As an income investor, should you be worried aboutinflation ?
On an annual basis, prices were up 2.7% in March. That's the
highest mark since December 2009.
Cotton prices are up more than 170% in the past year. Oil had
increased by 40% through mid-April. Copper, corn and wheat prices
registered double-digit gains in the first three months of 2011
alone, from the same period last year.
In the past six months,
), Kellogg's (NYSE:
have all put through price increases to consumers.
have done the same.
CEO Bill Simon has said he thinks
"is going to be serious." He warned that recent
transportation-related cost hikes will be passed through to
This means the amount of income you're earning may not keep pace
with how much prices are rising -- especially if you are retired
and living on a fixed income.
If you own long-term bonds, such as 30-year U.S. Treasuries, you
could see their prices fall dramatically as yields rise to keep
pace with inflationary expectations.
This is what I've been telling my
subscribers. I've also been telling them to look into what I think
is the perfect solution if inflation rises... and a good place to
keep your money, even if it doesn't.
The perfectasset class if inflation strikes -- or
The solution is an
known as bank loan funds. These funds buy pieces of loans made by
major banks such as
JP Morgan (NYSE:
to large corporate borrowers.
The loans are issued at floating rates, which reset every 60 to 90
days. So if inflation increases and interest rates rise, then
you'll benefit from earning higher rates. And even at current low
interest rates, I'm finding securities, like the
Eaton Vance Floating Rate Fund (NYSE:
, which invest in these floating-rate bank loans and offer steady
yields of about 6%.
But what if inflation isn't a problem and interest rates don't rise
dramatically to battle it?
Worst case, you would be paid to wait, reaping high yields of 6%
for your patience. At best, you would receive high yields AND
capital gains as inflation expectations ramp up.
Are there risks to this strategy? Yes. A double-dip
triggered, say, by oil prices rising to $150 a barrel, could lead
to higher default rates and a decline in the price of bank loan
funds. Still, this may be a risk worth taking while you can still
find funds trading at a discount to their historical valuations.
Valuations are creeping up as investors catch on to this sector. In
the first two months of this year alone, bank loan funds attracted
$10 billion, according to Morningstar. That puts them on track to
surpass by far the record $16 billion of inflows for all of 2010.
If inflation accelerates and rates increase, then senior loan funds
are likely to see more popularity.
Action to Take -->
If you invest now, then you might be able to earn a nice capital
gain in addition to a high
and added safety from inflation.
-- Carla Pasternak
P.S. -- If you're an income investor, why would you buy a stock
yielding 2% when you can find one paying 26% right here? Watch this
presentation for more.
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.