4 High-Yield, Crash-Proof Investments

Even as stocks reach record highs, there’s a growing sense of fear among investors that the market is setting up for a drop. The S&P 500 has surged 20% over the past year, taking stocks to 31 times cyclically-adjusted earnings despite a lackluster economic backdrop and a Federal Reserve that’s withdrawing monetary stimulus.

Professional money managers have been slowly moving to cash, with Bank of America’s fund manager survey showing cash positions at highs not seen since 2001. 

I’ve had a back-and-forth conversation with a financial advisor friend for the past several months. The nearly nine-year bull market defies any kind of rational portfolio investing based on fundamentals but is still just as strong as it has been since 2009. The anxiety has gotten so bad that my friend has 40% of managed money in cash, and clients aren’t too happy that they might be missing out.

But there may be a way to protect your portfolio and still earn a return on your money. I researched different asset classes for correlations with stocks and performance over the previous two bear markets. What I found were two investments classes with solid cash yields and that may not fall as much as regular equities when a correction finally comes.

#-ad_banner-#‚ÄčThese Two Assets Could Be The Answer To Yield And Protection
It turns out there are two asset classes that might provide a solution. Both pay solid cash yields on top of price returns that do not move perfectly with stocks. 

Investments in these assets could provide a return opportunity higher than cash or bonds but offer some protection from falling stock prices should the bull market come to an end.

I measured the correlation of master limited partnerships (MLPs) and real estate investment trusts (REITs) versus the S&P 500 over three periods: over the last year, during the year to March 2009 and over the two years through September 2002.

Remember, correlation is how closely the returns of one investment follow returns of another. In this case, we’re looking at how closely the returns of MLPs and REITs follow the stock market. 

MLPs have seen their correlation with stocks fall in both of the last two market panics. They have had a 0.49 correlation with stocks over the last year compared to 0.45 during the dot-com bust and just 0.25 during the 2008 crash. 

REITs have been only slightly more correlated with stocks over the last year compared to MLPs. The nature of the last recession meant REITs saw a sharp selloff along with stocks and the correlation increased, but the relationship between stocks and REITs decreased during the worst two years of the tech bubble burst.

4 REITs And MLPs To Protect Your Wealth
The Alerian MLP ETF (NYSE: AMLP) has struggled since the 2014 crash in oil prices but still pays a 10.3% yield on the MLPs held in the fund. Growth in U.S. energy production means more products to be transported and stored by MLPs, which avoid corporate taxes by paying out at least 90% of profits. MLPs are less volatile than the broader energy sector because part of revenue is based on volume rather than commodity prices. 

Williams Partners (NYSE: WPZ) has reduced its leverage over the last couple of years and may not need to issue as much equity over the next few years. This means the current yield of 6.1% could go even higher, with distribution growth in the 5% to 7% range. 

Williams Partners is heavily tied to the liquefied natural gas (LNG) export story, with agreements to supply liquefaction terminals with natural gas. The U.S. Department of Energy estimates that global LNG demand could double by 2040, with the United States becoming a net exporter of natural gas for the first time since 1957. 

The Vanguard REIT ETF (NYSE: VNQ) is higher by 2.7% over the last year on top of a 4.7% yield. REIT valuations have been trading at an average discount of between 3% and 5% to net asset value since late last year. This contrasts with a historical average of a 3% premium to NAV, implying at least a 6% upside on a return to average. This gain would be in addition to the REITs’ 20-year compound average return of 9%. 

HCP Inc (NYSE: HCP) is one of the largest healthcare-related REITs, with exposure to senior housing facilities, medical offices, hospitals, and life science properties. The company spun off some of its skilled nursing facilities late last year in a move to focus on its core properties and simplify the portfolio. 

Tenant leases stretch decades and are not reactive to changes in the business cycle, which means revenue is extremely stable. Shares pay a 5.7% yield and should continue to benefit from aging demographics in the United States.

Correlations less than 1.0, a perfect correlation between two investments that follow each other exactly, don’t necessarily mean these assets will provide absolute protection for your assets in a stock market crash. The MLP index still lost 31% of its value over the year to March 2009 as stocks fell by nearly half. 

The REIT index lost 59% of its value during the last recession though the next recession isn’t likely to hit real estate nearly as hard. Both indexes managed to provide returns, 30% for MLP investors and 27% for REITs, during the dot-com bust as the broader index plunged by 43% over the two-year period.

Risks To Consider: Correlation is based on historical data and can change if risks line up to drive all asset prices lower in tandem. Assets still won’t be perfectly correlated but may be more so than they are now.

Action To Take: Investors worried about stock prices and an eventual correction can seek safety in assets like REITs and MLPs. These asset classes can also provide high yields and capital appreciation.

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