At Edgemoor Investment Advisors, we look broadly across various asset classes to find opportunities to invest for income.  Most financial advisory firms limit their income investments to Treasurys and corporate bonds.  While these have been an important component of our portfolios recently, the more consistent mainstays of our income strategy are preferred stocks, master limited partnerships, utilities, and other securities with high yields.

The mix of securities and asset classes that we buy changes over time, depending on market conditions.  For example, beginning in the fall of 2008 we saw an opportunity to buy high-quality bonds, mostly investment grade but also some high yield, at significant discounts as a result of the turmoil in the credit markets. We stuck with relatively short maturities and companies with strong balance sheets, and we were able to find bonds with yields to maturity (the combination of coupon payments and the expected change in price to par value over time) often in the neighborhood of 7%-8%, but varying depending on the specifics of the security.

Now that credit markets have improved and, as a result, bond spreads have narrowed, we no longer find as many securities with these characteristics.  Today we typically must either accept a lower yield for the same credit quality, or buy lower-quality bonds to get a yield comparable to what we were finding previously.  That’s not to say that there are not still attractive corporate bonds available – many of the bonds we find now are suitable for our portfolios.  However, the rare opportunity presented amidst the market crisis has largely gone away.

We are now returning our primary income focus to the other types of securities that we have long held in our portfolios.  Preferred stocks, including those issued by real estate investment trust (REITS) and some financial institutions, offer attractive yields in the range of 7%-8%.  Master limited partnerships, which are usually energy producers or pipeline companies, offer yields of 6%-8%.  Finally, common stocks such as gas and electric utilities and telecom carriers, among others, provide dividend yields in the 4%-6% range.  While these securities do not mature like bonds, we like the combination of high yields, rising dividends/payouts, and potential for capital appreciation.

This universe of our potential income investments, much broader than what most financial advisors consider for their income portfolios, provides a variety of attractive opportunities to generate income for our clients.  We welcome your comments and thoughts.

– Paul Meehan

Yesterday, Kristina Peterson of the Dow Jones Newswires reported that the Federal Reserve will cease all purchases of home-loan-backed securities- the likes of which it purchases in bulk from government controlled Ginnie Me, Fannie Mae, and Freddie Mac – next month, as previously announced.

While this decision could lead to an increases in mortgage rates, markets are anticipating the Fed’s move and, as a result, there may be no dramatic bump in rates at the end of March.

Edgemoor Managing Director Jordan Smyth was a source for the article:

…latest Fed statements show no wavering on the program’s Mar. 31 expiration date and the market is now beginning to anticipate its end.

“It shouldn’t be a surprise to anybody,” said Jordan Smyth, managing director of Edgemoor Investment Advisors in the Washington area. The central bank has made it a point to communicate clearly to the market what to expect and then deliver on that promise, he said, “rather than have people think if things don’t work out perfectly, there’s another bailout coming.”

As the Fed continues to scale back efforts such as these – pulling back the throttle of government-induced economic stimulus – it will be very interesting to note the changes to the economic landscape. So far, Chairman Bernanke has been appropriately measured in his approach, and we’ll keep a close eye an any future developments as they arise.

Greetings from Washington, the headquarters of Snowmaggedon, Snowpocalypse, and Snoverkill, some of the names given to the massive storms that have rocked this area over the past week.  More snow is coming on Monday, but only a light dusting compared to what we’ve just seen, and we fully expect kids to be back in school on Tuesday!

In between the storms, I managed to escape to Orlando for the TD Ameritrade Institutional 2010 National Conference, which TD Ameritrade management claimed was the largest ever gathering of independent advisors.  This annual conference, like those hosted by other custodians, provided an excellent opportunity to learn about current investment advisory trends and products, hone skills related to our work, and network and share best practices with other advisors from around the country.

The mood among attendees and presenters was optimistic, due to the general agreement that the worst of the financial crisis is behind us and the economy has turned.  Issues remain, but advisors and their clients are becoming more confident and willing to increase exposure to the markets, despite the turmoil of the past few years.  Based on asset flows, it is clear that clients are increasingly attracted to the advantages offered by independent firms (called Registered Investment Advisors by the SEC) as compared to large brokerage firms, including the absence of conflicts of interest and, in many cases, significantly lower costs.

A highlight of the event was the discussion between former presidents Bill Clinton and George W. Bush.  These two one-time rivals have been working together to coordinate relief efforts in Haiti and have become friends (so they claim).  Both seemed relaxed and were very entertaining, sometimes playing to stereotype.  Clinton typically gave long, detailed, multi-part answers to the questions asked, which sometimes left me dazed and confused.  Meanwhile, Bush often answered in a shorter, more direct manner, even saying in one case, “I don’t know what you’re talking about.”  They share concerns about global political trends, particularly regarding terrorism and the volatile situation in the Middle East, but both also believe in the ability of our country, and the global economy, to surmount obstacles and regain strength.

One of the key themes of this and other similar meetings I have attended recently was the growing importance of new methods of communicating with  clients and sharing information, including blogs and social networking tools such as Twitter, LinkedIn, and Facebook.  As readers of this blog know, we have recently begun experimenting with some of these tools in an effort to facilitate more frequent interaction with clients and friends.  We have also found these outlets to be valuable sources of information and insight into the markets, the economy, and financial planning issues.  Please continue to check this blog for updates and provide us with your comments and feedback.

I returned from the conference invigorated and excited to share what I had learned, implement new ideas, and continue to talk with and learn from the advisors I met.  I landed at the airport in Washington soon after the snow began to fall, just in time to get back to the office and prepare for a weekend of shoveling.  Like the economy, conditions in my driveway and the streets have improved, but there’s still some work to do.