Income Investment Choices for a Recession

If you’re furious – or just plain frustrated – with inflation numbers, fuel prices, and the daily trading drama on Wall Street, remember that we’ve seen this problem before, survived, and recovered.

Surely you know the proverb that bad news can be good news for the financial markets. While the next recession isn’t official yet, there are signs it’s gathering. But some consequences of a standard economic downturn benefit fixed-income investors and are tolerable for stock and fund holders who diversify and seek high dividends. There is no reason to panic.

Let’s start with bonds. It’s usually too late to sell and it’s probably worth buying selectively. Since the 10-year Treasury yield hit 3.48% on June 13, it has fallen to around 3%, a rise in bond prices that is easing year-to-date losses in popular funds.

BNY Mellon Municipal Bond Infrastructure Fund (DMB, $13), a closed-end fund and a longtime recommendation of by Kiplinger Investing for Income, bottomed out on May 23, down 24% for the year. The fund is now at less than 10% for 2022, as its steep discount to net asset value has returned to a premium. The 5% return should be the equivalent of 7% or more if you are in a high tax bracket. Duration is moderate and most of its bonds are investment grade. (Returns and other data are as of July 8; investments I like are in bold.)

A Fork in the Road for Bond Yields

Remember, everything you see and hear about the Federal Reserve’s interest rate hike campaign is tied to short-term rates. The aim is to fight inflation at the cost of an economic slowdown, which means that long-term bond yields, including mortgage rates, should stabilize or fall. Indeed, long Treasury and investment grade corporate bond yields could fall more sharply once the bond world sees a two-month easing in inflation readings, prolonging this bond rally.

“The antidote to all this pessimism is a change in the outlook for inflation,” said Ken Leech, chief investment officer of Western Asset Management. Leech likes gasoline futures prices to dip, as do prices for fertilizers, lumber and more. The Bloomberg Commodity Index is down 15% since early June. This supports the dollar, which in turn is disinflationary. The Invesco Dollar Bull ETF (UUP, $29) is up 11.5% for 2022.

Turning to equities, the Dow Jones Industrials and S&P 500 will remain sensitive to news-driven 2% daily swings. But there is a compelling case for dividend payers. So far this year, for example, the surprise ace among all blue chip mutual funds is Federated Hermes Strategic Value Dividend (SVAAX), with a gain of 5%. (You can buy the fund with no sales charge on major online brokerage platforms.) Lest you mistake it for an oil fund, its 16.5% energy weighting tracks holdings in healthcare and public services. Yields are lagging sis-boom-bah bull markets, but the fund is quickly closing its long-term total return gap with struggling Vanguard and Franklin dividend growth funds. In addition, the federated fund yields 3.9%.

I know the public is nervous that inflation will remain high. But what seems like bad economic news can be balm for your wallet. The rest of 2022 will be better than the first half for many investments, even if the clouds of recession close sooner rather than later.

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