Investors should steer their carts down the dividend, international, and muni aisles, says Morningstar's Christine Benz.
Jason Stipp: I am Jason Stipp for Morningstar, and welcome to the Friday Five.
It's Black Friday, and in the spirit of this famous shopping day, Morningstar director of personal finance Christine Benz has five items for your investment shopping cart.
She's here with me to offer the details on those.
Thanks for joining me Christine.
Christine Benz: Jason, Happy Black Friday.
Stipp: Thank you. So, five things for your investment shopping cart. The first one should be something of great interest to all the dividend fans among our viewers, and we know there are a lot of them. What's idea number one?
Benz: Well, there are two funds actually that I would bring to you, Jason. One is Vanguard Dividend Growth VDIGX; this is a fund that focuses on companies that have raised their dividends year-after-year. And the other counterpart to that would be Vanguard Dividend Appreciation, which you can buy either in index fund VDAIX or exchange-traded fund VIG format.
The reason I flag these right now is that I run these screens almost every week and look for specific attributes, and it seems that almost whatever screen I create, whether I'm looking for high-quality dividend-paying funds or looking for funds that have recently earned our gold rating from our analyst team, or looking for funds with a high percentage of wide moat [stocks], these funds always come to the top. So, I think, that they really look good from a number of angles right now.
One thing I would anchor this recommendation in is that our analysts--our equity analysts--think that the large caps look relatively cheap, as they have for some time, and these funds focus on large caps, and they also focus on companies that our analysts think have wide moats.
So, I think a number of things to like, as well as with them being Vanguard funds , they are all very low cost.
Stipp: So, certainly hitting on a number of very attractive cylinders there.
The second one, Christine, will be taking our cart down an aisle that a lot of investors probably don't really want to go down right now, and that's in the international space. Why should investors be looking at these international investments right now?
Benz: Well, we're closing in on year-end; this is the time of year when a lot of investors rebalance their portfolios. The idea is that you're sending money to your laggards and stripping back on your [winners]. I think if any of us are looking at our portfolios right about now, chances are we are seeing our international-stock funds and international stock holdings depressed overall. That's probably an area you'd want to add to in the spirit of looking at the lowest valuation securities in your portfolio.
International funds right now that we like a lot … we recently came out with our new Analyst Ratings, and I did a quick screen for some of the gold-rated international funds. Oakmark International OAKIX is one of our longtime favorites, Dodge & Cox International DODFX, and Harbor International HAINX--those are three I would name.
One thing I like about them, Jason, is that they focus the lion's share of their assets on developed-markets securities, but they have historically gone into emerging markets. I think if, at some point, we continue to see emerging markets sell off, they could get very cheap and could be very attractive to some of these valuation-conscious funds.
Stipp: So, some very good managers there. We know that there are some trouble spots globally, but that can also create opportunities for these really skilled managers to go in and make some bets.
On the individual stock side, Christine, did you see if there were any individual international stocks that investors might want to consider?
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Benz: I did, not many Jason, but one that jumped to the top of the list and dovetails with a theme that our equity analysts have been sounding for a while is Novartis NVS, the health-care giant. It rates very well on our stock screens. It has a wide moat, and it also has currently either a 4 or 5-star rating, I can't number which, and it does bounce around a little bit based on the stock price.
But our analyst Damien Conover does think that the company has a very attractive product pipeline. So, he thinks that there is a lot of upside in its share. So, that's one of our favorite foreign stock holdings for people who are inclined to buy individual stocks.
Stipp: So, now we're going to take the cart down another aisle that potentially is a little bit messy, but could present some opportunities for investors: the muni-aisle. What should investors be looking for if they're looking to shop for municipal bond funds right now?
Benz: One reason I would call it out right now is that the key way in which you shop for any bond's attractiveness is that you take a look at its yield, and one thing that you can see when you look at munis versus taxable bonds of the same general interest rate sensitivity and credit quality is that you can see the munis in some case are trading--the yields are on par with what you get from a taxable bond fund. So, that makes it a pretty attractive entry point, and you don't even need to be in the highest tax bracket to have that muni bond or muni bond fund make sense for you.
So, if you're trying to make this decision, we have a tool called Bond Calculator, which has a tax equivalent yield function. It lets you compare the yields of two competing instruments--a taxable bond or bond fund and a municipal bond--to see which is more attractive once you factor in your tax bracket. That's the starting point. But I think that if most investors run the analytics on this, they'll see that the munis can be very competitive on a yield basis once the tax criteria are factored in.
Stipp: So, one thing that we do know is when you see higher yields, sometimes it can mean that you are taking on higher risk, and a lot of times really high-yield investments could also come with a lot of risk. What should investors keep in mind about controlling that risk in the municipal space, given that we have seen some continued headlines this year about trouble with budgets in municipalities?
Benz: Right. So, to me, Jason, that is a strong call to stay diversified in terms of issue, certainly, so you probably don’t want to opt for individual bonds, and also the bid-ask spreads can kill you as a small investor. But you also want to stay geographically diversified unless you live in a very high tax rate state, such as New York or California. Two shops we like an awful lot for municipal bonds are Fidelity and Vanguard; those are really our two favorites at this point.
Stipp: So, let’s take the cart down more of a macro aisle now, and talk a little bit about inflation. This is something that investors, they should always take their shopping cart down there at some point. So, what are you thinking about what kinds of inflation-fighting tools you should be putting in that shopping cart right now?
Benz: Especially for retired investors, making sure that you have that component of inflation protection is really important.
My standard prescription for inflation fighting would be Treasury Inflation-Protected Securities or TIPS. The problem is, I think, by many measures TIPS are looking pretty overvalued, at best maybe fairly valued. So, we want to be careful about syncing your whole inflation-fighting portfolio into TIPS at this juncture, and maybe think about diversifying it a little bit.
I did a video with Marta Norton a couple of weeks ago where she shared a few ideas for inflation protecting a fixed-income portfolio. Bank-loan funds were at the top of her list. She also likes a slice of high yield. It's kind of intuitively appealing why those might fit within an inflation-fighting tool kit. So you think of an improving economic environment when high yield would thrive would often be when inflation is on the move. So, you might see some ability to combat inflation from bank loans and high yield.
Also I think equities, over time, offer you the best opportunity to outstrip inflation. I think there are again, dividend-growth securities, companies with the ability to increase their dividends over time, make a really nice component of that inflation-fighting toolkit.
Stipp: So, speaking of equities, some folks who might be going out on Black Friday will see those stores packed, and they might wonder … if this retailer is a good investment. It seems to be, hopefully, they are doing good business on Black Friday. What should investors think about if they are considering putting a retailer in their investment shopping cart?
Benz: I did a quick look, Jason, at what retailers our analysts really like now, and I looked for a couple of things. Again, I looked for a 4- or 5-star rating, plus a wide moat. Most retailers do not clear that wide-moat hurdle. The competitiveness within the retail space is extreme, and consumers are really fickle. So, our analysts don't think many companies do deserve that wide-moat status.
A couple of companies that jumped out, though, are within that home improvement space: Home Depot HD, in particular, as well as Lowe's LOW are two of our analysts' favorite retailing names. They've certainly had the headwinds of a tough housing market; people really haven't been inclined to want to spend a lot of money on home improvement, but our analyst there thinks that the companies are very well positioned, and they are some of our favorites within the retail space.
Stipp: Well, Christine, some great ideas for the investment shoppers in all of us. Thanks so much for joining me and happy holidays to you.
Benz: Thank you, Jason. Happy holidays to you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
