Where to Find Yield Today

The following first appeared on Money & Markets.

Having the Fed funds rate back near zero is fantastic if you’re a borrower. It’s not so great if you’re an investor looking for income. T-bills, savings accounts and money market funds all yield essentially zero, and it’s hard to find CDs yielding more than about 1.5%.

It is still possible to generate a respectable income stream on your investments without taking excessive risk. You just have to look a little harder than usual and be willing to look at new pockets of the market you might not have considered before.  So today, we’re going to cover where to find the highest yields.

Not surprisingly, some of these sectors were badly beaten up in March, and all have to be considered a little risky in the post-coronavirus environment. But at current yields, at least you’re being adequately compensated.

Where to Find the Highest Yields


I’ll start with real estate investment trusts (REITs). I covered REITs back in early April, noting that the sector had been battered and left for dead.

Not all the negativity in the sector was unwarranted, of course. With most of the country on lockdown for the past two months, a lot of commercial tenants have been unable to pay the rent. Some REITs have lowered or suspended their dividends as they assess the damage.

It might be a while before things start to look truly normal again. Restaurants, gyms and entertainment companies in general will be licking their wounds for months. It may be well over a year before their customer levels recover to pre-crisis levels, which means landlords will need to be flexible. So if you’re a REIT investor, you’ll want to focus on the strongest names with the best access to capital.

Back in April, I mentioned Realty Income (O). While the REIT is focused on retail, its exposure to riskier pockets like full-service dining and gyms is tolerably small. At current prices it yields 5.5%, and I’d consider that dividend safe.

Ventas (VTR), which I also mentioned in the article, today yields a whopping 11.3%. Keep in mind that, as a senior living REIT, Ventas was hit particularly hard by Covid 19, and the company may decide to cut its dividend later this year. I don’t consider that especially likely, but I can’t rule it out in this environment.

I also mentioned EPR Properties (EPR) back in April, and I still consider this entertainment-focused REIT to be a nice value play. Unfortunately, they opted to conserve cash by suspending their dividend. So, if you’re buying specifically for yield, you’ll want to wait on that one.

And naturally, if you want to get out of the stock picking game, you could always just buy the index fund and be done with it. The Vanguard Real Estate Index ETF (VNQ) gives you broad exposure and yields an attractive 4.2%.

Business Development Companies

Last week, I recommended business development companies (BDCs), noting that like REITs, this high-yielding sector has really taken its lumps this year. Business development companies make loans and equity investments in small- and medium-sized businesses, making them a lot closer to Main Street than to Wall Street.

As with REITs, some BDCs have gotten hit particularly hard by the stay-at-home orders. But there are still some real gems out there if you’re willing to roll up your sleeves and look under the hood.

Ares Capital Corp (ARCC) and Main Street Capital (MAIN) were two solid BDCs I mentioned last week. I’d mention again that these two income machines currently offer yields of 12.2% and 9.0%, respectively.


Finally, I’d add pipeline stocks to the list. Anything even tangentially related to energy got utterly annihilated in March. Between the drop in demand from virus lockdowns and the surge in supply due to Saudi Arabia’s price war with Russia, crude oil prices tanked, taking energy stocks with them.

But here’s the thing: Many pipeline companies focus on natural gas far more than crude oil, and their business model depends on volume, not price. There was never any reason for fee-based, natural gas transporters to get roughed up like they did.

Today, you can snap up shares of Kinder Morgan (KMI) at a 7.1% yield and shares of Enterprise Products Partners (EPD) at a whopping 10.3% yield. Note that Enterprise Products is an MLP and has the cumbersome tax reporting that comes with that distinction.

All of these stocks have proven to be volatile this year. But it seems like the worst is behind them. And if you’re looking where to find the highest yields these days, this definitely points you in the right direction.

How I Invest My Own Money

The following first appeared on Money & Markets.

Last week, I wrote that the 60/40 portfolio is dead.

So, it’s only fair to ask: If I believe that the bedrock of American retirement is toast … how do I invest my money?

Before I jump into it, I have to throw out the usual caveats. Just because I invest a certain way doesn’t mean that you should. I’m 42 and have two kids to feed (and a third on the way). You may be in a very different stage of life and have a very different set of circumstances. But that said, I’ll share how I invest my money.

With that out of the way, let’s jump into it.

