This from Investment U:

Most investors have never heard of, or purchased, shares of a master limited partnership (MLP). But, with many yielding more than 10% and prices at historically low levels, these bargains are getting hard to ignore.

Few investors know that master limited partnerships are publicly traded asset pools. They have the tax benefits of a partnership plus the liquidity of a publicly traded stock.

Because they invest in many different types of assets, most master limited partnerships have significant debts on the balance sheet and have suffered from the credit crisis. But not all debt is bad debt. And their crisis could be your opportunity.

Profit From Master Limited Partnerships In the Energy Sector

I prefer master limited partnerships in the energy sector because their business is easy to understand. The ones that interest me own the pipes that move oil and natural gas from production to marketplace. Some of these companies also process natural gas, and they may even own an oil or gas field directly.

These companies are like utilities for energy production. Without their infrastructure, oil and gas couldn’t move to the consumers who need it. They play an integral part in the supply chain, and this makes their income stream steady and predictable.

The market has unfairly beaten up the prices of these partnerships. And the bankruptcy at Lehman Brothers only made things worse. They were dumping assets even before they went under. As a lender and advisor in this sector, Lehman was a major player in master limited partnerships.

One of my favorite master limited partnerships is Boardwalk Pipeline Partners (NYSE: BWP) – a firm that handles the storage and transportation of natural gas. Its largest shareholder, Loews Corp. (NYSE: L) heavily influenced BWP by assembling the core company assets, and taking the partnership public. It still owns 52% of the shares.

Loews Corp is controlled by the prominent Tisch family – known for their financial discipline. Boardwalk is no exception. It generates consistent cash flows and has limited debt. It has a ratio of long-term debt to capital of only 38%. Yet at a current share price of $16.30, it yields 11.5%.

Boardwalk’s shares have fallen 48% over the past 12 months. But even if energy prices stay depressed, it should rebound when the market sell-off subsides.

The Master Limited Partnership of NYSE: KMP

Another master limited partnership that I like is Kinder Morgan Energy Partners (NYSE: KMP). KMP is the largest independent owner and operator of petroleum-products pipeline in the United States, transporting more than two million barrels a day of gasoline, jet fuel, diesel fuel and natural gas liquids through over 8,300 miles of pipelines.

It is a major transporter of natural gas in Texas, the Rocky Mountains and the Midwest. The natural gas pipelines business segment consists of approximately 14,700 miles of pipelines with transportation capacity of about seven billion cubic feet per day, and working gas storage capacity of about 35 billion cubic feet. They also own or operate additional natural gas gathering, treating and processing facilities.

CEO David Kinder said in the dividend announcement, “While no company is 100% immune to external conditions, KMP continues to demonstrate that our diversified portfolio of stable assets is capable of generating consistently strong cash flow, even in extremely difficult market conditions.”

Having been formed in 1992, Kinder Morgan has now raised dividends for 12 years in a row – an exceptional record for a company that young. In fact, this pipeline giant just announced it was raising its payout again – increasing cash distributions per partnership unit from 99 cents to $1.02. With today’s price of $48.45, this puts its yield at 8.4%.

Master Limited Partnership Investing With An ETF

Another option for master limited partnerships is an exchange traded fund (ETF) that specializes in investing in the energy sector. The master limited partnership & Strategic Equity Fund (NYSE: MTP) holds a basket of energy master limited partnerships, and it’s currently yielding nearly 14%.

Many of these partnerships look incredibly inexpensive and they’re generating steady income. The income they offer will pay you until the share prices recover – perfect for investors looking for an alternative to stocks in this volatile market.

Owning these makes you a limited partner, which allows you to claim a share of the master limited partnership’s depreciation on your tax returns. In addition, they avoid the corporate income tax, on both state and federal levels. You still would owe tax payments ­(just like your other investments), but you suffer no double taxation.

This is why master limited partnerships are not appropriate for tax-deferred accounts – such as an IRA – because you would lose the ability to deduct this depreciation.

If crude oil and gas prices fail to stabilize, then sentiment against these master limited partnerships could stay negative. And that could mean even better bargain shopping down the road…

Source: Master Limited Partnerships: A New Way to Shop for Bargains

The current mess has created lots of imbalance in stock prices. As thousands of financial ‘professionals’ worry about their job prospects, stock prices are getting hammered. But that doesn’t mean that all of these companies deserve this mistreatment. There are solid businesses out there that have been completely undervalued by the market.

