banks' common stocks. Bank shares have badly lagged in the broad recovery from spring's plunges. But that's changing.

There are at least three buy signals. One is current dividend yields on the order of 6%. That is several percentage points higher than BB-rated junk debt, as well as the banks' own bonds. Regulators will not let most banks raise dividends, but only those with their own, idiosyncratic troubles are cutting them.

Second is the slight (but likely to continue) steepening of the yield curve. That refers to the difference between short-term interest rates and longer-dated yields. This is critical for bank earnings, because their interest income from loans, mortgages and investments can thereby rise faster than the cost of deposits and overnight borrowings from the Federal Reserve. This is a slow process, and it will take a few more months to filter into banks' financial results--but unless there are political breakdowns and a near-depression, it will by 2021.

Third is news from the field--chiefly, data implying that despite high unemployment, continuing infections and business closings, consumers and businesses are not skipping or defaulting on their debts to the degree that markets feared six months ago. As bank after bank issues third-quarter results, two

prominent numbers to watch are the volume of loans in forbearance and the net interest margin. Most major banks, and many regional and local and midsize ones, are reporting much lower amounts of forgiven or suspended loans than they had anticipated three months ago. In fact, most are eager to write new consumer loans and home mortgages (which include big up-front fees). Whether that is a certainty or if it could worsen again in winter is unknown. Banks are mainly cheering for the warring government factions to enact at least some extended and enhanced unemployment benefits and aid to state and local governments.

The net interest margin is the gap between what banks pay for deposits (or other funding, such as Federal Reserve credit lines) and the yield on their loans and other investments, such as Treasury bonds. Relief requires a steeper yield curve, which the markets believe would be the likely outcome of a larger, rather than "skinnier," stimulus part deux. Contrariwise, if the wide economy tanks all over again, interest rates won't rise, and bank earnings will go into septic shock. That is why financial

stocks tend to rally on sightings or rumors that Nancy Pelosi and Steven Mnuchin are sitting at the table. But for now, the tenor of the third-quarter numbers from lenders such as Citizens Financial, Comerica, PNC and Truist are encouraging.

All this is staring us in the face while bank shares are cheap. A common benchmark is the ratio of share price to book value, which in normal times ranges from 1 to 1.25. As of October 16, we still see lollygaggers like Citizens Financial (CFG, $28, yield 5.9%), at 0.55 times book; People's United (PBCT, $11, 6.8%), at 0.66 times; and Comerica (CMA, $42, 6.5%), at 0.78 times. Even JPMorgan (JPM, $102, 3.5%) trades at 1.3 times book, down from 1.6 times to 1.8 times before the virus struck.

Whether you own individual shares or try our suggested pairing of KBWB, the Invesco KBW Bank ETF, and IAT, the iShares US Regional Bank ETF, you will get paid well. And how much more can you lose? In September 2017, we referenced IAT at $44 and a yield of 1.6%. It is now $36, with the dividend yield at 3.7% and the price-to-book ratio at 0.96. If not now, when?

Timely Tactic of the Month

Our friends at PGIM believe longer-term U.S. interest rates, such as 10-year Treasury yields, will stay trapped below 1% until well into next year. That's lower than most other managers foresee; the consensus is that the next multi-trillion-dollar Treasury stimulus will raise Uncle Sam's borrowing costs. But PGIM is usually right when it stands apart from the crowd, and its stance would favor putting some chips on international bonds. We thus expect PGIM's active management team to make hay in PGIM Global Dynamic Bond Fund (PAJAX), which is up 3% in the past three months and yields 4.6%.

CELEBRATING 100 ISSUES Copyright 2020 ? The Kiplinger Washington Editors, Inc. ? 1100 13th Street NW ? Washington, DC 20005-4051 ?