How I Invest My Money
The first plank might surprise you a little. Even though I believe the 60/40 portfolio to be dead for the foreseeable future, I still have a little less than 15% of my portfolio invested in something along the lines of a 60/40 portfolio. It’s a 401(k) account, and my only options are stock and bond mutual funds. It’s the best I can do with the options at my disposal.

Still, it’s worth it. The tax savings and matching more than compensate for less-than-perfect investment choices. So, my first $19,500 in savings each year goes into the 401(k).

No exceptions.

Moving on, if you’ve read my work for any length of time, you know I’m an “income guy.” A lot of my investment recommendations tend to revolve around income strategies.

So, it should come as no surprise that another 25% of my portfolio is investing in long-term dividend stocks, REITs, pipelines and other income-focused plays. I’m still a long time away from retirement, so most of these stocks are set to automatically reinvest the dividends each quarter.

Following the income theme, the largest chunk of my portfolio is invested in put-writing strategies. About 40% of the total is invested in strategies that primarily sell put options.

You’ve probably heard that the vast majority of options expire worthless. Well, that’s true. So, if you know they’re likely to expire worthless anyway … why not sell them?

If done correctly, selling out-of-the-money put options can be a conservative income strategy. You collect premium each month much like an insurance company. Once in a while, as with insurance companies, disaster strikes and you have to pay out. But if you manage your risk appropriately, those occasional disasters won’t bury you. And as with real insurance companies, put option sellers can buy “reinsurance” by buying even deeper out of the money put options to cap any losses.

Following again on the income theme, I have a little over 7% of my money invested in real estate (outside of my personal home) and roughly 5% in precious metals.

And finally, the remainder of my portfolio is invested in a hodgepodge of other strategies, some of which are a little experimental. I think it’s important for every investor to allow some chunk of their portfolio to be used on more speculative plays. You might not hit a home run on all of them, but on a few you just might.

Plus, indulging your more speculative side keeps investing fun and engaging.

So that’s it. That’s my current portfolio and how I invest my own money. I don’t expect (nor would I advise) that you copy it. But I hope it shows you that there really is life beyond the traditional 60/40 portfolio!

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser based in Dallas, Texas.

Warren Buffett Really Rained on the Parade

This piece originally appeared on Money & Markets.

A lot of value investors came out of the woodwork to buy the dip in March and April following the coronavirus rout.

One was conspicuously absent from the party: Berkshire Hathaway’s Warren Buffett.

Buffett is a hero to generations of value investors. In fact, he’s one of my heroes.

One glance at his returns will show you why. From 1964 to 2019, Mr. Buffett grew Berkshire Hathaway’s by an almost absurd 2,744,062%. Over the same period, the S&P 500 returned 19,784%.

In past crashes, Buffett has always swooped in and bought the dip. He certainly did in the last crisis when he bailed out Bank of America, Goldman Sachs and General Electric, making himself billions in the process. The is the man whose self-described secret is being “greedy when others are fearful and fearful when others are greedy.”

But this time around, Buffett chose to sit on his hands. His cash hoard actually grew to $137 billion at the end of the first quarter from $128 billion at year end. At today’s prices, about 30% of Berkshire Hathaway’s market value is just the cash in the bank.

But not only is Buffett not buying. He’s actually selling. The Oracle of Omaha dumped $6.1 billion in stock in April, including his positions in American Airlines, Delta, United Airlines and Southwest Airlines.

This should be sobering to anyone with money in the market.

You can take comfort being in the market when Mr. Buffett is buying. Buffett isn’t always right, and like a lot of value investors he’s often early to the party. But buying by Buffett is that ultimate seal of approval… and that reassuring pat on the shoulders that says it will be all be ok.

In His Own Words

As always, Buffett was eminently quotable at the Berkshire Hathaway annual meeting this past weekend. But one quote really stood out. On why he hadn’t put his cash to work, Buffett said:

“We haven’t done anything because we don’t see anything that attractive to do.”


“This is a very good time to borrow money, which means it may not be such a great time to lend money.”

There are several takeaways here.

The first is a point that I made last month: Even after the March tumble, stocks aren’t cheap. In fact, they’re still priced a lot more like a market top than a market bottom.

The second takeaway is that bonds aren’t exactly a screaming buy either. As Buffett put it, this isn’t such a great time to lend money.

