2 Ways To Profit From Accelerated R&D Spending

Genia Turanova's picture

Wednesday, December 7, 2016 - 11:30am

by Genia Turanova

Recently, I discussed the encouraging growth in research and development spending in the most recent U.S. GDP report issued by the Bureau of Economic Analysis (BEA). While GDP growth for the third quarter of this year was a modest 2.9%, R&D spending growth came in at an astonishing annualized rate of 17%.

The significance of this bodes well for the economy as a whole, in that increased R&D spending leads to new products, processes, and overall economic expansion. And although I mentioned this development to my Game Changing Stocks newsletter subscribers, various opportunities tied in with this type of spending also exist for my other publication, The Daily Paycheck. Best of all, many of these opportunities out-yield the market, and the two of my best ideas currently offer an average yield greater than 6%.

Digital Realty Trust (NYSE: DLR)
Recently, the combined selloff in bonds and pullback in tech stock prices has created an opportunity in DLR shares. Organized as a real estate investment trust (REIT), Digital Realty owns, acquires, develops, and manages technology related real estate. In short, its business is to provide data center solutions to many industries that depend on data usage, collection and storage every day to operate normally. The company works with tenants across a wide spectrum of industries from cloud and IT services, to financial services, healthcare, and manufacturing sectors. It's as high-tech as a REIT can get.

Since mid-year, DLR shares have pulled back around 17% from their peak price of $113.21. However, before that peak, the shares rallied nearly 60% in 2016. The pullback, therefore, may allow some investors to start building positions in this strong company. Today, propelled by the strong R&D spending across many industries and the ensuing advances in technology, the need for offsite data storage and management solutions continues to expand. As it grows, Digital Realty should be a direct beneficiary. Shares currently trade around $91 with a 3.8% dividend yield.

Tekla Healthcare Opportunities Fund (NYSE: THQ)
The Tekla Healthcare Opportunities is a closed end fund (CEF) that concentrates on the healthcare sector but seeks both current income AND long term capital appreciation. The fund's top 10 holdings reflect this dual goal, and are well diversified around such well-known healthcare, biotech, and pharma names such as Gilead Sciences (Nasdaq: GILD), Merck (NYSE: MRK), UnitedHealth Group (NYSE: UNH), and Abbott Labs (NYSE: ABT).

Due to the many uncertainties related, in part, to drug pricing and regulatory pressures, the entire healthcare sector has had a rough time most of this year. THQ shares were off as much as 19% during the first quarter of 2016 and, after gaining 30% from their trough, gave up another 20% leading in to the home stretch of the election season. With all these swings, amplified by the CEF structure of THQ, the shares have declined some 8% for the year -- but this return does not account for dividends.

In addition to getting at least some regulatory relief, pharma, biotech, and medical device makers are notorious R&D spenders, which means the industry is poised to benefit from the fruits of this type of spending, too. The extra growth related to the extra innovation should give the sector an extra boost down the road.

Other aspects of healthcare are also heavily regulated, so it's no wonder that optimism surrounding a relaxation of that pressure, as well as the relief about the drug pricing issue, has given the fund a 10% bounce. But at $15.80, shares still trade at an 8.5% discount to their net asset value. Plus, they pay a monthly distribution that annualizes at 8.5%.

Risks To Consider: With DLR, the risks are related to its business execution and competition. With THQ, the fund covers a regulated and competitive sector and price volatility could be too much for some investors. The fund's dividends are paid out of income and capital gains, so if the sector or the market decline, this would present a risk to dividends. Also, the fund's mandate allows the use of leverage in the portfolio, which is used to enhance yield and returns. While this is a cheap tool in a low rate environment, rates are now on the rise. This could potentially affect distribution levels.

Action To Take: While the increase in R& D spending sets the stage for gains in Game Changing Stocks, these two Daily Paycheck stocks, DLR from the Fast Dividend Growers list and THQ from High Yield Opportunities, seem to be uniquely suited to benefit as well. The two sectors represent attractive long-term value for income-oriented investors, and the current price levels for both offer attractive entry points.

In The Daily Paycheck, I seek to build a balanced and growing income portfolio based on three pillars of dividend investing: Fast Dividend Growers, High Yield Opportunities, and Steady Income Generators. To learn more about how my simple strategy can let you sit back, relax, and generate thousands of dollars in steady income, click here.

Genia Turanova does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.