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Hennion and Walsh CIO on why he sees opportunities in municipal bonds

Kevin Mahn, Hennion & Walsh Asset Management CIO, joined Yahoo Finance to discuss today's market action and why he sees opportunity in municipal bonds.

Video Transcript

SEANA SMITH: I want to bring in Kevin Mahn. He's the chief investment officer at Hennion and Walsh Asset Management. And Kevin, great to have you on the program. Stocks, I guess, you could say taking a bit of a breather today outside of what we're seeing of some of the buying action in technology. But what do you make of the market at this point? Is there reason, do you think, that this rally is going to keep going?

KEVIN MAHN: Yeah, I think what's happened over the course of the past couple days is the pullbacks we've seen in certain areas that have really been providing performance to the market throughout the context of the COVID-19 pandemic in areas such as biotech, larger cap health care, traditional technologies, revolutionary technologies, and e-commerce, perhaps, have created attractive entry points for investors looking for growth opportunities in the months and years ahead, as it's hard to imagine that Americans and, quite frankly, citizens across the globe aren't going to continue to shop more remotely, aren't going to continue to work more remotely.

And God forbid, unfortunately, there are likely more rare and chronic diseases that will plague society for years to come. And the solutions to those types of viruses and diseases generally come from the smaller cap biotech company. So we do see growth opportunities there. But we're getting more and more inquiries, Seana, on income opportunities given the relative lack of income opportunities that exist in traditional areas right now.

ADAM SHAPIRO: So Kevin, it's great to see you. Let's talk about income opportunities, because what is it? Fisher always says don't buy an annuity. We won't go there. But you talk about portfolios of preferred securities. Now, when I hear that kind of phrase, I'm thinking way back to Warren Buffett having preferred shares in Goldman, that kind of thing. Is that what you're talking about? How does someone who doesn't have billions get in on preferred shares like you're talking about?

KEVIN MAHN: Sure, and given, Adam, that the Fed has basically told us that they're likely to keep rates at or near zero for many years to come with the most recently issued dot plot charts suggesting that 15 of the 17 voting members think they'll keep the Fed funds target rate in the range of 0 to 25 basis points all the way through the end of 2022. Where do investors turn for income? Preferred securities, municipal bonds or municipal bond strategies, and dividend paying equities are three areas that we think are worthy of consideration.

Preferred securities. They represent ownership in a corporation and have characteristics of both bonds and equities. Preferreds generally pay a fixed income. They hold a par value. They have a credit rating. And they trade on major exchanges. Generally, issuers of preferreds come from the financial sectors. In fact, the majority are bank issued preferreds.

But they pay an income level that's above that of common shareholders and generally above bond holders as well. So there's a lot of attraction towards preferred securities right now when you can earn a yield of 4%, 5% versus the 10-year treasury that's yielding around less than 1% right now.

SEANA SMITH: Well, Kevin, I mean, that's interesting what you're saying. Well, let's go back to one of the things that you you're talking about, and that's a muni bonds, because it's interesting when you see, I guess, how the outperformance or the attractiveness that this has been over the last couple of months, because we had a total of $71 billion going to that in October. It was a record-setting month for muni bond issuance. You mentioned that in your note. Why do you think then that demand is going to remain strong for muni bonds, because I think you could also argue that there could be a couple of headwinds that they could face here down the road?

KEVIN MAHN: Certainly, that's why you need to be selective, Seana, in terms of the municipal bonds that you invest in. And we generally prefer to stay in the investment grade category. You are correct. There was a record setting month of over 71 billion in issuance in October, as a lot of municipalities pulled their deals forward to avoid the election uncertainty in the month of November.

Now, what we see is that supply is likely to fall significantly in the month of November, December. And if demand remains where it is or increases, as higher net worth investors fear that higher taxes may be on the way, you could see even now higher amounts of demand for municipal bonds and tax-free income in general. So that equation of lower supply, higher demand generally translates to good price performance.

ADAM SHAPIRO: Well, when you mentioned municipal bonds, I hear Mitch McConnell say let them go bankrupt. We'll invite you back on that issue because they can't go bankrupt. Who knows in this world. But the other issue-- an old-fashioned way to get income or dividends-- I got to warn to. Kevin, and, you know, Royal Dutch Shell for years and years and years, never cut the dividend. And then guess what they did? They cut the dividend. So what advice do you have for people who want to go the old-fashioned route?

KEVIN MAHN: Yeah, and it's good advice on your part, Adam, as I believe I saw stat that over 639 or 640 companies have cut or suspended their dividends over the course of the COVID-19 pandemic. So you need to find those companies that have strong balance sheets, a history of growing their dividends, positive free cash flow to support that dividend, and also have relative growth prospects as well.

As going back to 1930, dividends have accounted for over 42% of the total return of the S&P 500. I think that relative percentage is only going to grow in the years ahead given where valuations are right now. So if you can find a consistent dividend payer of a company that's within a sector that's likely to continue to grow such as technology, such as e-commerce, I think that's certainly worthy of consideration.