I’ve long been a proponent of contrarian investing and buying assets on the cheap. It delivers superior long-term returns and uncovers portfolio “superstars.” And it seems that I’m not the only one beating the pavement for deep values…

Warren Buffett just took a $5 billion stake in Goldman Sachs (NYSE:GS), with the ability to buy another $5 billion more. And MidAmerican Energy, one of his subsidiaries, just bought Constellation Energy (NYSE:CEG) shares for half of what they were trading at earlier this month.

Clearly Buffett has been using the liquidity crisis to grab some phenomenal bargains. And we should be on the lookout for the same. The market’s recent fluctuations have been offering investors some tantalizing buys. (Take a look at today’s crib sheet for 3 ideas.)

So keep a level head and invest with caution in the current environment. The rules of the game are changing and short-term relief could be replaced with higher inflation and a longer bear market.

But that doesn’t mean there are some great values out there.

Source: Forget the Bailout, Buy Like Warren Buffett

Major brokerage firms settled class action suits with clients who bought a “risk-free” product called “auction rate securities.” Until February, auction rate securities had been a place investors could pocket a slightly higher yield without, they were told, “additional” risk.

Then, in the tumult of the credit crisis, the regular auctions failed.

This caused Goldman Sachs (NYSE:GS), Lehman Brothers (NYSE:LEH), Merrill Lynch (NYSE:MER) and the other investment banks to tell investors who owned these so-called “cash like” securities, “Whoop’s! The market for these securities is frozen… and so is your cash.”

Investors rushing to capture a slightly higher return inadvertently opened up the doors to risk exposure that they hadn’t expected. And the fallout from write-downs and lawsuits on auction rate securities has been severe. But that doesn’t mean this is the end of questionable financial products…

Are Auction Rate Securities As Safe As Money Markets?

The sales pitch for these auction rate securities had been that they were as safe as money market accounts, and almost as safe as cash. The bonds are, in reality, long-term securities, but the banks promised they would hold weekly or monthly auctions to set the interest rates and give investors the option of selling.

These auction rate securities are generally from:

• Tax-exempt institutions
• Municipalities
• Corporations
• Student loan providers
• And closed-end funds

Types of investments that would normally be associated with safety and security.

The financial firms liked lending at the low rates generally associated with short-term debt, while they were actually lending at longer terms. But because of the creative Wall Street facilitated auctions, this fact was obscured from investors.

And as long as investors were receiving their money, and the financial companies were receiving their fees, it looked like everyone came out a winner… until the auctions failed.

When they did, investors called their lawyers instead of their brokers… in the hope of getting some of their money back.

The largest of the Wall Street firms are buying back billions of dollars of these auction rate securities from affected investors. But this doesn’t solve the problem. Hundreds and thousands of other investors bought these same products from mid-size and online brokerage firms that haven’t agreed to settle.

It’s nothing new.

The Auction Rate Security Failure Exposes a Tainted History

If you are a student of Wall Street history, you know that auction rate securities have a soiled past.

“The Securities and Exchange Commission,” according to The New York Times, “reached a $13 million settlement with 15 investment banks, and the industry agreed to impose a voluntary code of conduct for the auction-rate market. The SEC investigation centered on how bidding was conducted for these securities. Critics complain that investment banks have the upper hand in bidding because they can bid after seeing what other investors have bid.”

This lack of transparency is old news, yet it might as well be pulled from today’s headlines.

Auction rate securities are now history. The market hasn’t rebounded and investment banks are going to lose billions as regulators and courts force them to buy back these notes.

What’s most notable is that this debacle hit many people and institutions that shouldn’t have been victims. Small business owners and individuals who thought these notes like cash faced a liquidity crisis when they couldn’t get their money back.

And the institutions that used this market to borrow short-term funds saw the source dry up. Lack of access to this capital led to liquidity consequences. Everyone involved ended up getting hurt, and there were lessons learned on both sides of the lending borrowing spectrum.