In a normal, functioning market, interest rates reflect risk. You get rewarded with a higher interest rate for accepting greater credit risk and a longer time to maturity. But in its attempt to save the system from collapse, the Fed has massively distorted the bond market. Interest rates no longer reflect the risk being taken but rather the price at which the Fed is willing to buy.

Now, make no mistake. This isn’t a Fed-bashing hit piece. I understand why the Fed opened the floodgates the way they did, and I don’t think they had much of a choice if we are to be honest. Had the Fed not backstopped everything, we likely would have seen the financial system fail.

But that doesn’t mean we get a free lunch here. We will pay for the Fed’s move with lower bond returns, lower long-term growth and possibly with nasty inflation a few years down the line.

So, What Should You Do?

So, stocks and bonds are both expensive. Fantastic. What are we supposed to do?

I have one recommendation out of Buffett’s playbook. Most of us don’t have $137 billion laying around, but keeping a little more cash than usually on hand would seem like a good idea.

It also makes sense to prune your portfolio a little. Buffett dumped his airlines because he doesn’t have a good read on when their situation improves.

But at the same time, you don’t have to sell everything. Buffett still has a portfolio full of blue chips like Apple (AAPL), Coca-Cola (KO) and American Express (AXP).

I’d also add one final recommendation that the Oracle might disagree with. I think it makes sense to own a little gold. You don’t have to get carried away, but putting something like 5% of your net worth into precious metals gives you a degree of protection from currency instability should the Fed’s bailout efforts take a wrong turn.

The 60/40 Portfolio is Dead

The following first appeared on Money & Markets.

Responding to rumors that he had taken ill and died while on a speaking tour in Europe, Mark Twain told The New York Times: “The reports of my death are greatly exaggerated.”

Well, I don’t want to “greatly exaggerate,” but I think it’s fair to say that the 60/40 portfolio is dead. Or at the very least, it’s going to be on life support for a while.

It had a good run.

According to Vanguard, a portfolio invested 60% in stocks and 40% in bonds generated a compound annual return of 8.6% going back to 1926. That’s a stretch that includes the Great Depression, World War II, the stagflation of 1970s, the tech bubble and bust, and the 2008 meltdown.

It’s a portfolio that has clearly survived the test of time. And it’s easy to assume that it will continue to post numbers like these indefinitely.

Unfortunately, that doesn’t seem likely.

I’m no permabear and this isn’t an anti-buy-and-hold hit piece. I’m generally the optimistic sort, and when I err it’s usually on the side of being too aggressively invested, rather than too conservatively. But the numbers here are pretty straightforward. And they don’t look great.

Breaking Apart the 60/40 portfolio

We’ll start with the 60% invested in stocks, using the S&P 500 as a proxy.

As I wrote last month, the S&P 500 never got truly cheap during the coronavirus bear market. Yes, the market dropped 35% in record time, which brought it down to something closer to “fair value.” But at no point did it ever approach anything close to the valuation lows seen in previous bear markets.

Furthermore, those lows were short-lived. The market ripped higher in April, and today the S&P 500 is essentially at breakeven for the past 12 months.

The S&P 500 is trading at a cyclically adjusted price-to-earnings ratio (“CAPE”) of 26.5 today. If history were any guide, that would suggest annualized returns over the next decade to be close to zero.

Now, I’m the first to admit that historical comparisons should be taken with a grain of salt. Interest rates are lower today, which means that, all else equal, stock prices should be higher. The S&P 500 is also dominated by capital-light tech companies that should, all else equal, trade at higher valuations than clunky industrial firms.

I get all of that, which is why I think the S&P 500 will generate halfway decent returns over the next decade. But I still expect those returns to be lower than the historical average.

All About Bonds

But let’s say I’m wrong. Let’s say that it really is different this time and for reasons I can’t currently imagine, we really are in a period of permanently higher stock prices.

I actually don’t consider that idea to be crazy. Stranger things have happened.

But even if stock prices continue to push ever higher, there’s a big, gaping black hole where bond returns used to be.

The 10-year Treasury today yields 0.63%. A more diversified basket of bonds, such as the iShares Core U.S. Aggregate Bond ETF (NYSE: AGG) yields a little better at 2.6%. We’ll be generous and use that as our return assumption.

