Where to Find Yield -- Investing for a Good Return - Part I

One of the aspects of our current economy that gets little mention in the media is the absence of the traditional safe investments that provide a reasonable return. There are likely millions of people who have saved throughout their lives for retirement with the idea that they will have income on their savings to supplement Social Security so as to allow for a comfortable existence. There are millions more who have put together funds for the college educations of their children in the expectation that money put aside while the child is an infant will grow until it is needed. For most of the last three decades, one could put money into a certificate of deposit guaranteed by the FDIC and earn 5%. It was a safe and reasonable return which encouraged folks to save. That is not true anymore. Most bank deposits pay returns of less than one tenth of a percent. Even certificates of deposit that tie the funds up for many years take the rate to slightly more than one percent. Folks who hoped to live off the income of their savings are out of luck. Parents who are saving for their children's education are similarly in trouble.

The main reason for this problem is the monetary policy being pursued by the Federal Reserve. The Fed has lowered short term rates to near zero. It has also reduced long term rates to historic low levels. The hope was to increase the housing industry by making mortgage rates advantageous, but it has not worked. Too few people qualify for the mortgages in the first place. The hope was also to encourage folks to refinance their mortgages to lower monthly payments so as to pump more money into consumer purchases. This helped for a while, but too many people can no longer qualify for a new mortgage for this to continue to help. Further, rates have now been so low for so long that nearly all the refinancing has already occured. The hope also was that low rates would allow cheaper credit for new businesses so as to encourage economic growth. This did not work since the Dodd Frank law pushed through by the Democrats place major obstacles in the path of new loans to small businesses. If these businesses could get the loans, the rates would be lower, but the government made sure that they could not get the loans.

We know from the Federal Reserve that it is going to continue with the current monetary policy for the foreseeable future. Rates are going to be low even though they are not helping much to pump up the economy. In that atmosphere, the question then is how can one obtain a decent return on one's investments. It is a question with a simple answer, but not an answer that most folks will like. The answer is that one must accept some risk in order to get a decent return. Let me explain:

Investing in a bank deposit insured by the FDIC had the lowest possible risk; there was a guarantee by the federal government for the funds. On the other hand, investing in a stock that pays a high dividend has two areas of risk: the stock could sink in a poor market and the company in which you invest could find itself in hard times. Buying a corporate bond also carries risk; the issuer could go under or interest rates could rise with the result that the price of the bond would fall. These are just examples, but the level of risk is present in every area where the return is decent. Indeed, there is now an additional level of risk that has come to the forefront, namely tax risk. In the next year, there is likely to be a change in the tax levels pertaining to various forms of investments. For example, taxes paid on corporate dividends are scheduled to rise from a maximum of 15% to a maximum of over 40% (including the new Obamacare taxes on this income). There has also been talk of keeping the maximum to 20%. No one knows for sure what will happen, and this uncertainty increases the risk.

There are, however, still areas in which one can find return.

Today, I will discuss safe corporate dividend stocks -- There are many corporations that pay high dividends. Many of these, however, are far from safe places to put one's money. One needs to look for companies that are in industries that are relatively safe from gyrations. Buying a company that makes the latest electronic devices is not what makes sense here; the market could shift and the company could fall. Similarly, buying stock in a company that is connected to commodities is also not the preferred course; if the market for the commodity tanks, the stock will as well. The company has to be in an industry with a product that will still be in demand no matter the state of the economy. Food is a good example of such a product. Another example is electric power or water.

One also needs to look for a company with a steady record of dividends. Many companies realize that their investors are seeking a steady and safe return through dividends. They respond by maintaining the dividends for so long as possible. Some other companies change their dividend policies often. I would stay away from these.

One also needs to look for a company that is growing both its earnings and its revenues. The dividend is great, but it will only continue if the company is prospering.

Here are a few examples of companies that meet these criteria:

a) Armanino Foods of Distinction (symbol AMNF) -- this is a small company that makes Italian foods and sauces. It pays a regular dividend that is currently 5.1%, but it also has paid special dividends on many occasions in the past. In 2012, the special dividend brought the rate paid to 6.3% based upon the current market price. The company also has been growing both revenues and earnings for many years, including right through the last recession.

b) BAB, Inc. (symbol BABB) -- this company franchises a few different restaurant concepts. It pays 6.6% with its current regular dividend. It also pays special dividends from time to time; indeed, there is a reasonable likelihood that BAB will pay a special dividend in December. The company is steady and earns enough to continue to pay the dividend. It has a new restaurant concept that it is currently franchising (a muffin and frozen yoghurt store) which will provide a significant boost to revenue and income if it is successful.

c) First Energy (symbol FE) -- this is an electric utility that currently pays a dividend of 5.1%. It is a huge company and it faces different challenges than the small firms just discussed. For example, one of the First Energy subsidiaries provides electric power in much of New Jersey. Its system was slammed by hurricane Sandy, but it seems to have responded to the outages and damage much better than PSEG, the other large New Jersey utility. First Energy also has a number of coal fired power plants, installations which all are on the target list of the Obama administration. That being said, however, First Energy seems positioned to deal with these challenges and to continue to pay its dividend.

d)Verizon Communications (symbol VZ) -- Verizon has changed itself from an old fashioned land line telephone company to a new version that provides cell phone service as well as internet/television/VOIP telephone services while phasing out the old land lines. It currently pays a dividend of 4.8%. The biggest area of growth for the company is its FIOS fiber optic system which is engaging in full competition with competing cable and satellite systems with some measure of success. For years, Verizon was growing with major capital expenditures to construct its systems. Now, however, the level of capex should decline and the profits on all the investments should be forthcoming.

Each of these companies have their own particular risks. Even so, using them a part of an investment strategy to increase yield should work. I strongly suggest that you investigate any of them, however, before investing in order to make sure that they meet your risk criteria.

In the next installment, I will talk about other categories of investments that can be used to get higher yields.