Securities we like that probably would benefit if the federal government were to stop taxing dividends of tax-paying corporations include John Hancock Patriot Premium Dividend II (PDT; in the running for the top-ten longest mutual fund names) and Franklin Utility (FRUAX).
PDT is a closed-end fund, the price of which hovers on either side of its NAV. (I mention that because I generally eschew closed-end funds selling at a premium or even close to NAV because they so easily slip into discount mode. I make an exception in this case because I find preferred stocks especially attractive but want the diversification offered by a mutual fund.) The fund is modestly leveraged (which helps to cover its not-inconsiderable management expenses) and the majority of its preferred stocks have been issued by banks and utilities. Current yield is about 7.5%.
Franklin Utility (FRUAX, the advisor class shares with no load and reduced management expenses) has been a stellar performer in its class mainly because it has sidestepped most of the telecom havoc of recent years. That's fine with me because what I want to own is a nicely diversified, reasonably well-researched list of viable gas and electric companies that pay some dependable dividends. The yield on FRUAX is more than 5%. Public power companies' stocks have been pretty beaten up in recent years, which is when I like to get interested. We need what they do, and it seems unlikely that they will have to contend with cheap imports. Furthermore, with only cursory research on my part, it seems that most utilities are likely to be repairing their balance sheets rather than plowing capital into new facilities for a while. This should make their dividends more secure and could even boost their collective P/Es.
Yield Ho!
It took Christopher Columbus a little over five weeks from the time he left the Canary Islands until the lookout shouted, "Land Ho!" someplace in the Bahamas. From what I've read, he had some pretty disgruntled sailors on his hands after five weeks of nothing but salt water, and he was mighty glad to hear that announcement. Advisors and their clients have been adrift without encouragement for more than three years, and many of those clients feel every bit as mutinous as Columbus' crew. And every day some analyst or journalist shouts, "Land Ho!" but the solid ground of a rising stock market keeps turning out to be a mirage.
I personally think our ship is still a good distance from the promised land, but I believe a lot of clients will be able to continue the journey if we just provide some food and water in the form of positive returns. When I see a range of 5% to 12% cash returns available for the taking, I just want to shout from the lookout, "Yield Ho!"
J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.