HOW TO GET 12% TODAY These eight mutual funds and stocks offer investors the chance for safe, high returns over the coming year.
(MONEY Magazine) – Remember those good old days of double-digit yields on Treasuries, bond mutual funds and even bank certificates of deposit? Well, that was the early 1980s. You're in the single-digit '90s now, with long-term Treasury bonds yielding 7.8%, money-market funds paying less than 5% and CDs delivering what investor Bruce Parker (shown with his family at right) calls ''brutally poor returns'' of around 4%. Today, only stocks offer you an excellent shot at double-digit returns from dividends and share-price gains. And this may surprise you: even with the market at record highs, you don't have to take big chances. Far from it. You can still find low-risk issues that could return 12% or more annually. These safe stocks pay dividend yields of 4% to 5%, and analysts forecast that their earnings will grow at least two percentage points a year faster than inflation, which is likely to stay below 5%. With such stocks, or the mutual funds that hold them, you could see $10,000 invested today swell to nearly $18,000 by 1997 and to more than $31,000 by 2002. Of course, there may be temporary setbacks. Some strategists foresee a sharp drop from here before the stock market continues its advance to a 3400 Dow or above. Geraldine Weiss, a specialist in blue-chip stocks who edits the newsletter Investment Quality Trends, believes that the Dow could fall more than 10% to 2800 sometime this year. In that case, total-return stocks with dividend yields of 4% to 5% would be the smart choice, as demonstrated by recent research done by Scudder Stevens & Clark, a money-management firm in New York City. Scudder's study found that among the 1,000 largest U.S. stocks, the prices of shares yielding at least 50% more than average were about 20% less volatile over the past 21 years than the group as a whole. ''In bad times, high yields protect stocks against big price drops,'' Weiss explains. As a result, over the 21-year period, the top yielders returned an average of 14.4% annually, vs. 13.1% for all 1,000 stocks. To find low-risk investments that have the potential for 12% total returns, MONEY canvassed two dozen analysts and fund managers. Their recommendations fell into eight categories -- four types of funds, which are the best choices if you have less than $20,000 to invest, and four stock groups. For both funds and stocks we discuss the least risky types first, and in each category we single out a top pick.
High-Yield Stock Funds Managers of these funds look first for stocks with dividend yields that surpass the S&P 500's by 50% or so and then mix in bonds and preferred shares to further reduce their portfolios' volatility. ''The approach of these funds fits in well with the goals of the average American who wants to avoid losses,'' says financial planner David Kliff of Buffalo Grove, Ill., a Chicago suburb. Top pick: Income Fund of America (5.75% load; 800-421-0180), which yielded 7.4% for the 12 months through Jan. 30 and returned 23.8% last year. Despite the stiff initial sales charge, Income Fund's long record of low-risk, high- return performance makes it worth considering. Over the past 10 years, the fund has returned an average of 15.8% annually after deducting the 5.75% sales fee, vs. 14.6% for the equity fund average, where loads are not deducted. Despite its name, Income Fund of America recently had more than half its $3.5 billion portfolio in stocks, yielding about 5.5%, with the rest in bonds and cash. The fund's emphasis on high dividends sometimes leads it to shares poised for big gains. ''High yields often signal low prices,'' says George Miller, one of the fund's managers. For instance, during the bear market of late 1990, the fund invested heavily in temporarily depressed growth stocks. From October 1990, when the market hit its low point, to the end of 1991, those holdings gained an average of 40%. On Kliff's recommendation last year, corporate sales executive Bruce Parker of Buffalo Grove, Ill. (pictured on page 77) added $4,500 of the fund's shares to the $10,200 of high-yielding electric and telephone utility stocks in his three young children's college portfolio. Says Kliff: ''This fund made sense for the Parkers' college planning because it builds value steadily without wild price swings.''
Value Funds These portfolios hold stocks whose prices are low compared with the per-share value of their earnings or assets. Some of the funds' managers also buy bonds and preferred shares to boost yields. In 1991, value funds -- sprinkled throughout the fund industry's equity income, balanced and income categories -- lagged the average diversified equity fund by about nine percentage points, and red-hot small-company funds by 24 percentage points. In today's high- flying market, however, value funds look like the best choice. ''For conservative investors, the safest strategy is to buy laggards, since last year's winners look risky,'' says Sheldon Jacobs, editor of the advisory newsletter No-Load Fund Investor in Hastings-on-Hudson, N.Y.