Looking Out for the Next Questionable Financial Product

But that doesn’t mean this is the end of questionable financial products…

There are products out there right now that wouldn’t pass the sniff test, and many more on the way. And with the yield on many products trading in double digits, now is a good time to look around for new income investments. But when it comes to listening to your broker remember “caveat emptor” – let the buyer beware.

The next time your broker calls with a new product that you don’t fully understand, just say no. Warren Buffett is famous for avoiding companies whose product he cannot understand. Buffett was criticized for missing the tech boom of the 2000s, but he also missed the resulting crash. If a brilliant mind like Buffett is confused by these shell games, perhaps we should be, too.

With inventive minds working to package and repackage securities or debt instruments behind new wrappers, I guarantee there will be another exotic product coming out that seems too good to be true.

And it probably is. So stick with what you know.

Invest in understandable products from well-known agencies and companies. Many of these “new” products aren’t necessary to achieve above-average returns. There’s nothing wrong with stocks, bonds, ETFs and commodities. In fact, the only thing wrong with these investments may be the “Wall Street product machine” that tells you they aren’t good enough.

Perhaps they should be focusing more on finding investments that offer above-average returns, with below-average risk. It’s what we do here at The Oxford Club everyday.

Happy investing,

Floyd

Source: Auction Rate Securities: How to Avoid the Wall Street Product Machine

Floyd Brown says one way of doing this is to rethink the “boring” image of dividend-paying stocks. These stocks can offer great returns and a steady cash flow.

Floyd says there are five pharmaceutical companies offering outstanding dividend yields in a growing sector. And with most negative sentiment already priced into the stocks, downside risk is limited…

This from Investment U:

Fat dividends have attracted me recently to the largest pharmaceutical companies. Ten years ago, these firms were the darlings of growth investors. When Bill Clinton’s plan to reform and socialize medicine was defeated in the early 1990s, the shares of these firms rocketed higher.

However, near the end of the decade shares of many of these stocks stalled and, as a group, their prices have remained stable. But in the following decade, regular increases in the dividends and earnings of the shares have compressed the price-to-earnings and dramatically boosted the dividend yields.

When you approach dividend-paying stocks or companies, gauging their strength is sometimes difficult. Here is one way to know if they are actually going to pump up your returns:

• A common misconception is that a high dividend yield is the most important measure.
• But a yield that is higher than that of other stocks in a sector could actually be a sign of weakness.
• If the firm is in trouble, they could be preparing to cut, or in some cases, cease to pay a dividend.

A high yield preceded major downturns in financial stocks that had gotten in trouble with subprime and other bad loans. The dividends were slashed to improve the liquidity and cash position of the businesses.

The Dividend PayOut Ratio – An Important Indicator

The important indicator for you to watch is not just dividend yield, but the dividend payout ratio. This is the percentage of earnings directed to paying stock dividends, and it shows us if a company can maintain a level or growing annual payment.

For example, Pfizer (NYSE:PFE) currently has a 6.6% yield. With a stock price of $19.11, the firm must pay a dividend of $1.28 to maintain that yield. Last year, Pfizer earned $1.33, and it has a payout ratio of 92% of earnings.

Pfizer generates more than enough profit to continue to pay the dividend, but if the company should stumble more – and make less than $1.28 next year – it would not have the earnings to cover dividends. Then the firm would have to dip into reserves or borrow money to pay the dividend. In such a case, the dividend would be at risk.

The best dividend paying stocks are those that hold the yield steady as they grow. In this case, the dividends are growing year after year, and you benefit from both the capital gains and the cash.

The Top 5 Dividend-Paying Stocks

For decades, buying shares of such franchise players as Coca-Cola (NYSE:KO), Johnson & Johnson, Altria (NYSE:MO) and General Electric (NYSE:GE) have been great dividend-paying stock plays.

In the current market, I like pharmaceutical stocks because the largest have become virtual cash machines. The dividends offer a protection against dramatic drops in share price. In addition to Pfizer…

• Johnson & Johnson (NYSE:JNJ) yields 2.6%
• Novartis (NYSE:NVS) yields 2.6%
• Glaxosmithkline (NYSE:GSK) yields 4.4%
• And Eli Lilly (NYSE:LLY) yields 4.0%.

