Looking to invest some extra cash? If you have money on the sidelines, figuring out where to put it can seem daunting in today’s market.
The global economy is growing, but sluggishly at best, and estimates have been coming down. The International Monetary Fund recently trimmed its 2013 growth forecast to 3.25%, with the U.S. coming in at a modest 1.85%.
Slower growth has pressured the price of gold and other commodities. And while some markets have rallied this year — notably the U.S. and Japan — others are faltering: Hong Kong’s Hang Seng index is down 1.7% and Brazil’s Bovespa index has slumped 9.5%.
Despite these challenges, some advisers see good opportunities for long-term investors. “There are going to be jitters in the marketplace,” says Rob Siegmann, an adviser with Financial Management Group in Cincinnati, Ohio. But stocks look attractively valued, he says, and “there are more positives than negatives” in the U.S. economy, including a real estate recovery and healthy corporate profits.
Against this backdrop, we asked some strategists and money managers where they would invest $50,000 now, looking for their best ideas in these uncertain times.
Here are some suggestions, based on our interviews and research. Where to invest depends on your tolerance for risk, other holdings in your portfolio and time horizon — the longer the better. However you go, you should keep your portfolio’s mix of assets in line with your long-term goals, says Siegmann. As always, you should do your own research or consult an adviser before investing.
Look for 'organic' growth
Despite the big gains in U.S. stocks this year, some market experts think there’s more upside ahead.
Veteran Wall Street strategist Ed Yardeni — a Yale-educated economist and head of Yardeni Research — has a year-end target of 1,665 on the S&P 500 (.SPX), up 5% from recent levels around 1,580. If "irrational exuberance" takes hold, stocks could exceed that target, he recently wrote in a client note. And he figures there's only a 10% chance of a "panic attack" in which stocks plunge.
Why the sunny outlook? The U.S. economy is "fundamentally sound, which is bullish for stocks," he notes. Foreign investors view U.S. stocks and the dollar as safe havens and are buying U.S. assets for "safe-keeping." And he figures investors will keep buying stocks as long as central banks in the U.S., Europe and Japan keep interest rates low and flood financial markets with money.
"My theory is that the U.S. may be going back to the future as investors around the world start to see similarities between the current decade and the 1990s," when stocks soared, he noted.
Granted, profits for S&P 500 companies are expected to grow only 4.5% this quarter on no revenue growth, according to Thomson Reuters I/B/E/S. About 57% of companies have missed sales estimates so far. And even some companies that have beaten forecasts — like aluminum supplier Alcoa (AA) — have seen their stocks slide.
One way to mitigate the downside: Look for stocks with strong "organic growth," says Eric Schoenstein, co-manager of the Jensen Quality Growth Fund (JENSX). These kinds of companies are growing due to strength in their core business, rather than "artificial" means like acquisitions or help from foreign currency exchange rates, he says. They can usually stay profitable in a variety of economic climates. And their stocks, while not the flashiest, tend to grow over time.
Three companies he likes are Nike (NKE), Colgate-Palmolive (CL) and Ecolab (ECL), a global maker of sanitation products. These companies operate in different industries but each has generated organic growth in various economic climates, he says. All three stocks pay dividends with Ecolab and Nike yielding 1.1% and 1.4%, and Colgate-Palmolive paying 2.3% at recent prices.
3 dividend ETFs
Stocks with healthy dividend yields have been strong performers in recent years, and some analysts see the trend continuing. Demand for dividends is likely to stay strong as long as the Federal Reserve and other central banks keep interest rates low, says John Kozey, a senior analyst with Thomson Reuters.
Kozey suggests focusing on stocks with below-average "payout ratios" — the percentage of earnings a company pays in dividends. Companies with lower payout ratios retain more of their profits, allowing them to increase dividends and grow the business over time. The sweet spot, he says, is businesses with above-average yields and below-average payout ratios.
Several ETFs offer exposure to dividend payers, providing a low-cost way to invest in a diversified basket of stocks.
The iShares Dow Jones U.S. Select Dividend Index Fund (DVY) follows an index of around 100 stocks that have grown their dividends over the past five years and had an average payout ratio of 60% or less. That's almost twice the 35% average payout ratio for dividend payers in the S&P 500, according to FactSet, a financial research firm. But that's still a reasonable level, says Kozey. The ETF recently yielded 3.7% and it costs 0.4% in annual expenses.
The downside: With 31% of its assets in utilities, the ETF may not offer as much growth as other funds.
The SPDR S&P Dividend ETF (SDY) focuses more on dividend growth, tracking an index of high yield "dividend aristocrats" — companies that have raised their dividends every year over the past 20 years.
These are "boring quality names," notes Morningstar analyst Samuel Lee, but they're likely to be solidly profitable in the long run. The annual expense ratio is 0.35%, on the lower end for similar ETFs.
The downside: The ETF doesn't yield as much as the iShares fund, currently paying 2.5%. It's relatively defensive with 18% in consumer staples companies.
Another option is to branch out globally. The iShares International Select Dividend ETF (IDV) tracks an index of foreign stocks with payout ratios below 85% and dividends above or equal to their three-year average. It mainly holds stocks in Australia, Europe and Canada, and it recently yielded 5.2%, according to iShares. The ETF costs 0.5% in annual expenses.
The downside: The ETF may be more volatile than a U.S. dividend ETF, and foreign companies are more likely to cut their dividends if profits wane, Morningstar analyst Patricia Oey wrote in a recent report. Foreign stocks can also decline due to weakness in foreign currencies.
Bonds: Stay short-term and consider bank loans
Quality corporate bonds and Treasurys may not yield much, but they can play a role in your portfolio as a shock absorber, dampening volatility and limiting losses if the stock market plunges, says Jim Miller, president of Woodward Financial Advisors in Chapel Hill, N.C.
Miller is sticking with high quality, short-term bonds for clients who want fixed income. Rising interest rates could pressure bond prices, he says, and longer-term bonds will get hit hardest in that scenario. Bond prices and yields move in opposite directions.
One top-ranked fund: Metropolitan West Low Duration Bond Fund (MWLDX). The fund returned an average 5.6% over the past three years, beating 96% of peers, according to Morningstar. It only yields 1.5% but its short duration of 1.2 years is a sign it probably won't lose much value if interest rates rise modestly.
"Floating rate" funds may also be worth considering. These funds invest in bank loans taken out by companies to fund their operations or make an acquisition. Interest rates on the loans are variable and tend to reset with market rates. And in contrast to traditional bonds, bank loans generally benefit from rising interest rates because their coupon payments rise as well, according to a 2012 research paper by Deutsche Bank Asset Management.
Top-rated funds, according to Morningstar, include Fidelity Floating Rate High Income Fund (FFRHX), Oppenheimer Senior Floating Rate Fund (OOSCX) and RidgeWorth Seix Floating Rate High Income Fund (SAMBX). Yields on these funds range from 2.5% to 4.3%.
The downside: Floating rate funds are riskier than quality corporate bond funds and can tumble in price, like other risky assets. The higher yielding funds may take more credit risk. The Oppenheimer (OOSCX) and RidgeWorth (SAMBX) funds each cost $75 to buy on the Fidelity platform.
Daren Fonda is Senior Writer and Investing Columnist with Fidelity Interactive Content Services, a provider of objective investing content on Fidelity.com. He does not own any of the securities mentioned in this article.