High-yield/macroeconomics (fka YIELD)

[Bio_pete]

If Recession Comes, You Can Still Build Wealth: John F. Wasik

By John F. Wasik

Sept. 4 (Bloomberg) -- If the U.S. housing bust triggers a recession, you can still profit in the financial markets.

Investment advisers tell their clients to buy bonds when the stock market is in a prolonged tailspin.

The conventional wisdom is that about 40 percent of your portfolio should be in bonds, yet that wouldn't give you complete sanctuary since corporate and mortgage debt has been pummeled as corporate borrowing costs increased when asset-backed securities were contaminated by defaulted subprime mortgages.

While Treasuries are certainly profitable if rates drop, you will need an extra layer of insulation in your equity holdings -- earnings-rich stocks that pay dividends and are priced lower relative to their peers. Finding growth outside the U.S. is also essential.

One school of investing says you will suffer less volatility and gain income through high-dividend stocks in tandem with bonds. Another desirable trait that could be added to that philosophy: established non-U.S. companies.

For now, a select group of dividend-growing non-U.S. stocks appears to have dodged the maelstrom triggered by subprime mortgage woes. Most are going about their business conservatively and are glad to reward investors with consistent dividends at reasonable share prices.

Vodafone's Return

One example is Vodafone Group Plc, the world's largest mobile-phone company. The stock has had a total return of 47 percent in the past year, and sports a dividend growth rate of 32 percent over the past half-decade and an estimated price-earnings ratio of 14.4, according to Bloomberg data through Aug. 31.

A similar company is Manulife Financial Corp., Canada's largest insurer by assets, which has had a total return of 16 percent. With a P/E ratio of 14.6 and dividend growth rate of 25 percent, the firm has been untouched by the U.S. mortgage and housing meltdown.

You can do even better. I ran a search on my Bloomberg to determine which stocks posted dividends of 2 percent or better; were bargains with price-earnings ratios of 10 or lower; and were up at least 10 percent this year. I turned up 622 companies.

The figure would have been higher if the bubble-like Chinese markets were included in the search. Most of the picks on this screen are outside of the U.S.

Picking individual stocks that are bucking the U.S. slump isn't the goal. And waltzing blindly into a single security or sector to grab dividends is often perilous. You would do much better if you held a large basket of these kinds of companies.

Flight From REITs

Jumping into one dividend-rich sector isn't the answer, either. Just look at the recent decline in Real Estate Investment Trusts, which not only have paid generous income, they gained ground during the last market downturn.

Investors have been fleeing REITs, and mutual funds that invest in them, because of concerns that the U.S. home-sales decline will spread to the commercial market.

REITs have climbed 80 percent over the past five years, as measured by the Bloomberg REIT Index. Now they seem to be headed south. The index slid 16 percent during the last six months.

Of course, there's nothing wrong with focusing on income. If you are within two years of college tuition bills or a property down payment, capital preservation is a must.

In that case, take a look at federally insured certificates of deposit. Yields range from 4.85 percent to 5.50 percent, depending on the term of the certificate, according to BanxQuote, a savings service.

Overseas Growth

One common mistake is to focus too much on one's home country and ignore the growth occurring from Dublin to Taipei.

Mutual funds that have thrived outside the U.S. market include the Janus Overseas and the American Century International Opportunities funds.

American Century is up 18 percent this year while the Janus fund has climbed 11 percent.

Either fund would be a good choice to represent non-U.S. stocks as they have beaten more than 90 percent of their peers.

For an even broader sampling of world markets, consider the Vanguard Total International Stock Index Fund. It invests in three other Vanguard index offerings covering European, Pacific and emerging markets and is a fixture in my Roth 401(k) retirement account.

Are you nearing retirement or just risk-averse? After all, one objective is to reduce your stock investments and other risky assets by diversifying.

Diversify in Bonds

Say you wanted to increase your bond holdings and invest in a wide variety of debt. A well-diversified choice would be the Vanguard Total Bond Market Exchange-Traded Fund.

It aims to track the Lehman Brothers Aggregate Bond Index, a big basket of taxable U.S. bonds. A similar vehicle is the iShares Lehman Aggregate Bond Fund.

Neither fund will thrill you with its returns over the past year, although performance isn't the point, as these kinds of funds are income-focused.

Why even consider these vehicles? As the U.S. stock market struggles to stay in positive territory -- the Standard & Poor's 500 Index has risen about 4 percent this year -- the iShares fund has gained 3 percent. That's some consolation in a turbulent climate for stocks.

Don't let gloomy market forecasts put you off your main mission of trying to capture growth and income. There's more safety in numbers, that is, large baskets of different kinds of securities.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aI3fQ2cK7RZI&refer=home