Just when you think things can’t get crazier, they do.
The US pulls out of Afghanistan, leaving people and weapons behind unnecessarily. Russia invades Ukraine because they are threatened by NATO. China is rattling the saber over Taiwan. The Canadian Prime minister governs against the will of the majority; all because he wants to save face. Unpopular mask mandates are quickly disappearing as mid-term elections loom.
The Fed talks tough about inflation, already in double-digits. Their ¼% rate increases into 15%+ inflation are as ineffective as a sneeze in a tornado. Inflation continues to rob a huge chunk out of the nation’s buying power.
The military trains their officers how to control their emotions while thinking and acting logically when the world around them is going crazy.
One thing we still have control over is where and how we invest our money. We need to think logically and keep a cool head.
Jared Dillian recently wrote:
“I don’t have much in the way of ideas or investment themes for the New Year, other than the Fed is going to hike rates into an uncomfortable orifice. If that was your base case for 2022, what would you do? Buy stocks? Buy commodities? Buy bonds?
You would buy none of the above. And that is the predicament I am in. I write a couple of investment newsletters with trade ideas, typically long trade ideas, and nothing looks especially attractive.”
I’m with Jared, everything is risky and unattractive. I thought about selling some of my preferred stocks, currently yielding about ½ the real inflation rate. I decided against it. Where will I reinvest the proceeds?
How do you protect your life savings with double-digit inflation, the market at historic bubble levels, bond market unraveling and worldwide political turmoil?
I’m trying to make sense of this mess. Fortunately, I have some qualified friends who can help. Tim Plaehn, editor of the Dividend Hunter is a former air force pilot, flight instructor, cool head, and voice of reason.
Last time we checked in with Tim, he said:
“As I write this a few days before Christmas 2021, the Stable Dividend and Variable Dividend categories posted year-to-date total returns of about 20%. The Individual Preferred Stocks have earned their average yield of about 7.3%.”
I’m doggone concerned.
I own several of Tim’s recommendations and enjoyed their inflation-beating returns. With less than ten stocks holding up the market indexes, even moderate Fed tightening will result in a market correction.
Tim’s 2021 returns were a result of seeing undervalued stocks appreciating while paying nice dividends. The dividends alone are unlikely to beat 2022 inflation.
No matter how solid the company, their stock price is not immune to market swings. Speculators must meet margin calls and mutual funds are forced to sell good stocks to meet redemptions.
Time to check in again with Tim….
DENNIS: Tim, thanks again for taking time for our reader’s benefit. In the March issue of The Dividend Hunter, you told readers:
“In these times, I try to stay focused on what is important…and work on the things I can control.
The Dividend Hunter strategy of building a high yield income stream gives us much greater control over our investment results compared to trying to time the market for capital gains.”
Please elaborate– I don’t see anything that is likely to cause the markets to rise.
TIM: Dennis, thanks again for the opportunity to address your readers. The beauty of income investing is that you don’t need the markets to go up to earn an attractive return on your portfolio.
Dividend income provides a cash return on your investment. Dividend income helps you achieve your goals. It can be retirement income, and/or you can reinvest to keep the dividends growing.
Dividend income is always there, always paying, and if you reinvest, always growing. It is not dependent on what the stock market is doing. Currently, our dividend yields are much higher than any fixed-income investments– and have the ability to grow even more.
DENNIS: In the past, you’ve discussed “quality companies” and their ability to sustain their dividends during tough times. What can you tell us about how these stocks perform when the market is tanking?
TIM: While all stocks at some point go down, at least temporarily, quality dividend-paying stocks typically don’t decline as much, and are quicker to recover.
For example, through the first 2 ½ months of 2022, the major market indexes were off by 10% to 20%. Through that same period, my Dividend Hunter stocks, on a share price basis, average close to break even, and the dividends give us a positive total return. I like being up 3% to 4% vs. down 10% to 15%.
Traders (market timers) are worried about a market decline. The market experiences a 10% to 20% drop on average every other year. It always recovers.
Many traders panic, feeling the market will go down and stay down. That’s not the case unless you invest in over-valued over-hyped stocks. Income investors grit their teeth, stay cool and collect dividends; stock appreciation becomes a nice bonus.
DENNIS: A lot of the pundits are pushing diversification, which makes sense. How does that apply to your readers?
TIM: High-yield investments generally come out of a few sectors, such as BDCs, REITs, and energy midstream.
I constantly look for new sources of high-yield income. Over the last couple of years, I have expanded my recommendations to include preferred stocks and covered call ETFs.
I’m often asked which one or two or three stocks I like best. I don’t work that way. Things will go bad for individual companies, and you can’t always predict the company or timing. Diversifying across 30 or so investments make the hit of one going down less painful. It’s basic investing.
While we diversify our income investments, I also remind our readers they MUST diversify further, sometimes outside of the stock market. Gold and real estate are a couple of examples. You don’t want to just hold eggs in baskets. Solid dividend payers should be a portion of a well-diversified portfolio.
DENNIS: Your primary concern is the ability for a company to sustain, and possibly grow their dividends. In these times, are you more focused on those who might cut their dividends?
TIM: Right now, I have very little concern about dividend cuts. All of our companies and other investments are doing very well. Business is good.
This is very different from early 2020 when businesses were shutting down or cutting back due to the lockdown. The companies in trouble now are the high-flying unprofitable tech stocks and zombie companies that can’t meet their obligations.
Educated investors shouldn’t be surprised when dividends are cut. I follow their earnings calls and announcements and see their business and cash flow. If I have questions, I call their shareholder relations department and they will answer my questions. If I’m uncomfortable, I tell my subscribers; when in doubt, get out!
Too many brokers tell clients to “stay invested”, without doing their homework. Then they are surprised with a dividend cut, and their clients are clobbered.
Companies cut dividends because they don’t generate enough money to pay them. Occasionally I get surprised when a company, with plenty of cash, cuts their dividend as a precautionary move. In some cases, I’ve seen a solid company with cash, and recommend we increase our positions.
DENNIS: In your recent letter you discussed Hercules Capital (HTGC). You concluded:
“All HTGC customer loans carry floating interest rates. As rates rise, so will their net investment income. In a recent presentation, Hercules noted that the annual net investment income will grow by $0.14 per share for each one percent increase in interest rates.”
Tim, this grabbed my attention. With the Fed raising rates is this a hedge protecting us from rising inflation?
TIM: Yes, that is one way to look at it. As the Fed raises interest rates, BDCs like HTGC will see rising profits and be able to grow dividends or pay special dividends.
With the special dividend announced for 2022, HTGC already sports a double-digit yield, well above inflation.
Our other BDCs and energy sector investments will keep well ahead of inflation. I just added a new energy royalty company to the list that I think will do very well over the coming years.
There are others that are similar. Some mining stocks tie their dividend to the price of gold. We are always looking for these opportunities.
DENNIS: One final question. As a former military officer, I know you strive to remain rational and in control, affecting those around you. This must be similar when dealing with readers; particularly when the portfolio begins to decline. It’s emotional and scary. Thoughts??
TIM: Thanks again for inviting me.
Yes, maintaining a cool head and thinking logically is a must. Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” That is when our plan and flexibility must shine.
In addition to our monthly reports and updates, we are in constant contact with our subscribers. We also have regular webinars where subscribers can ask questions. It’s important to keep our subscribers informed.
Dennis here. As I mentioned, nothing looks attractive; yet holding too much cash is a sure loser with current inflation. I scour Tim’s newsletter each month and generally find good opportunities to invest some cash safely, with good return.
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