Top pick: Wellington Fund (no load; 800-662-7447), which yielded 5% for the 12 months through Jan. 30 and returned 23.7% last year. Over the past decade, the fund met or beat the 12% total return goal in seven years; its average annual gain for the period was 16.2%. That record prompted Paul and Katharine Dastugue, pictured on page 79, to move money from maturing CDs into Wellington last July. The balanced fund now has 61% of its $3 billion assets in stocks and the rest in corporate and government bonds of more than 20 years' average maturity. For the fund's stock portfolio, manager Vincent Bajakian says he buys only shares that he believes can outpace Standard & Poor's 500-stock index over the next 12 to 18 months. In screening stocks, he looks first for issues with price/earnings ratios that are lower than their historical average relative to that of the S&P 500. A recent analysis by Morningstar set the average P/E ratio of Wellington's stocks at 17.1 vs. 23.3 for the S&P 500, based on earnings for the past 12 months. Bajakian then focuses on those issues that also have high yields. For instance, he recently bought major oil company stocks when they were paying 4.7% on average -- or 1.8 percentage points more than the S&P 500. ''That is about as wide as the spread between oil and S&P yields ever gets,'' says Bajakian, who believes oil stocks could gain 25% if crude prices stabilize $1 to $2 above the recent $19 a barrel. Energy stocks are Wellington's largest single industry holding, accounting for 16% of the fund's equity investments; financially strong banks make up another 12%. All together, Bajakian's stocks recently paid 4% -- a third more than the S& P 500. High yields make the fund's price almost 40% less volatile than the average equity fund's. Despite the bear market in the second half of 1990, for example, Wellington lost only 2.8% for the year, compared with 5.3% for the average equity fund. ''If a correction comes, you won't get killed with Wellington,'' says Jacobs.
Mid-Cap Funds Most total-return funds concentrate on the shares of some 310 U.S. companies with market values above $2 billion. But a few hunt among companies with market capitalizations of $200 million to $2 billion. These so-called mid-cap firms have been attracting more money from pension funds and other institutional investors since Standard & Poor's launched its MidCap 400 index in June 1991. The pros' money has helped push up prices: last year, the index's 46.6% return trounced the large-cap S&P 500, up 30.5%. The share prices of funds that focus on mid-cap companies tend to bounce around more than blue chips do. But a balanced fund that holds bonds as well as mid-cap stocks can limit risk to a level that's suitable for conservative investors and still provide 12% returns. Top pick: Fidelity Balanced Fund (no load; 800-544-8888), which yielded 4.7% for the 12 months through Jan. 30 and returned 26.8% last year. ''Fidelity Balanced is a good way for conservative investors to diversify,'' says financial planner Neil Kauffman of the Philadelphia firm of Kauffman & Drebing. With its $812 million in assets recently divided 35% in stocks, 55% in bonds -- mostly with maturities beyond five years -- and 10% in Treasury bills, Fidelity Balanced is less than half as volatile as the S&P 500. The fund's typical stockholding has a market value between $750 million and $1 billion. Fund manager Robert Haber looks for undervalued stocks as measured by their cash flows -- earnings plus non-cash items such as depreciation. His biggest holdings, at 8% of the portfolio, were companies that make industrial products. These stocks include Briggs & Stratton, $975 million in revenues, a manufacturer of gasoline engines. ''I am looking for financially strong companies that can maintain their dividends,'' says Haber. ''But I don't buy a stock unless I am convinced it can be 20% higher in 12 months.''
Funds with Convertibles Convertible bonds and preferred stocks can be exchanged at the owner's option for a specified number of common shares. In the meantime, a convertible typically pays investors a higher yield than the common while sharing in price gains if the stock rises. Because of the detailed analysis involved in buying individual convertibles, most individuals invest in them through mutual funds. Top pick: Lindner Dividend Fund (no load; 314-727-5305), which yielded 8.6% for the 12 months through Jan. 30 and returned 27.4% last year. ''We recommend Lindner Dividend for conservative investors interested in the higher income from the convertibles and other preferred stocks the fund holds,'' says San Francisco investment adviser Debra Wetherby. While the fund returned 91% as much as the average convertible fund that Morningstar followed last year, Lindner Dividend risked only about half as big a price drop. Roughly 25% of the portfolio is in convertibles; the rest is divided among common stocks (12%), corporate bonds with a six-year average maturity (20%) and nonconvertible preferred shares (43%). Fund manager Eric Ryback favors common stocks and convertibles that are followed by few analysts. With convertibles and other preferred shares, he looks for issues paying 8% or more. With common stocks, he buys out-of-favor companies where he believes earnings are about to rise sharply. His recent common-stock holdings include issues such as Asarco, a $2.2 billion producer of copper and other metals, that could be especially big beneficiaries of an improving economy. Ryback believes Asarco's 1992 earnings could come in at least $1 higher than the consensus figure among analysts of $1.56 a share.