All these are outstanding yields for growing firms. Pfizer grew revenue 9.4% last quarter. JNJ grew 8.7%, Novartis grew 14.7%, Glaxo grew 3.5% and Lilly grew 11.20% in the last quarter.

While a number of these drug firms have been under pressure from market perceptions of slow growth, shallow pipelines of new drugs and patent expirations, these negatives are already priced into the shares. 

Investing in dividend stocks is not a sexy investment strategy, but it can be one of the most profitable. By following the “show me the money” mantra, these cash machines can start improving your portfolio and deliver outstanding returns.

Source: 5 Pharmaceutical ‘Cash Machines’

But contrarian investors should be wary of such ‘expert’ opinion. Floyd Brown in Investment U says: “Trucking is an integral part of our national goods transportation network. And because it’s tied so closely to our economy, it will also be one of the first sectors to see a turnaround.“

Floyd says savvy investors should follow Warren Buffett into undervalued transport stocks now…

Even Warren Buffett – the closest person America has to a modern day industrialist – has used the last few years to build an increasing stake in transportation stocks like Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and his biggest purchase by far, Burlington Northern Railroad (NYSE:BNI).

• BNI transports goods eastward from Pacific shipping ports, and commodities such as coal and corn around the Midwest over 32,000 miles of track in 28 states and Canada. It is currently trading at a forward PE of 14.
• Railroads are coming back into vogue as their economy and their cost effectiveness make them popular again. That’s why Warren Buffett took a $5 billion stake in the railroads.
• Trucking also deserves a look. YRC Worldwide (Nasdaq:YRCW) and Knight Transportation (NYSE:KNX) were hurt along with the rest of the sector with the spike in diesel costs this spring. With energy prices starting to settle down, the larger concern for trucking companies is the overall economy, as a continued slowdown will be just as costly.

Transportation Stocks – Calling All Contrarian Investors

For contrarian investors like myself, buying when the rest of the crowd isn’t in love with a particular sector or company is par for course, as is the case with transportation stocks. The secret is to find value that everyone else is missing…

For example, YRC Worldwide is trading in deep value territory at only 62% of book value. With revenue over $165 per share, this firm is selling at approximately 10% of its sales. The forward PE is only 11.

Commodity, oil and agricultural products all had a significant price increase this spring and summer as energy prices impacted profitability across the board. Many have already seen their prices crash downwards along with crude oil, and it remains to be seen whether this will continue.

While slowing with the U.S. economy, international development around the world will continue to be an engine of growth to drive production in multiple industries and there will always be a need to transport these products.

As the great leaders and businessmen of the 19th Century knew, markets can retreat, but after every retreat comes a new day of increased growth and higher market returns.

By investing like the great industrialists, we can follow their examples to great wealth. Build your fortune the same way as Vanderbilt and Buffett by investing in unloved and undervalued sectors like transportation…

Source: Follow the Great Industrialists to Incredible Wealth

Floyd says any investor can use a simple stock screener to help identify potential bargains. Reviewing cheap stocks for companies with profits, cash flow, and the ability to make debt payments is an excellent way to find the next portfolio superstar.

Using this strategy, Floyd says Qwest Communications (NYSE: Q), American Shared Hospital Services (AMEX: AMS), 3COM Corp (Nasdaq: COMS) are good contrarian profit plays…

Protecting investment principal and your profits should be a concern in any market, much less a bear market. Contrarian investors looking for deep discounted value can find themselves walking a tightrope between “buying on the cheap,” and “buying garbage.” And in the down markets like we’ve been in, it can be hard to distinguish between the two.

Nevertheless, keeping a portion of your portfolio in deep value and contrarian plays can be hugely profitable. The possible rewards of double-digit plus returns from these “portfolio superstars” are the stuff cocktail-party stories are made of.

The last year has been painful for the market. Record numbers of stocks are in the gutter, and cheap stocks seem to be everywhere. Many of these shares are selling at a discount not because of poor performance, but simply because of negative investor psychology. Here’s a strategy for finding these bargains, and separating them from the companies on their deathbed.

Screen for Stocks… Like a Professional

I like to use an ordinary stock screener, but if you have one you like, use whatever you’re comfortable with. If you don’t use one on a regular basis, try Yahoo’s stock screener. These are great tools to start off a potential investment search that many professionals wouldn’t be caught without.

