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What To Buy In A Tough Market For Income

02/10/10 03:27:36 PM
by Koos van der Merwe

Analysts are at loggerheads when it comes to market direction. The bears are shouting sell, but the bulls are saying that when everyone sells, that's the time to buy! So what should you do?

Security:   AW.UN.BPF.UN.PZA.UN. KEG
Position:   Accumulate

When times are tough, the secret is to buy. Famed investor Sir John Templeton taught us that, telling us that during the Great Depression, he bought 100 shares of every company he wanted to own. His millionaire status proved that his strategy was right.

But what do you do if you are in your 70s and do not have the time or the patience, for that matter, for a long-term hold? What if you need the dividends to live on? You can do two things. You can either spend hours looking at every company that pays a good dividend, or you can buy preferred shares that you are convinced will not default. You analyze the company and then with your heart on your throat, buy the stock. Then again you can buy an exchange traded fund (ETF) that invests only in dividend-paying companies or preferred shares, and pass the most of the risk onto, hopefully, a clever manager.

FIGURE 1: CPD ETF. Claymore Canadian Preferred Share exchange traded fund (ETF).
Graphic provided by: MetaStock.
One such company is Claymore S&P/TSX Canadian preferred share (Figure 1) (CPD-T). The present yield is 5%. Note the flag that has formed with a target of $19.71. The problem is the low volume (not shown), which suggests that a buy is a long-term hold, with all stock owners holding the share with the hope that the manager will always perform. Then again, is 5% a decent yield, especially with interest rates? This suggests that they could start rising as the recent US auction of 10-year notes, as suggested by pulling in a high yield of 3.692%.

Personally, I am staying away from Treasury bills and other government bonds with low yields. When times are tough, people are inclined to look for good food at low prices.

The Claymore preferred stock disturbs me because the rate is so low, so I am of the opinion that we should build our own house of interest/dividend- bearing stocks with a yield above 7%. In Figure 2 are four stocks that could be the foundation for that house.

So here's a look at some income trusts on the Canadian market. They are the KEG (yield 11.3%), Pizza-Pizza (PZA) (yield 13%), Boston Pizza (BPF) (yield 11.10%), and A&W (AW) (yield 7.7%). All four are income trusts, which means that in 2011 the scenario changes in that they will lose their income tax advantage as income trusts. So for a short-term hold, the income looks very good. What do the charts say about capital growth?

FIGURE 2: A&W, PZA, BPF, KEG COMPOSITE. Here's a composite chart of A&W, PZA, BPF, and KEG, income trusts on the Canadian market.
Graphic provided by: MetaStock.
Figure 2 is a composite chart of all the four companies and shows how they are currently pausing after a strong rise. The indicators and the rapid relative strength index (RSI) are all falling, with the exception of the indicator on the A&W chart, which has given a buy signal. Note too how all the stocks appear to be consolidating above the rising stop indicator on the chart.

Constructing your own portfolio of Income-bearing stocks can be challenging but also highly profitable. Here are four to start with. Enjoy the challenge.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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