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INVESTMENT: Five Sectors That Usually Continue Paying Out During the Bad Times
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Five Sectors That Usually Continue Paying Out During the Bad Times

By Michael Dow



BT 201604 070 21 Investment 001Everybody is feeling the pain right now, regardless of where their money is parked. Commodities are rock bottom, equity markets are on a knife edge and the so-called high interest savings accounts aren't worth bothering with. The geopolitical crises and economic slowdowns around the world aren't making the situation any better. The simple fact is that relatively stable income producing assets that steadily gain value over time are much harder to come by than they were a decade or so ago. That being said there are a few sectors which have stood the test of time and have proven to be reasonably safe havens for income investors during the worst of economic circumstances.



REITS

There are many reasons why real estate investment funds should comprise a decent portion of any serious investor's portfolio. Not only are these funds forced by law to pay out a very high percentage of all returns to shareholders, they also provide a very good hedge against volatility in stock and bond markets. It is a simple fact of life that in any kind of economy people and companies still have to utilise rental property. In fact there have been times in which economic downturns and housing price collapses have increased demand for rental space. As Joe Light of the Wall Street Journal points out, "REITs often move in a different direction from stocks or bonds. In the past three decades, REITs' rolling 36-month correlation with other stocks—a measure of whether their returns moved independently of one another, or in tandem—has ranged from 0.89 to negative 0.16. A value of 1 would mean that they moved in perfect lock step, whereas a negative value means stocks rose when REITs fell and vice versa". This combination of producing consistent income - in many cases a very high yield -€“ and the diversity aspects of this asset classes make them a superb option during the bad times.



Pharmaceuticals

This particular sector has always been a favourite amongst the more risk adverse investors. This industry is due to see strong growth for the foreseeable future, particular as demand from emerging markets continues to soar. There are certainly some considerable risks involved with betting big on the small caps that are looking to break out onto the global stage with the next new wonder drug, but betting on the big established players in the global pharmaceutical market is a wise move. That's because this is one of those heavily-regulated sectors in which those firms that have the economies of scale, the established customer base, the patent protections and all of the other advantages are in a much better position to take advantage of new opportunities around the world.


In addition to helping other companies save money and society stay healthy, the pharmaceutical industry is one of the top performers in terms of net profit. Pharmaceutical companies have the highest profit margins across the main industrial sectors, beating out banks, carmakers, oil and gas and media. According to a Forbes report, in 2013 the pharmaceutical industry had an average profit margin of nearly 20 percent, with American pharmaceutical giant Pfizer (NYSE:PFE) achieving an incredible profit margin of 42 percent. With the world aging quickly and the citizens of emerging market economies having more disposable income year-on-year, the future looks pretty stable for this sector, which will serve investment portfolios well.

BT 201604 070 23 Investment 003

Telecoms

While it might not be the most stable of sectors, the telecommunications space is definitely worth a gander if you are looking for a decent and consistent yield on your investments during downturns. "We think the relative appeal of telecom stocks is the stable cash flow generation, minimal to zero exposure to European markets and above-average dividend yields," said S&P Capital IQ analysts in a recent research note. Telecom stocks are paying an average 4.8-percent yield, which is attractive to most investors right now, given the low-rate environment, and they range as high as Windstream's hefty 10.6 percent.


Historically the telecom sector has been one of the highest dividend yielding industries in the S&P 500 Index, a trend which looks set to continue for some years to come. Many of the telecommunication sector's members appear to still have some upside as several firms digest recent acquisitions while the industry consolidates. They're also benefiting from the healthy, but slowing, growth in the number of wireless device subscribers and their increasing dependence on their services, which is boosting chargeable minutes.



BT 201604 070 22 Investment 003The Big Financial Players and Insurers

Investing in the financial sector during a time of economic turmoil might sound completely counter intuitive. Again, this is another one of those sectors in which the small cap space becomes a very risky asset class during a bear market, but many of the bigger fish in the pond tend to still offer good long-term value for money and tasty dividend yields. That is partly because the big banks and other financial institutions generally operate on high margins and in the last few years have benefited from the whole 'too big to fail' phenomenon which has served to shield them from complete catastrophe.


Some of the higher yielders in this sector after the 2008 financial crisis were banks like Barclays, HSBC and Standard Chartered, all of which managed to stay afloat despite the wave of bankruptcies, and even managed to maintain solid dividend yields of 4-6% percent during the bad times. Even though the global economy is heading towards a downturn, these big financials look set to continue paying out to their shareholders.


Insurance companies are also well known for giving out reliable and juicy dividend yields come rain or shine. Like the banks they always take a sizable hit whenever there is a recession or a bear market, but they remain very cash flow intensive as people and companies alike still need coverage during the bad times. This is definitely a sector to park some cash in right now.



Energy and Utilities

Note: we are not talking here about the oil companies whose profits have been decimated by rock bottom crude prices; although some firms like Royal Dutch Shell PLC have somehow managed to keep paying investors. By energy and utilities we mean those well-established companies that have a firm grip in both developed and emerging markets. Of course they are exposed to competition and fluctuations just like everyone else but at the same time they benefit from a reliable source of demand around the clock. In the last few years the pay outs from some of the utility companies in Europe and North America have been especially enticing. Those looking for shelter from the upcoming sell-off showers would be well advised to give this sector a good look.


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