Open up your screener, and let’s find some deep value stocks…

We want stocks on the major indexes that are trading like penny stocks (stocks trading below $5 a share). At Investment U we generally don’t advise investors to purchase penny stocks, because there are a lot of good reasons these companies are priced so low. However, the market is not a rational system. It behaves irrationally and over-reacts. This has created some exceptions for the contrarian investor…

Set your first criteria on the screener under “Share Performance” for “Current Price” with a condition of “<=” and a value of “$5.” (Companies trading less than or equal to $5.00 a share.)

Next, we will look at valuation. There are a number of metrics we could use like price-to-earnings (PE), price-to-cash flow or price-to-book value. However, today I want to look at price to sales (P/S) ratio. By screening for these super cheap firms trading at less than one times sales you are paying less than $1.00 for a $1.00 in sales.

Set your second Criteria under “Valuation” to “P/S” with a condition of “<=” and a value of “1.” (Companies with a P/S ratio of less than 1.)

Hmm, what do we find?

We find a mix of beaten-down companies including financials, media firms, tech firms, auto related firms, a couple of airlines and even some consumer names. The screener returned over 200 stocks from this simple two-factor screening. I find that by looking at the largest companies you can find the ones best suited to weather economic downturns.

In reviewing the list, I am looking to identify companies with profits, cash flow and the ability to continue to make debt payments.

Here are three of the firms that caught my attention.

Qwest Communications (NYSE: Q) is trading at $3.85. This telecom firm gets no respect. It is the product of the ill-fated merger of long distance provider Qwest and the old regional Bell firm US West. As the firm loaded up on debt for the merger, the business swiftly changed. It has been plagued by the cancellation of landlines. In addition, its core business is shrinking. If its customer base stabilizes, and if it’s able to leverage its network, its debt will go down. Without a mountain of debt to dig out from, shareholders should see profits hitting the bottom line, and their wallets.

3COM Corp (Nasdaq: COMS) is trading at $2.20. Last year, the Chinese and Bain Capital tried to take this computer-networking firm private. The Pentagon blocked the sale because of national security concerns. Why? The technology this firm controls is vital to national security in everything from handheld devices to networking applications. Security personnel are currently watching over the Olympic Games via IP-based surveillance cameras, thanks to networking provided by 3Com. Quarterly earnings at 3Com are improving, and the share price action is more the result of the broken leveraged buyout than the state of the company.

American Shared Hospital Services (AMEX: AMS) is trading at $2.17. This firm helps hospitals acquire the Gamma Knife equipment used in advanced radio surgical and radiation therapy services. This company was known for paying a healthy dividend. But late last year management decided to cut the dividend to reinvest the cash in growing the company. Shares were punished as income investors fled. The AMS Chairman, Ernest Bates MD, is bullish on the future saying in the last company conference call that earnings results “show how our strategy to use AMS’ creative financing solutions to make proton beam radiation therapy (PBRT) systems, Leksell Gamma Knife PerfexionTM systems, IGRT systems and other next-generation devices for radiation oncology delivery available and affordable to our clinical partners and their patients has put us on the path for long-term growth.”

With a little research you can find that this current market correction is just the opportunity that deep value and contrarian investors like myself love to see. So fire up the stock screener and find your portfolio’s next “superstar.”

Source: Finding Deep Value Plays… and Your Portfolio’s Next Superstar

Fortunately for Pickens, he has a plan to move away from volatile oil. It’s called the Pickens Plan. It involves converting US cars to run on natural gas instead of petroleum and devleoping a massive wind farm in Texas.

Floyd Brown at Investment U says Pickens has a history of being in the right place and the right time and profiting handsomely. Floyd has picked four stocks to help you follow Pickens’ lead into natural gas and wind energy…

T. Boone Pickens is a proponent of the much-debated peak oil theory. He believes the oil price shocks we have experienced this year are only the beginning. He sees much tighter supplies in the future.

“America is in a hole,” he told CNBC last month, “and it’s getting deeper every day. We import 70% of our oil at a cost of $700 billion a year – four times the annual cost of the Iraq war. I’ve been an oilman all my life, but this is one emergency we can’t drill our way out of. But if we create a new renewable energy network, we can break our addiction to foreign oil.”

