{"id":21511,"date":"2011-06-06T09:54:17","date_gmt":"2011-06-06T13:54:17","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=21511"},"modified":"2011-06-06T09:54:17","modified_gmt":"2011-06-06T13:54:17","slug":"this-pick-pays-6-and-protects-you-from-one-of-the-markets-biggest-worries","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/06\/06\/this-pick-pays-6-and-protects-you-from-one-of-the-markets-biggest-worries\/","title":{"rendered":"This Pick Pays 6%… And Protects You From One of the Market’s Biggest Worries"},"content":{"rendered":"

By Carla Pasterna, DividendOpportunities.com <\/strong><\/span><\/a><\/p>\n

This Pick Pays 6%… And Protects You From One of the Market’s Biggest \t\t\t\tWorries<\/strong><\/span><\/p>\n

As an income investor, should you be worried \t\t\t\t\tabout inflation?<\/span><\/p>\n

You bet.<\/p>\n

On an annual basis, prices were up 2.7% in March. That’s the \t\t\t\t\thighest mark since December 2009.<\/p>\n

Cotton prices are up more than 170% in about a year. Oil had \t\t\t\t\tincreased by 40% through mid-April. Copper, corn and wheat \t\t\t\t\tprices registered double-digit gains in the first three \t\t\t\t\tmonths of 2011 alone.<\/p>\n

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In the past six months Kraft (NYSE: KFT<\/a>), Kellogg’s (NYSE: K<\/a>) and McDonald’s (NYSE: MCD<\/a>) have all put through price \t\t\t\t\tincreases to consumers. Nike (NYSE: NKE<\/a>) and Whirlpool \t\t\t\t\t(NYSE: WHR<\/a>) have done the same.<\/span><\/p>\n

Walmart (NYSE: WMT<\/a>) CEO Bill Simon has said he thinks \t\t\t\t\tinflation “is going to be serious.” He warned that recent \t\t\t\t\ttransportation-related cost hikes will be passed through to \t\t\t\t\tshoppers.<\/p>\n

That means the amount of income you’re earning may not keep \t\t\t\t\tpace with how much prices are rising — especially if you \t\t\t\t\tare retired and living on a fixed income.<\/p>\n

If you own long-term bonds, such as 30-year U.S. Treasuries, \t\t\t\t\tyou could see their prices fall dramatically as yields rise \t\t\t\t\tto keep pace with inflationary expectations.<\/p>\n

This is what I’ve been telling my High-Yield Investing<\/em> subscribers. I’ve also been \t\t\t\t\ttelling them to look into what I think is the perfect \t\t\t\t\tsolution if inflation rises… and a good place to keep your \t\t\t\t\tmoney, even if it doesn’t.<\/p>\n

The Perfect Asset Class If Inflation Strikes — Or Not<\/strong>
\nThat solution is an asset class known as bank loan funds<\/em>. \t\t\t\t\tThese funds buy pieces of loans made by major banks such as \t\t\t\t\tJP Morgan (NYSE: JPM<\/a>) to large corporate borrowers.<\/p>\n

The loans are issued at floating rates, which reset every 60 \t\t\t\t\tto 90 days. So if inflation increases and interest rates \t\t\t\t\trise, you’ll benefit from earning higher rates. And even at \t\t\t\t\tcurrent low interest rates, I’m finding securities, like the \t\t\t\t\tEaton Vance Floating Rate Fund (NYSE: EFR<\/a>)<\/strong>, that \t\t\t\t\tinvest in these floating rate bank loans and offer steady \t\t\t\t\tyields of around 6%.<\/p>\n

But what if inflation isn’t a problem and interest rates \t\t\t\t\tdon’t rise dramatically to battle it?<\/p>\n

Worst case, you would be paid to wait, reaping high yields \t\t\t\t\tof 6% for your patience. At best, you would receive both \t\t\t\t\thigh yields and capital gains as inflation expectations \t\t\t\t\tramp up.<\/p>\n

Are there risks to this strategy? Yes. A double-dip \t\t\t\t\trecession triggered, say, by oil prices rising to $150 per \t\t\t\t\tbarrel, could lead to higher default rates and a decline in \t\t\t\t\tthe price of bank loan funds. Still, this may be a risk \t\t\t\t\tworth taking while you can still find funds trading at a \t\t\t\t\tdiscount to their historical valuations.<\/p>\n

Those valuations are creeping up as investors catch on to \t\t\t\t\tthis sector. In just the first two months of this year, bank \t\t\t\t\tloan funds attracted $10 billion, according to Morningstar. \t\t\t\t\tThat puts them on track to far surpass the record $16 \t\t\t\t\tbillion of inflows for all of 2010. If inflation does \t\t\t\t\taccelerate, and rates increase, senior loan funds \t\t\t\t\tshould only see more popularity.<\/p>\n

If you invest now, you might be able to earn a nice capital \t\t\t\t\tgain in addition to a high yield and added safety from inflation.<\/p>\n

Good Investing!<\/span><\/p>\n

<\/span><\/p>\n

\"\"
\nCarla Pasternak’s Dividend Opportunities<\/em><\/span><\/p>\n

<\/em> Disclosure: None<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Cotton prices are up more than 170% in about a year. Oil had increased by 40% through mid-April. Copper, corn and wheat prices registered double-digit gains in the first three months of 2011 alone.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-21511","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21511","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=21511"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21511\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=21511"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=21511"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=21511"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}