UTG - This Is How I Am Investing $100000 In 2024

2024-01-02 07:35:00 ET

Summary

• Where I would prioritize my investments in 2024 to achieve strong returns.
• We look at two key areas in the market that deserve focus.
• The big question for investors: What will happen with interest rates?

Co-authored by Treading Softly

I've often discovered that when buying something that needs to be assembled, two groups of people are represented by those buyers. The first group is the ones who diligently follow the instructions, read the manual, and do everything step by step in a very calculated manner. The other group, potentially, who has more experience in assembling things in general, will plunge ahead with no instructions, no manual, and just wing it. There's a potential that both groups will end up with a properly assembled item in the end, whether by luck, experience, or careful diligence.

When it comes to the market, many investors will strike it out on their own and try to succeed, some simply by winging it, buying stocks and shares of company names that they recognize or that they just have a gut feeling about. Others will diligently read and research and learn the nuances of the field and then, when they feel confident, try to strike it rich. One thing that I often come across with new retirees or novice investors is that some of them simply just want to be told what to buy. For that reason, we do provide a Model Portfolio with over 80 picks, their risk rating, and buy-under prices, something to give them a guide.

Today, I want to take a slightly different approach instead of just spoon-feeding information out to the public. I want to present a few different areas in the market that I think are well worth looking into and considering in 2024. We're going to strike the middle road between telling you what exactly I think you should buy and you figuring it out on your own, floundering in the water.

Let's dive in!

Fixed Income - Bonds, Baby Bonds, and Preferred Securities

When interest rates rose heavily, the fixed-income sector was slaughtered. This makes sense if you think about it. If you can buy Treasury notes with zero credit risk and get a 5% yield, why in the world would you want to buy a preferred security from a regional bank with a 3% yield at par? The answer is, you wouldn't. So, as interest rates rose rapidly, many preferred securities saw widespread selling. This applied to bonds and baby bonds. The entire sector sold off heavily.

So why do I like it in 2024? Well, to be honest, I enjoyed the sell-off throughout 2023 because I'm a net buyer in the market. While the market might be selling in a concern or a panic, I'm willing to buy these elevated yields and then just enjoy the income for years to come. I was able to buy some bank preferred securities that have a 3% yield at par and now I'm sitting on a 6-7% yield. The bank is unlikely to ever call them because interest rates are likely not going back to zero anytime soon. I can just simply enjoy the income for decades to come.

For many, though, who like to trade more frequently or move in and out, the fixed-income sector is primed to offer high yields and double-digit capital gains should interest rates be cut. The real question with 2024 that hangs over everyone is what are interest rates going to do? Are they gonna remain elevated? Are they going to be raised further or going to be cut? Many believe that the interest rates are going to be cut multiple times in 2024, and if you are one of those people, the fixed-income sector is where you should be spending most of your money. If you're concerned that interest rates will remain elevated or get hiked further, owning a good chunk of fixed income is going to provide you great income no matter what prices do, and when interest rates do eventually get cut, you'll enjoy the gains of that time. It's delayed gratification.

Ideas for your consideration:

Entergy Louisiana, 4.875% Collateral Trust Mortgage Bonds Series due 9/1/2066 ( ELC ) - annualized yield to maturity 5.8%

Aspen Insurance Holdings Ltd, 5.625% Perpetual Non-Cumulative Redeemable Preference Shares ( AHL.PR.D ) - yield 6.7%

Either way, if I had $100,000 to throw in the market today, a good 50-60% of it would be thrown into this sector right out of the gate.

REITs and Utilities

Not entirely identical, but very similar to fixed income - it would be REITs and utilities. Both of these are considered to be "bond alternatives" and often trade with prevailing interest rates as much as fixed income can and does.

Many utilities and REITs have been unfairly beaten down, not because of the operations of the company themselves, but because of the yield that they offer. Investors who are attracted by these two types of investments are those who are buying for the dividends or looking for income in the long run. The utilities that were hit the hardest were utilities with the lowest yields already or the utilities that were carrying more debt than perhaps they should, with interest rates climbing so strongly.

This has left these two areas of the market awash with deals for those who are willing to buy now and wait for interest rates to decline. Furthermore, if you're worried about the economic sensitivity of the market, being that a recession would impact a lot of discretionary spending and consumer goods, owning utilities or real estate are two prime sectors that are often more immune to economic cycles than others. People will pay their power bills to keep their lights on, and companies will pay their power bills to continue to operate, all the while stopping other discretionary spending to keep themselves and their companies alive. This is one reason why I like owning "essential income" or essential companies that provide services that cannot be survived without.

When interest rates do decline, we expect to see that these sectors will enjoy strong recoveries and, in many cases, will then offer yields much less attractive than they are currently.

Ideas for your consideration:

Realty Income Corporation (O) - Yield 5.3%

Reaves Utility Income Fund (UTG) - Yield 8.5%

Canadian Utilities Limited (CDUAF) - Yield 5.5%

Conclusion

A big question that is overhanging the market in 2024 is what is going to happen with interest rates. The expectation of a recession has never truly gone away. But recently, the market has decided to start gambling on the expectation that interest rates might be cut sooner rather than later. The hope here is that the Federal Reserve can pull off what's called a "soft landing," where we don't feel as strong of a recession, but inflation is able to be brought back to its target zone and interest rates can begin to be cut. More likely, what is going to occur is a harder landing, where we are seeing economic pain before interest rates are cut. Because of the concern over the potential of a harder landing than many expect, it's better to play it safer and to buy bond alternatives or even fixed income, which can provide you with a stable, steady income stream now and then reward you richly when interest rates are cut in the future.

When it comes to retirement, the last thing you want to do is to be gambling and swinging for the fences. It's important to be focused on your goal; as a professional income investor, that goal for me is to have a portfolio that generates outstanding income, regardless of the economic situation or the political environment in which I find myself. You can achieve true financial security and financial independence by having a portfolio that richly rewards you for your ownership. That rich reward can be through monthly and quarterly dividend checks pouring into your account, allowing you to have the financial means to pay your bills and enjoy your hobbies.

That's the beauty of my Income Method. That's the beauty of income investing.

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