“In 10 years, $5 trillion goes out of the country for oil. It’s nuts. It’s the greatest transfer of wealth from one area to another in the history of the world.”

Instead, he wants this money to stay in America – with a good portion of it going into his pocket.

His plan is simple. Cars need to be converted from crude oil and gasoline to compressed natural gas as soon as possible. And to replace the natural gas used in electrical generation, he advocates a giant wind farm stretching from Texas to North Dakota.

“America is the Saudi Arabia of wind,” he likes to say.

T. Boone Pickens Has An Energy Plan to Save Our Economy

To be sure, Pickens has an energy plan to save our economy – he is building the largest wind farm in America. It will generate as much clean electricity as two nuclear plants, and, best of all, with little negative effect on the environment.

His commitment to clean fuels has impressed the environmental community, prompting the Sierra Club’s director Carl Pope to say, “To put it plainly, T. Boone Pickens is out to save America.”

But don’t believe that he’s lost his focus on making money because he is in his 80s. “Money! First thing, it’s about money,” Pickens told Fast Company magazine in June.

“Of course, I’m also a good environmentalist. I can pass the saliva test. But I’m not going to go do a 4,000-megawatt wind farm for the environment first and money second. I’d rather go give money someplace else. You’re talking about $10 billion.” And what kind of return does he expect? “A minimum of 15%; it’ll probably be closer to 25%.”

Last year he also brought Clean Energy Fuels (Nasdaq: CLNE) public – a company that markets natural gas for vehicles. It designs, builds, finances and operates 170 fueling stations and supplies compressed natural gas and liquefied natural gas. But what it doesn’t have is profits.

With Mr. Pickens owning 16 million shares, don’t expect that to slow this company down. Management is growing revenues at a rate of 25% per year.

I don’t have much taste for the shares of any company without positive earnings, such as Clean Energy Fuels. But the current downturn in natural gas prices has hit stocks in this sector hard. Today, a number of these gas stocks are cheap for the first time in over a year.

Natural Gas Stocks & Wind Power – The Pickens Plan

Two firms that specialize in natural gas exploration and production that have recently pulled back from elevated highs include:

• Chesapeake Energy (NYSE: CHK), with a forward price-to-earnings ratio (P/E) of only 9.
• Devon Energy (NYSE: DVN), which has a P/E of 9.

In terms of wind power:

• General Electric (NYSE: GE) is one of the world’s largest manufacturers of wind turbines. With over 8,400 installed worldwide, it provides power generation capacity of more than 11,300 megawatts. GE currently trades at a very attractive P/E ratio of 13.5 and a 4% dividend yield. It pays you to hold its stock.
• FPL Group (NYSE: FPL) is the diversified utility and power generator that grew out of Florida Power and Light. It leads the nation in the development and operation of wind power. With more than 45 facilities located in 15 states, it has a generating capacity of more than 4,000 megawatts of electricity.

This represents approximately 35% of the nation’s wind-generated power.

There are many ways that our country is working to free itself from its energy shackles, and I don’t know if America will embrace the Pickens Plan above all others.

But T. Boone Pickens has a history of being in the right place at the right time, and profiting handsomely. By following in his footsteps and investing like him, you stand to make a bundle as well.

Source: The T. Boone Pickens Way: How To Supercharge Your Portfolio

The current bear market has hit REITs particularly bad. Wall Street has dumped REITs in a hurry to get rid of any exposure to property.

This sets up a great contrarian investment play, according to Floyd Brown at InvestmentU.com. That’s because much of the selling has been irrational. Unlike the banks, REITs have been able to protect their value and their income. The majority own commercial properties with long-term tenants, stable values and fixed income payments. Floyd has singled out three ways to profit…

There is very little we can do to assess the loans given by American Express to its cardholders, or by Citibank to a real estate developer in South America, or even the derivatives contracts held by AIG with investment grade counterparties. But we are very capable of understanding the property REITs hold…

•  These are physical assets we can understand – an office building in Herndon, Virginia, development property in   Chattanooga, Tennessee, or a shopping mall in Honolulu.

•   Most real estate is leased to long-term tenants; therefore, the amount of vacant space is measurable.

•  The cash flow of real estate investment trusts is regular and predictable.

