When the most conservative investors in the world start buying stocks because bond yields are so low, you have to wonder when the spiral comes to an end. Now is the time to start looking for safe havens.
A Scary Article
“Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities.” That’s the lead sentence from a recent Bloomberg article. If it doesn’t scare you, it should.
To be fair, it isn’t as if the banks have completely lost their heads and gone 100% into equities. Of the banks that have said they own or plan to own equities, the percentages are relatively low. The percent increase, on the other hand, is large. For example, Japan was reported to be on the way to doubling its equity exposure, via exchange traded funds (ETFs), over the next year or so.
The Most Conservative
When the most conservative investors start to make the shift to equities to find higher returns and the market is at or near all time highs, you have to start thinking about downside risk. Unfortunately, if you are trying to live off of dividend income, you need to be invested. Here are some stock ideas for investors concerned about the current trends:
An Integrated Oil Giant
Royal Dutch Shell is an integrated oil and natural gas giant. It is among an elite group of companies in the world, but is trading at a steep discount to the highest quality names. The interesting thing is that the company is financially strong, has a long history of dividend increases, and looks to be well positioned for the future. It appears to be very similar to Exxon Mobil Corporation (NYSE:XOM), but with about twice the dividend yield.
The reason for Shell’s discount pricing is twofold. First, it has material exposure to Europe. That’s the company’s home market, even though the Shell nameplate is ubiquitous in The United States. Europe is struggling through a very difficult period, marked by the constant concern that the euro will wind up a failed experiment.
Second, it has made a big bet on U.S. natural gas. New drilling techniques have taken natural gas prices to historically low levels. Although prices have picked up recently, they are still so low that many projects just aren’t profitable. However, Shell expects natural gas to supplant coal as the number two energy source in the world. That seems likely and would change the now questionable gas push into a long-term winner.
With an around 5% dividend yield, downtrodden Shell is probably the best risk-adjusted option in the oil patch.