Given the uncertain outlook for the U.S. economy, this might be a good time to consider shipping stocks - for companies that operate oceangoing cargo vessels.
Ship operators generally fall into two categories: oil tankers and dry bulk shippers.
While you already know what oil tankers do, dry bulk might be an unfamiliar term. Dry-bulk cargo is iron ore, grain, steel, and most other items that you'd want to ship except for crude oil, natural gas and gasoline.
Ship operators charge by the day. The day rates, subject to the balance of supply and demand, are notoriously volatile. Because operating costs are relatively fixed, profits skyrocket when rates are high and can turn to losses when rates drop.
Spurred by the rapid growth of emerging economies in China, India, Latin America and elsewhere, the demand for shipping capacity has soared, pushing day rates and ship operators' profits up. In boom times, however, operators usually keep expanding their fleets until supply exceeds demand, and day rates drop.
In recent weeks, oil tanker rates have dropped while dry-bulk day rates have soared. Consequently, although both categories have enjoyed share price increases so far this year, dry-bulk shippers have been the stars. But that doesn't mean you should dump your tanker stocks in favor of dry-bulk shippers. Some say dry-bulk rates have gone up too far, too fast, and that oil tanker rates are probably headed back up.
What makes shipping stocks attractive to me is that many pay hefty dividends equating to yields in the 5 to 10 percent range and sometimes higher. Those dividends add significantly to returns and tend to cushion share price drops when the overall market heads down.