• In addition, the ability of a REIT to afford its dividend is apparent. You can easily tell if they have the funds to keep a steady flow of dividends coming.

When Congress created REITs in 1960, they were attempting to let small investors benefit from a diverse portfolio of large-scale real estate investments. While protecting investors through the diversification of these portfolios, the greatest advantage of REITs is in their dividend power.

REITs Distribute 90% of Their Taxable Income

By law REITs are required to distribute 90% of their taxable income. Because these distributions are passed directly to shareholders, taxes are paid only once. It avoids the double taxation of dividends other investments are subject to. (Reducing investment expenses is one of our “4 Pillars of Investing“.)

Today, many REITs are trading at multi-year lows, and would represent an attractive investment even without dividends. But it’s through the dividends, and the ability to reinvest them, that can lead to the greatest gains. By reinvesting and compounding the dividend growth, investors can see their money double in a short time. Take a look…

Compound Interest
Interest Rate	Time to Double
5%	14.2 years
8%	9 years
11%	6.6 years
14%	5.2 years
17%	4.4 years

REITs Hold Value During Periods of Inflation

Because they hold physical assets, REITs hold their value during periods of inflation. But investors aren’t purchasing more of these dividend machines with today’s inflationary environment. In fact, fearful investors have been unloading REITs at bargain prices.

Two real estate investment trusts trading below Net Asset Value (NAV) are:

• Hospitality Properties Trust (NYSE: HPT), yielding 14%. Previously, HPT was trading above $50 in December 2006 and now it trades for $21 plus change.
•  Brandywine Realty Trust (NYSE: BDN), yielding 11%. BDN was trading for $35 a share in February 2007, and now it can be bought for $15.

Both of these REITs have issues that have exaggerated share price losses.

Brandywine has made some big development bets that have not been living up to plans, and Hospitality Properties Trust acquired a string of truck stops that is slightly outside of its core hotel business. Both were high flyers less than a year ago, but neither firm’s assets are devalued enough to chop share prices by over 50%.

If you do not want to trade in REITs directly, look at DWS RREEF Real Estate Fund II (AMEX: SRO). This is a closed-end fund that, due to its leverage, currently yields 13.19%. It’s trading at a discount to NAV.

Add it all up and REITS offer you the prospect for attractive total returns and downside protection. A combination of dividends, and potential share price appreciation makes these attractive investments – especially ones with the potential to double in less than five years.

Source: Real Estate Investment Trusts: How to Double Your Money With REITs

Then I noticed a sign in the window. “Branch hours are extended today to accommodate all the customers wishing to open a High Yield 4% Certificate of Deposit.”

These customers weren’t demanding to withdraw their money; instead, they were rushing to make deposits. Bank of America (NYSE:BAC) was experiencing a reverse run as investors hurried to start investing in CDs guaranteed by good ol’ Uncle Sam at the biggest bank in America.

Fleeing other investments and the ravages of a bear market, they were trying to protect their money in FDIC insured savings products. Many of these investors may wind up worse off than when they started. “Safer” investments fail to keep up with rising inflation. But there are ways to protect your returns and limit your interest rate risk if you are investing in ultra-safe CDs.

A Glorious Bull Market Goes Bearish

From the early 1980s until 2000, America’s stock market experienced a glorious bull market. The S&P 500 climbed a steep mountainside from 100 to 1,500 points. The average investor in this market became a genius. Every broker was a maestro.

But bulls don’t last forever, and the bears finally showed up. Since 2000, returns have been negative, or flat at best, in the S&P 500, which tracks the performance of America’s 500 largest public firms. Many undisciplined investors have fared far worse. Now that same broker is transformed from a maestro to a goat.

The generation most invested in this market of the last 10 years is my own – the baby boomers. This generation, which gave America free love, Woodstock and the Internet, are scared. As a group, we haven’t saved much for retirement anyway.

Now we find ourselves preparing for retirement with a foreclosure notice in one hand and a bank CD that won’t match inflation in the other.

The Mirage of 4% CD Rates

The safety of a 4% CD is a mirage in the desert of high inflation. Consumer prices rose at an annualized rate of 7.9% in the second quarter. They had already increased at 3.1% in the first quarter of 2008. In 2007, inflation rose by 4.1%, whereas year-to-date we’re already up 5.5%.

