(MONEY Magazine) – Q. With everyone concerned about the future of oil, I'm looking for a fund that invests in alternative energy, like solar or wind power. I found one called New Alternatives, but its 1.4% expense ratio and 4.75% load seem high. HOWARD TENDLER VALLEY COTTAGE, N.Y.
A. You're right, New Alternatives isn't cheap. It's also pretty small, with just $46 million in assets. Its goal is to invest in socially responsible companies in the business of so-called green energy, including the solar and wind power you're interested in. Unfortunately, there are very few pure-play companies in such (slowly) emerging technologies.
But if you think about alternative energy in terms of viable fuels beyond oil, one commodity is already plentiful and profitable: natural gas. North America has decades worth of it in the ground, and it is both cheaper and more environmentally friendly than oil. There are a handful of relatively low-risk American companies with significant natural gas reserves, including Burlington Resources (BR), Anadarko Petroleum (APC), Devon Energy (DVN) and Apache (APA).
Or you can go the no-load fund route. Fidelity Select Natural Gas (800-343-3548) holds many reserve-rich companies that I like, plus some that are involved in gas exploration and production. Its annual expenses are 1.2%. The FBR American Gas Index fund (888-888-0025) invests in the member companies of the American Gas Association—some of which are also in the New Alternatives fund. But it has a better performance history than the green fund and a lower expense ratio of 0.9%.
Q. Michael, in your September story "Dividends Rule!" you recommended stocks with high dividend yields. But you didn't discuss real estate investment trusts, some of which have yields in the high teens. What am I missing? DOUG WALKER BOSTON
A. In general I like stocks that pay above-average dividends, because last year's tax cut has made those dividends more valuable. Most investors now get to keep 85¢ of each dollar of dividends vs. as little as 65¢ previously. As a result, high-dividend stocks have been beating the market, and I think that's likely to continue. When investors realize how much more today's dividends are really worth—this is still sinking in—they'll be willing to pay higher prices for the stocks that pay them.
Real estate investment trusts are a different story. For one thing, most of the distributions paid by REITs don't qualify for the new, low 15% tax rate. But the main reason I've been avoiding REITs is that I think interest rates are likely to rise over the next five years. Higher mortgage rates could undermine real estate prices, both commercial and residential. Granted, real estate prices hardly ever decline as a whole nationwide, so local growth in certain hot markets will continue and some REITs may prosper. But it seems like an extra, unquantifiable risk.
Q. I'm a 19-year-old college student trying to invest for the first time. Where's the best place to start? THERESA MCCOY DETROIT
A. Most people shouldn't start out by trading individual stocks. Instead, put a small amount of money every month into an S&P 500 index fund. Once you have a stake in the market, you will watch it closely and see the world through the eyes of an investor.