Electric Utilities Despite the industry's stodgy image, securities analysts look for double-digit returns from several electric utilities. Here's why: Recently, the 24 companies in Standard & Poor's electric utilities group yielded an average of 6.4%. Furthermore, if rates on long-term Treasuries, now 7.8%, edge down close to 7% in the next three months, as forecasters such as Peter Hegel of fixed- income money manager Van Kampen Merritt expect, the share prices of utilities could rise another 6%. Historically they have moved about that much for each half-point change in long-term rates, according to research by money- management firm Federated Investors in Pittsburgh. In addition, utilities' share prices rise when the companies boost their dividends. ''If two stocks have equal yields, investors will pay more for the one with higher dividend growth,'' says manager Christopher Wiles of Federated's Liberty Utility Fund. Rising dividend and utility stock prices over the past 20 years have helped the Off-Line Investment Club, pictured on page 81, achieve 12% annual returns. Top pick: Utilicorp United (recently traded on the New York Stock Exchange for $28.50; 5.6% yield). With $1.1 billion in annual revenues, Utilicorp provides electricity to customers in eight midwestern states, including Iowa, Kansas and Missouri. This diversification keeps Utilicorp shares from being hit hard if, say, a particular state regulatory commission turns down a rate increase. Moreover, the company is likely to raise its $1.60 dividend by 5% to 6% a year, says Wiles. ''Utilicorp's total-return prospects are among the industry's strongest.''
Telephone Stocks Few stock groups currently yield more than the seven regional Bell companies -- an average of 5.5%. Not all these phone companies, however, have sufficiently strong growth prospects to pay double-digit total returns. ''Going for the highest yielder may mean you won't get much more than that,'' says analyst John Bauer at Prudential. He points out that with state regulators rarely approving rate hikes, companies can boost revenues only by attracting new subscribers. In fact, several other analysts choose a non-Bell competitor as the best opportunity for double-digit returns. Top pick: GTE Corp. (NYSE, $31.50; 5.4% yield). Because of rising revenues from its cellular-telephone business and declining interest expenses as it pares debt, $22.2 billion GTE could post 10% annual earnings growth through 1995, compared with 6% for the typical Bell regional, says analyst Marianne Bye of Lehman Bros. Analysts estimate that GTE's cellular revenues will grow by 25% a year, at the same time that the company will be cutting its marketing costs. As a result, Value Line analyst Steven Halper believes that GTE could increase its $1.75 dividend by 7.4% this year. Lehman Bros.' Bye thinks that GTE stock could rise 20% to $38 a share within the next 12 months.
Oil Stocks For only the sixth time in 20 years, the average dividend yield of the world's 18 biggest oil companies recently topped three-month Treasury bill yields -- 4.9% vs. 3.8%. The last five times that happened, oil stock prices rose an average of 12.9% over the following three months. This time, however, Prudential analyst Frank Knuettel thinks that oil stocks may remain depressed a little longer -- until the second half of the year. McDonald & Co. analyst Jack Aydin recommends that investors favor oil producers that also refine and market petroleum products. His reason: these companies would profit from higher prices for gasoline and heating oil even if the price of crude, recently $19 a barrel, remains weak for a year. Top pick: Texaco (NYSE, $59.75; 5.3% yield). Both Aydin and Knuettel recommend the $38 billion company, partly because of its above-average yield. Aydin calculates that higher prices for gasoline and heating oil could boost Texaco's earnings 22 cents, or 5% from 1991's $4.42 a share, and that a 1 cents rise in the price of gasoline would add 16 cents, or 3.6%. ''I can see capital appreciation of 15% for Texaco stock,'' says Aydin, ''and a total return in 1992 of 20%.''
Real Estate Investment Trusts The depression in commercial real estate gives gutsy real estate investors a terrific opportunity to cash in on the economic recovery. Individuals can best do it through real estate investment trusts (REITs), which pool money from many investors to buy properties or make mortgages. Financially strong REITs are expected to earn double-digit returns even without rent hikes by buying fully occupied neighborhood shopping centers and other properties for half what it would cost to build new ones, analysts say. As a result, REIT shares, which yield 7% on average, have rebounded. For example, the National Association of REITs Index, which tracks 134 trusts, has soared 34% from its low in October 1990. Even so, Jon Fosheim, a principal at REIT research specialist Green Street Advisors in Newport Beach, Calif., believes investors can get double-digit returns on selected issues. Among the strongest REITs are those that lease nursing homes and other health-care facilities to private or public operators. Top pick: Nationwide Health Properties (NYSE, $28; 7.7% yield). Unlike some REITs, Nationwide already is assured of earning its declared dividend of $2.22 a share at 1992 lease levels, says Fosheim. Of its $325 million in assets, 95% are accounted for by 111 nursing homes in 26 states. Moreover, Nationwide's debt is only 7% of its total capital. And Fosheim forecasts Nationwide's cash-flow growth -- the crucial factor in REIT performance -- at 5% or more annually over the next three to five years. He figures that Nationwide shares are undervalued by as much as 10% and could top $30 by year-end. ''This stock has a potential total return of at least 12%,'' he says.