By JACK HOUGH
If Wall Street is a struggle between fear and greed, both sides seemed plenty crowded this past week.
The fearful, eyeing political turmoil and deep fiscal woes in Greece, snapped up 10-year Treasury notes with yields as low as 1.70%, near their all-time low. Never mind that the latest reading on inflation was 2.3% for the year through April, suggesting those Treasury payments will fall behind the cost of living, sapping wealth rather than adding to it.
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Between extremes like these, there remain some sweet spots in the markets. Here is where to find them.
Stocks. Big dividend payers like utilities and telecoms have gotten expensive, says John DeClue, chief investment officer at U.S. Bank. Better to favor companies with strong "free cash flow" -- surplus funds that can be spent in coming years on dividend increases, stock buybacks or growth.
Look for such companies in two industries in particular: technology, for growth-minded investors, and health care, for cautious ones. A screen of these sectors for high "free cash yield," which measures free cash flow over the past year as a percentage of market value, turned up Microsoft (MSFT)
Among S&P 500 companies that generated free cash over the past year, the median did so at a yield of 5.1%, suggesting these four are less expensive than the market relative to their free cash.
Watch out for companies that pay generous dividends but also raise cash by repeatedly issuing new shares, says Jonathan Golub, chief U.S. equity strategist at UBS (UBS)
The utilities sector, for example, has a meaty 4.1% dividend yield, almost double that of the S&P 500. But utilities have lately issued more shares than they have repurchased, so the sector's total payout yield (dividend payments plus buybacks, minus issuance) is 3.5%, less generous than the 5.4% total payout yield for the S&P 500, Mr. Golub says.
The consumer-discretionary sector has a dividend yield of just 1.6% but is a voracious buyer of its shares, resulting in a total payout yield of 7%.
Mr. Golub's team supplied a list of stocks with high total payout yields and "buy" recommendations from UBS analysts. It includes BlackRock (BLK),
Kate Moore, global equity strategist at Bank of America Merrill Lynch, recommends another approach: looking for companies whose dividend yields exceed their bond yields. They likely are good values, but at the same time, their low bond yields suggest they are financially strong. Examples include Johnson & Johnson (JNJ),
Bonds. Falling Treasury yields have dragged down yields on other high-quality bonds. Among these are municipal bonds, which are issued by states, local governments and their agencies, and whose income is often tax-free.
"You must have us mistaken for another market," wrote Matt Fabian, managing director of research firm Municipal Market Advisors, in response to a request for good muni-bond deals.
Individual bond buyers can look for small blocks of high-yield bonds, but high commissions on such trades sometimes can offset the extra yield, Mr. Fabian says. Mr. DeClue agrees that high-yield munis are relatively inexpensive for investors who don't mind the risk, and recommends investing in them through mutual funds for diversification and lower fees.
"There's a perception that high-yield munis are like 'junk' bonds, but in reality municipal defaults are much rarer than corporate ones," he says.
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As for corporate bonds, yields are low for top-quality companies and even at the higher-quality end of the junk-bond market, to which investors have recently flocked, says Robert Levine, retired chief executive of Nomura Corporate Research and Asset Management and author of "How to Make Money With Junk Bonds".
The best junk values, Mr. Levine says, fall in a part of the market where most investors don't belong: triple-C-rated issues. A J.P. Morgan index of such issues yields about 12%, but triple-C-rated bonds are only a couple of notches above bonds that are in default.
There are far safer ways for bond investors to get better returns than Treasurys offer. Jurrien Timmer, who manages the Fidelity Global Strategies
Mr. Timmer also likes floating-rate bank debt, or business loans that have been sold by banks and trade as securities. These loans, like corporate bonds, come with the risk that companies will fall into financial difficulty and won't be able to pay, but they often are secured by collateral that can be sold off in such an event. Unlike bonds, the income they pay rises if interest rates broadly rise. Fidelity Floating Rate High Income,