Our parents suffered a similar fate while we were partying our way through the 1970s.Their experience tells us that instead of a CD yielding 4%, a better alternative would be stocks in sectors that can hold up in inflationary times – stocks with rich dividends.

Assets such as stocks will do a better job of holding value during high inflation. Why buy a CD at 4% when stock in companies such as:

• General Electric (NYSE: GE) yields 4.3%.
• US Tobacco (NYSE: UST) yields 5%.
• Pfizer (NYSE: PFE) yields 6.8%.
• Dow Chemical (NYSE: DOW) yields 5.1%.

These yields are eye-popping by most historic measures. You can pocket these and other dividend payments until the market rebounds. These companies will pay you to hold their stock.

Investing in CDs – Consider Laddering Your CD Portfolio

If you feel compelled to flee for the safety of CDs, or if you need to hold a large portion of your portfolio in these obligations, then at least consider “laddering” your CD portfolio.

Laddering is a lot like dollar-cost averaging when you buy stocks. With laddering, you stagger the maturity dates to take advantage of rising rates.

It works like this…

• You don’t invest all your CD money in a single maturity date.
• Instead of putting all your money in one product, you buy several.
• If you had $50,000 to invest, you would acquire a $10,000 one-year CD, a $10,000 two-year CD and so on until your last $10,000 buys you a five-year CD.

Each CD is like a rung on a ladder. When the one-year CD matures, you reinvest that money in a five-year CD. The cycle repeats, and gives you the ability to reinvest at better rates. Some of your money will always be less than 360 days from maturity.

Interest rates often climb in periods of inflation. Each year you will have an opportunity to grab the higher rates if they appear.

However, if you can sleep at night and still own stocks, then holding on is my recommendation. In the end, most bank CDs will leave you worse off after price inflation. Besides, I hate waiting in lines.

There are no guarantees, but history has shown that individuals brave enough to buy stocks in bear markets are better off in the long run.

Good investing,

Floyd

Source: Two ‘Safe Harbor’ Plays Right Now

• Cash Balances and Debt
  When the economy turns down, the highly leveraged firms are the ones that get in trouble first. This is part of the problem for GM and Ford right now, and it was the problem with Bear Stearns. If you have large debts, the interest payments alone are a constant drain. On the other hand, a company like Microsoft – with large stores of cash and no debt – can weather any storm. Amazingly, sometimes a firm’s stock price won’t adequately value the cash it holds.

• Cash Flow
  The market will – over time – value cash flow in similar ways. Look for times when the market undervalues a company’s cash by finding out how much cash a company is producing today. Cash flow is the lifeblood of a company. You can reasonably expect that Wall Street will appreciate the value of free cash flow in the future, even if the firm is out of favor today. Therefore, keep track of the cash a firm generates.

• Dividends
  Between 1872 and 2002, stocks returned an average compound rate of 9%. Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested dividends contributed 4.8% – more than half of the total return. Favor a stock with dividends for this very reason. You’ll get paid to hold a stock while the market takes time to recognize its value.

These three simple guides have worked wonders for me when analyzing many different stocks. One example would be the oil sector.

In the 1990s, oil stocks greatly underperformed the market. But they generated huge amounts of cash. I started buying these deeply undervalued stocks in the late ’90s knowing that eventually, the historic cash flow generation would win out.

In the late 1970s, the market valued a dollar of earnings from oil stocks more dearly than they did a dollar of earnings from those same stocks in 1997. Earnings ratios were out of line with the historic rates of return. Eventually they came back to normal, and proved the wisdom in buying earnings cheaply.

Many of today’s stocks show large differences between their price and their historical earnings ratios. You may find the market is incorrectly valuing many companies in relation to their cash balances and its ability to generate cash flow and dividends.

So instead of listening to analysts, do your own research and ask the right questions, like these: Can the company rebound to its historic price-to-earnings ratio? Is the market undervaluing a company? Can it continue to generate healthy cash flow and earnings? Will it be able to pay dividends and interest payments on debt?

In short, cash and cash flow can be a more reliable predictor of the future of a company’s stock price than your gut… and especially an analyst’s educated guess.

Source: Three Ways to Beat Analysts at Their Own Job