REITs: Providing Stability in a Volatile World

As Featured on Financial Advisor Magazine

With volatility expected to remain elevated in the stock market and the future direction of interest rates a bit cloudy, 2019 might be a good time for financial advisors and their clients to revisit real estate investment trusts, or REITs as they’re more commonly known.

Investors looking to bet on the way interest rates affect the residential mortgage market can invest in mortgage REITs, which earn interest income by originating mortgages and purchasing mortgage-backed securities. Over the past five years, these REITs have had a 9% total annual return and yield about 11.5%, according to Nareit.

“Right now, my firm generally believes taking interest rate risk to get a return is preferable to taking credit risk,” says Patrick McDowell, a fiduciary financial advisor at Arbor Wealth Management in Destin, Fla. “We believe that short-term rates are as likely to go down as up and that long-term rates won’t fall to extremely low levels.”

His pick in this sector is Annaly Capital Management (NLY). “Annaly assumes almost no credit risk, so the main risk they are taking is interest rate risk,” McDowell says. “They essentially are like a bank in that they do better when the spread between short-term and long-term rates widens or stays consistent.”

Pros and Cons to Buying Fiat Chrysler Stock


Pros to Buying FCAU Stock

Stock buyers increasingly see value and opportunity with FCAU, as the automaker is viewed as a positive outlier in a mediocre auto sales climate.

“We recently got long FCAU and made it one of our larger positions,” says Patrick McDowell, portfolio manager at Arbor Wealth Management in Destin, Florida.

McDowell points to several factors that have him bullish on the stock.

It's a good value. The company is cheap on just about any metric for a profitable going concern. “Auto investors appear to be pricing in 2008-level auto sales on a go-forward basis,” McDowell says. “Fiat Chrysler thinks they can be profitable even in that scenario.”

The company has plenty of cash. Fiat Chrysler has quite a bit of cash on the balance sheet and that cash balance will grow with the Magneti Marelli sale (to KKR’s Calsonic Kansei, in October), McDowell points out. “That should mean FCAU ends the year with around 40 percent of the market cap in cash,” he says.

Another merger could be near. McDowell believes the entire company is ripe for a merger or acquisition in the near future. “We think the auto parts and potentially the robotics arm Comau businesses being sold are a prelude to a full-fledged sale or merger of the company with a rival,” he says. “In order to fetch a better price in a potential sale, we think a tender/buyback or a stronger dividend is in the cards in the near future.”

7 Best Corporate Bonds to Buy and Hold for 2019

As featured on US News & World Report

Allegiant Travel Co. (ticker: ALGT)

Assigned a BB- rating by Standard & Poor’s, Allegiant Travel may be an under-the-radar choice for corporate bond seekers. Patrick R. McDowell, research analyst and portfolio manager at Arbor Wealth Management in Miramar Beach, Florida says smaller carriers like Allegiant have redefined the airline business model, specifically pointing out Allegiant’s focus on profitable flights rather than expanding routes to maintain market share. The current yield to maturity, which represents the total return expected when the bond is held to maturity, is 4.5 percent, making these bonds attractive in the near term, with a stable outlook for the long term. McDowell’s company recently enhanced its position in Allegiant with bonds maturing in mid-2019.

Icahn Enterprises LP Common Stock (Ticker: IEP)

Icahn’s holdings are far-reaching, with investments stretching from real estate to metals. With a BB+ S&P rating, McDowell says these bonds have grown more attractive in a low interest rate environment. Current yield ranges from 5.5 percent to 6 percent annually, depending on purchase price, with bonds reaching maturity in August 2020. “This bond is callable, which scares a lot of potential investors away,” McDowell notes, “But the yield to call is currently far better than the yield to maturity, so we wouldn’t be disappointed if these bonds were called away.” Yield to call is what a bond yields if you buy and hold it until the call date, assuming the call occurs before maturity.

Diversify Your Portfolio By Investing in Timber


“Money doesn’t grow on trees” is a popular adage but timber investors might disagree. Timber investments can bring consistent growth to your portfolio.

“Whereas certain assets like cash and bonds can periodically diversify a portfolio away from stocks, they do so at the expense of overall returns,” says Patrick R. McDowell, investment analyst at Arbor Wealth Management in Miramar Beach, Florida. “Timber has been a superior complementary asset to stocks over the last 40 years.”

Don’t limit your horizons. Considering only timber REITs or ETFs may mean missing the forest for the trees, McDowell says.

He offers advice for investors who want to own timber with the dual goals of earning similar returns to stocks while diversifying away from stocks.

“You want to find individual assets that are very reasonably priced that will provide you similar long-term timber returns without paying a premium,” McDowell says.

McDowell uses Keweenaw Land Association, Ltd., a land and timber management company Arbor Wealth Management is a shareholder in, as an example of an individual stock that fits that mold.

“By our valuation, investors today are essentially buying the timberland at cost and getting upside potential from three things: potential REIT conversion, mineral rights development and potential sale of whole company,” McDowell says. “If none of those things happen, we still own timberland at cost which should roughly mimic overall timber performance over a decade long time frame.”

In the meantime, the outlook for timber investments remains positive.

“We expect timber assets to produce anywhere between 5 to 10 percent annually on a go-forward basis,” McDowell says.

How To Hack Your 401(k)


Today is National 401k Day. To celebrate, I asked a selection of financial experts about their best practices on how to 'hack' a 401k.

Patrick McDowell, Investment Analyst, Arbor Wealth Management, Miramar Beach, FL

Use your 401k to enable a backdoor Roth IRA contribution transaction.

You can't make a non-deductible IRA contribution and then convert just that amount into a Roth IRA if you have other traditional IRA assets outstanding.

But, if you have a 401k that allows roll-ins, you can roll your IRA into your 401k and then execute the backdoor Roth IRA transaction.

It's a lot of work to get $5,500 or $6,500 into a Roth IRA and it somewhat limits your investment flexibility but if you have a great 401k plan it can be worthwhile.

The other hack is doing what's often called a self-directed 401k where you can invest in individual securities rather than just the standard fund options available.