Betting on the Dow and real estate stocks
September 13, 2012 9:50PM
Updated: October 15, 2012 9:17AM
D ear Mr. Berko: A money manager I know is very certain that the Dow Jones industrial average will be much higher this year and next year. Because the presidential administration and the Federal Reserve are working together and must work together, he thinks the Dow could rise to 16,000 in 2013. So he has all his clients fully invested, including the $187,000 I have with him. My account is up 17 percent since August 2010, and I was thinking of cashing out, but his enthusiasm is catching. He says corporate revenues and profits are much higher and will continue to be higher in 2013, which is why the market will continue rising. Please tell me what you think.
Also, I want to invest $15,000 in some real estate stocks as an inflation hedge and for income. Are there any real estate issues paying at least 5 percent that you would recommend?
Dear FL: The stock market could continue higher. But you must be mindful of six things: 1) This is an election year. 2) The market almost always rises in an election year. 3) Most politicians are liars. 4) Economic statistics published by every administration are always presented in a manner that benefits the party in power. 5) The Fed is not independent and does what the administration instructs it to do. 6) Nobody knows what the Dow will do next year — not the pope or even I.
You should also know that most corporations reporting higher profits and higher profit margins were able to do so by cutting costs and raising prices. Nongovernment economists tell us that since the recession supposedly ended, 83 percent of growth in gross domestic product was fueled by higher prices and 17 percent derived from an increase in demand. Proof of this pudding is that the number of retail sales units is less than it was before the recession. So consumer spending is higher because unit prices are higher.
And corporate profits are higher because corporations are able to cut their costs by reducing payroll.
If your broker is stone-ginger certain that the Dow will rise next year, then he’s a fool, but at least he’s a happy fool. Still, there are many good folks who agree with him! But I think the Dow will decline in 2013, no matter who takes over the Oval Office.
Real estate investment trusts that own real property may be good investments in the coming years if 1) prices are affordable, 2) consumers have spendable income, 3) banks are willing to lend, 4) demand becomes strong and 5) the economy does not flounder. I recommend the following:
National Retail Properties (NNN — $31) owns 1,520 free-standing retail properties in 47 states, all of which are net leases. NNN yields 5.2 percent, and the dividend, which has increased for 23 consecutive years, isn’t subject to federal taxes.
Urstadt Biddle Properties (UBA — $19) owns 7 million square feet of community shopping centers and office buildings in hoity-toity counties in Connecticut, New York and New Jersey. The 5.3 percent dividend is not subject to federal taxes and has increased modestly annually since 1998.
Universal Health Realty Income Trust (UHT — $42) owns medical office buildings, rehab and acute care hospitals, and surgery and children’s care centers. The dividend yields 5.9 percent, has increased for 24 consecutive years and isn’t subject to federal taxes.
Realty Income (O — $41.50) pays a monthly dividend, and that has increased every year since 1994. The dividend yields 4.3 percent and isn’t subject to federal taxes. O owns more than 2,000 properties in 49 states; they are leased to regional and national chains.
Invest an equal amount in each issue and you will earn a 5 percent current return on a $15,000 investment. However, those dividends will reduce your basis every year, which has the effect of converting ordinary income into capital gains.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.