What Happened to Dependable Income, Safety & Predictability?

Since the 2008 bank bailouts, market volatility has been the daily challenge for all investors.

Inflation is sky high, the Fed is slowly raising rates, hoping to bring it back to their 2% target. Interest rates are still below the rate of inflation. Stock jockeys and academics are screaming, 2% is just too hard – calling Fed head Jerome Powell wrongheaded and worse.

History shows, if the Fed lets up too soon, inflation will skyrocket to new heights, further destroying the wealth of the middle class and retirees.

While we can hope, guess, or predict, the major concern for all investors, young and old, is protecting our buying power and growing our wealth by investing intelligently.

Since 2008, “Dependable income, safety & predictability” left the building; particularly when considering inflation.

One constant in this whole mess has been Tim Plaehn’s newsletter The Dividend Hunter. Like clockwork, my dividend stocks have been producing income throughout 2022.

It’s time to check in with Tim. I’d like to see his year-end report card and thoughts on 2023.

DENNIS: Tim, thanks again for taking your time for our reader’s benefit. I’d like to review how your dividend stocks did in 2022, and then look ahead to 2023.

Tim, can you bring us up to date on how your portfolios did?

TIM: Hi Dennis. As you know, the Dividend Hunter strategy focuses on building a stable high-yield income. I divide the portfolio into three categories and track the total annual returns.

Here are the results for 2022:

The Stable Dividends category includes individual stocks paying stable to growing dividends. For the year, that group posted an average total return of minus 7.9%. The current average yield is 9.3%.

In the Variable Dividends category, I have ETFs and stocks that don’t pay predictable dividends. These include covered call ETFs and energy royalty companies. The category finished the year at just below breakeven, with an average total return of minus 0.72%. The group yields close to 12%.

The third group is a select list of Preferred Stocks. Rising interest rates pushed preferred prices down, way down. The group generated a minus 18.2% total return, which has pushed the average dividend yield up to 11.95%.

DENNIS: Considering the S&P dropped 20%, that is good performance. The average yield of all three groups beats inflation.

Despite regular income, it is tough to see the market value of our stocks go down; particularly below our cost. If the Fed stays on their stated course, market corrections should continue.

What advice do you have for readers as we continue through the process of cleaning up the mess that’s gone on for far too long?

TIM: In 2023, I don’t expect much to change in the markets. I expect a lot of volatility with no direction until the Fed stops increasing interest rates and/or the economy shows signs of a serious recession.

For income-focused investors, down markets provide opportunities. Buying shares on the cheap grows your income faster. When the inevitable upturn comes along, wealth rapidly increases.

I send my subscribers a Stock of the Week recommendation, which is one of the Dividend Hunter portfolio stocks that looks especially attractive.

Since we’re in this for income I recommend you always track your income. If your income is stable to growing, you are doing fine. While share prices are impossible to predict, it’s pretty straightforward to calculate how much dividend income you will earn every quarter.

My publisher offers a tool linking to your brokerage account, tracking dividend income for you. They also offer forecasts and “what-if” scenarios. Even if you’re just manually tracking, stay on top of your dividends.

Between two of my income services – Dividend Hunter and Monthly Dividend Multiplier – I’m pulling in 70 dividends a quarter and am on pace to double my dividend income every two years. I recently shared with my Dividend Hunter readers how they can copy my strategy.

DENNIS: As a retiree, I don’t have the regular income of a job, my investment returns help pay the bills. Not every reader can take advantage of the bargains.

My broker allows me to use an automatic dividend reinvestment program. I’ll see dividends posted into my account, then the next transaction automatically buys however many shares the dividend will allow. Many times, it is a small number of shares, including fractional shares.

I can’t do it with all my dividend stocks as I need some of the income to live on and pay taxes.

If readers have limited additional capital, what do you prioritize? By that I mean, after paying their bills, there is a certain percentage remaining in their account…where should they go first to pick the best opportunities?

