Investment strategies in a sluggish economy

Dividend stocks

In a weak economic environment, stock prices are unlikely to rise much, and bond yields are likely to stay low. So you want to find other ways to produce income. One way is dividend stocks. Some conservative utility stocks are paying dividend yields of more than 4 percent, and some blue-chip multinationals offer yields above 5 percent.

Several studies indicate dividends have historically provided about 50 percent or more of the stock market's total return.

"If we're in a zero percent world (for stock market appreciation), and you can get 4 (percent) to 5 percent return up front, anything you can do beyond that (when stock prices finally rise) will just add to your positive rate of return," Litchfield says.

But be careful in your stock selection. A high dividend yield can stem from a falling share price, which in turn could stem from problems at the company. A corporation that is devoting too much of its earnings to dividends -- or worse, borrowing money to pay dividends -- may not be paying them much longer.

"It's definitely a case of buyer beware," says Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, N.Y.

Master limited partnerships

Master limited partnerships represent another asset class that provides strong income. MLPs are companies that trade like stocks. The vast majority of MLPs are engaged in the transportation, distribution and storage of energy products -- natural gas in most cases. MLPs now yield more than 6 percent on average, according to the Alerian MLP Index.

MLPs also provide a tax advantage because most of your quarterly income comes in the form of return of capital rather than in dividends. Therefore, the income isn't subject to tax. Many MLPs are natural gas pipeline companies with long-term contracts, guaranteeing you income for years.

Demand for energy can obviously wane when the economy is weak, but natural gas has increased its share of the total electricity generated in this country to 24 percent from 17 percent 10 years ago, according to Solaris data. "And almost every (presidential) administration has promoted domestic energy production, so the wind is behind your back," Ghriskey says.

But realize you'll have to fill out copious K-1 tax forms, and tax rules make it unwise to hold MLPs in a retirement account. Also, the Alerian Index has more than doubled from its March 2009 low, so it's unclear how much upside is left for MLP share prices.

Foreign bonds

While it will be difficult to find many bonds in the U.S. with attractive yields in a moribund economy, that probably won't be the case overseas. This is true especially in some emerging markets where economies are booming.

Bonds in countries such as Brazil offer far higher yields than their counterparts in the U.S. You'll want to purchase bonds in a fund, as buying them individually is generally prohibitively expensive. You can buy funds that specialize in developed country or emerging markets bonds.

With the dollar likely to drop further amid weak economic conditions, you'll also gain a currency advantage in funds that don't hedge their foreign exchange exposure, Holtzman says. That's because the shares of these funds will be worth more in dollar terms as foreign currencies rise.

Bur remember that foreign markets -- particularly emerging markets -- can be quite volatile, and there's no guarantee your foreign bond fund will produce a positive return.


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