If we invest 40% of the portfolio in bonds, yielding 2.6%, and stocks generate 10% — which is generous given today’s valuations — that gets us a portfolio average of 7%.

That’s not all that bad. But again, it also assumes the market continues to perform in line with past returns, which is a stretch.

Let’s say instead that the stock market returns 5% per year going forward, rather than 10%. That knocks the returns of a 60/40 portfolio down to just 4% per year.

And let’s say the value investors are right and that stocks are priced to deliver essentially zero returns over the next decade. That knocks the return of a 60/40 portfolio down to just 1% per year.

This is why I really believe the 60/40 portfolio is dead, or at least dead for the next decade.

Again, this isn’t a bear hit piece. I’m not forecasting the stock market goes to zero or even that we retest the March lows. Maybe we do, maybe we don’t. Who knows.

Regardless, this should be a wake-up call. If your retirement planning “needs” an 8% return to be viable, you might need to consider working longer or cutting back some expenses.

You may also want to be a little more creative in your allocation. You can leave a good chunk of your investments in a 60/40 portfolio but also carve out some space for active strategies or for alternative investments, including gold or other precious metals.

But the worst thing you can do is carry on as if nothing has changed. Whether or not the 60/40 portfolio is dead, it’s certainly not priced to deliver the sorts of returns we’ve all become accustomed to.

The Best Chinese Stocks to Buy and Hold

The following is an excerpt from The 10 Best Chinese Stocks You Can Buy.

This a precarious time to be investing in China. But many Chinese stocks, particularly in the technology and service sectors, look attractive if you’re willing to deal with some volatility.

Even before the coronavirus outbreak, which originated in Wuhan province, relations between China and the West were strained. The U.S. and China have been engaged in a tit-for-tat trade war for most of the Trump presidency, and there is widespread fear in Western capitals that 5G telecom equipment manufactured by Huawei is capable of state espionage.

Trade tensions alone were reason enough to make many investors wary of Chinese stocks. Then the COVID-19 pandemic happened, exposing the risks of a globalized supply chain.

Consider Apple (AAPL). The world’s leading consumer electronics maker has been reporting supply disruptions since February stemming from Chinese factory closures, and JPMorgan recently estimated that the launch of the new iPhone, which usually comes out in September or October, might be delayed by a few months.

Going forward, a lot of companies might be reconsidering the merits of cheap Chinese manufacturing and opt to stay closer to home. But the truth is that China has long evolved past the smokestack stage of development. The country is a major technology and digital entertainment hub, even if the vast majority of its products and services are destined for domestic use.

You have to be careful when investing in Chinese stocks, as shareholder protections aren’t quite up to Western standards. Already this year, major accounting scandals have upended iQIYI (IQ) and Luckin Coffee (LK). But that’s a risk you take when you invest in emerging markets, and that’s why it’s important to diversify and avoid heavy concentration in any single stock.

Here are 10 of the best Chinese stocks on the market right now. Each is poised to do well no matter what happens next in the coronavirus and trade war sagas.

ZTO Express

If you like the idea of owning China’s Amazon, it only makes sense that you would also like the country’s version of United Parcel Service (UPS). Greater demand for e-commerce means greater demand for shipping and delivery services. It really is that simple.

This brings us to ZTO Express (ZTO), the largest player in Chinese express parcel delivery with a market share of 19.1% as of last year. The company has a fleet of more than 7,350 line-haul vehicles serving approximately 30,000 pick-up and delivery centers throughout China.

Like many Chinese stocks over the past few years, ZTO’s growth rates boggle the mind. Parcel volume jumped by 42% last year after jumping by 37% and 38% in 2018 and 2017, respectively. First-quarter 2020 volume figures aren’t available yet, but it’s likely that widespread lockdowns only made ZTO’s services all the more essential. Just understand ZTO might see activity similar to UPS in which a shift in consumer and product mix hamper profits in the short term.

China probably will record its first true recession in decades this year, but you’d never know it by looking at ZTO’s stock price. The shares have continued to push higher all year and are currently at all-time highs.

We don’t know a lot about what comes next in the post-coronavirus world. But it’s safe to assume that in any reality, ZTO and its peers deliver more parcels.

To read the rest of the article, see The 10 Best Chinese Stocks You Can Buy.