TIM: The financial planning rule of thumb is retirees can safely withdraw 4% per year from their retirement savings. The Dividend Hunter portfolio yields more than double that. With my system a retiree could withdraw 5% to 7% per year and still have some cash retained to reinvest for future income growth.

With current high inflation, I understand the retirees’ cash flow challenges. When all the bills are paid, you may have only a few percent left to reinvest.

Where to start? A little bargain shopping will highlight those investments to have the greatest impact on your future income stream. In this market, finance companies like Starwood Property Trust (STWD), (yield 10.5%) and Arbor Realty Trust (ABR), (yield 11.8%), are very, very attractive.

Some of the preferred stocks selling below par look inviting with their predictable dividends and upside potential.

As you mentioned, using an automatic dividend reinvestment program makes the process easier. Don’t let the small number of shares fool you, it won’t take long for the share count, and dividend income to build up.

DENNIS: I agree on the small share purchases. I own a couple stocks where my reinvestment plan has added 10%+ more shares, and additional dividend income.

Tim, there is something I don’t understand about preferreds. At par, many yield inflation-beating returns. As you mentioned, many are now selling below par – offering even greater yields.

Assume the Fed hits their 5% target. This creates some questions:

• What would cause the share prices to come back towards par?

• Should the Fed hold rates at 5%, wouldn’t the prices eventually work their way back to par?

TIM: The power of preferred stocks is that the dividends (coupon rates) are locked in. The rapid interest rate increases by the Fed triggered a sell-off in preferred shares, pushing prices down and current yields up.

I anticipate preferreds share prices will move higher when the Fed indicates it has stopped with the interest rate increases.

In the meantime, there are some great bargains providing a secure, high-yield income stream you can count on.

DENNIS: One final question. As low interest rate debt matures, many companies will be faced with higher capital costs. I expect some defaults, dividend cuts and maybe worse.

Many predict 2023 will be challenging for sure. Some companies may fold, while others will survive and perhaps thrive.

Picking the right companies will go a long way to “dependable income, safety & predictability” – something all investors strive for.

How do you sort through that when making your buy, hold and/or sell recommendations?

TIM: Dennis, you are my favorite pessimist!

I see the current level of interest rates as normal – that should exist. Investors should avoid shares in any company that relies on low interest rates for their business to operate profitably.

If there is a high-yield debt “crisis” the number of affected companies will be small, and we avoid them.

For any recommendations, I dig deeply into the company’s financial reports. Businesses report their debt structures, and my analysis looks for any “cracks” in the structure. If a company has a lot of low-rate debt maturing soon, refinancing will require a much higher interest rate. I need to understand how that will affect cash flow and profits.

Besides my portfolio recommendations, I keep close track of hundreds of high-yield stocks and investments. I’m a busy guy during earnings season!

During a market downturn, share prices of good companies will be taken down along with the bad. With good analysis, you can spot real bargains, ensuring your wealth grows when there is a recovery.

EnLink Midstream LLC (ENLC) is a good example. During the COVID crash ENLC dropped to less than $1.00 per share. The annual dividend was $0.35. I told my subscribers to load up on ENLC. I recommended selling in January 2022 at $6.90 per share.

With interest rates now looking like what I view as normal, I’m looking into recommending some high-yield bonds. You can earn over 8% with maturities of one to three years. I find the risk/return very attractive.

Thanks again Dennis for the opportunity to address your readers. We will get through this and continue to thrive.

Dennis here. I don’t mean to sound pessimistic; better to prepare for the worst and plan for the best. Times may get tough but those who are prepared will fare much better.

Tim does the hard-work analysis many of us are not capable of doing. Dividend stocks can help provide dependable income, safety & predictability.

Tim’s explanations are thorough and easy to understand. As an investor, that makes me much more comfortable when buying his recommendations.

For more information, check out my website or follow me on FaceBook.

Until next time…

Dennis

www.MillerOnTheMoney.com

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

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