November 2020

Kiplinger's Investing for Income: Strategies to Boost Your Cash Yield

5

25

for Income

Our maxim that something is always working defines the latest month, when utilities rocked, energy and real estate mostly struggled, and bonds were steady. We are sweating the safety of a couple of our selections' dividends, starting with AT&T. And there was no news about a dividend reduction. We have no information that its quarterly dividend is at risk. But some of its media businesses are floundering, so T's shares are down to a 10-year low, though good news about its wireless business prompted a 6% bump on October 22 (after our deadline for the price chart). Welltower and Valero took more torpedoes--but, opposite of that, American Electric Power soared 13.7%, American Water rose 9%, and even Suburban Propane, despite coming off a recent dividend chop, gained 21.4% on news of a strong third quarter. Suburban is up 75% since the market bottomed in March. We aren't thinking any more about replacing it, and if you were brave or brilliant enough to buy it on the dip, you're a genius. All we did was hold its place on the list. No changes to the lineup, though we'll likely have a couple for next year.

Utility stocks

Price

American Electric Power (AEP) AT&T (T) American Water (AWK) National Grid (NGG) Xcel Energy (XEL)

Traditional electric company serving 11 eastern and southern states

$91.52

Wireless-service giant that grew out of the former SBC 27.33

Largest investor-owned water utility, serving 16 states155.72

British national gas and electric utility that also operates in New York and New England 61.05

Central states electric system that emphasizes wind energy 73.13

High-yielding open-end bond funds

Dodge & Cox Global Bond (DODLX) DoubleLine Total Return (DLTNX) Fidelity Capital & Income (FAGIX) Fidelity New Markets Income (FNMIX) Hotchkis & Wiley High Yield (HWHAX) Loomis Sayles Bond (LSBRX)

A mix of domestic and foreign corporate bonds, mostly denominated in U.S. dollars $11.75

Income fund that makes the most of mortgage securities 10.72

Creative and aggressive junk bond fund

10.15

Impressive emerging-markets bond fund 14.38

Boutique high-yield fund that concentrates on small companies 10.59

Go-anywhere investment-grade bond fund 13.14

Closed-end mutual funds and ETFs

AllianceBernstein Global High Income (AWF) BNY Mellon Municipal Bond Infrastructure (DMB) Eaton Vance Floating-Rate Income Trust (EFT) iShares U.S. Preferred ETF (PFF) Nuveen Municipal Value (NUV) Pimco Corporate & Income Strategy (PCN) Real estate investment trusts

High-yield corporate bonds and government bonds from emerging markets$10.53 A leveraged closed-end fund that likes transportation and hospital bonds 13.66 One of the oldest floating-rate loan funds, with a team of five veteran managers 12.75 This exchange-traded index fund spreads your money in more than 301 preferred stocks 36.78 This non-leveraged closed-end is an alternative to the BNY Mellon Infrastructure fund 10.82 An unusual mixture of high-yield corporate, muni and foreign bonds 15.85

Annaly Capital Management (NLY) Digital Realty Trust (DLR) Realty Income (O) Welltower (WELL)

Borrows cheaply to reinvest in government-guaranteed mortgage securities $7.24 Developer and operator of data centers in the U.S., Canada, Europe and Asia 157.70 Landlord to chain stores and restaurants, also known for 602 straight monthly dividends 60.53 Develops and owns assisted-living facilities, hospitals and medical labs 54.28

Energy investments and partnerships

Brookfield Infrastructure Partners (BIP)* Magellan Midstream Partners (MMP)* Suburban Propane Partners (SPH)* Valero Energy (VLO)

Owns toll highways, ports and transmission lines

$46.86

One of the largest pipeline carriers of gasoline, diesel and chemicals 36.72

Propane distributor normally yields substantially more than junk bonds 16.49

World's largest independent refiner, known for large dividend increases 40.22

Funds in italics pay tax-exempt income. Investments with an asterisk (*) are partnerships. Prices and yields as of October 16, 2020. SOURCES: Fund companies, Morningstar Inc., Yahoo.

Yield 3.1% 7.6 1.4 5.0 2.4

3.2% 3.1 4.0 3.9 5.8 2.9

7.5% 4.7 5.6 5.3 3.4 8.5

12.1% 2.8 4.6 4.5

4.4% 9.9 8.7 7.1

Frequency quarterly quarterly quarterly semiannually quarterly

quarterly monthly monthly monthly monthly monthly

monthly monthly monthly monthly monthly monthly

quarterly quarterly monthly quarterly

quarterly quarterly quarterly quarterly

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