The Big Picture: Proven Methods For Managing Geopolitical Risks

Let’s step back from the market’s day-to-day gyrations to look at the “big picture” of geopolitical risks. As overseas strife worsens, how can you protect your hard-earned wealth? Below, I highlight proven portfolio protection measures.

In Tuesday’s Mind Over Markets column (“Security Fears Rock Shipping and Threaten Global Economy“), I explained how terrorist attacks on merchant shipping in the Red Sea could cause an industry-wide loss in freight capacity on routes from eastern Asia to Europe of up to 20% in the second quarter. That’s a serious threat to the global economy and financial markets.

What’s more, Russian President Vladimir Putin asserted on Monday that his country would hold military exercises with troops based near Ukraine to practice for the possible use of battlefield nuclear weapons.

Fresh from his inauguration this week for a fifth term, Putin is rattling his nuclear saber and heightening tensions with the West.

Meanwhile, the conflict between Israel and Hamas is escalating and threatens to spread throughout the Middle East. The bloody plight of Palestinians also is sparking violent unrest on American campuses, causing scenes reminiscent of the protests against the Vietnam War during the presidential election year of 1968.

Dividend Stocks: “Boring” but Bountiful

Worried about how these multiple crises could hurt your portfolio? One smart move now is to increase your exposure to dividend stocks. Let’s drill down into why dividend stocks make sense under current conditions.

This asset class provides higher safety, but with plenty of growth and income. Not only are top-quality dividend payers attractive sources of steady income, they also offer the potential for strong growth.

According to research from BlackRock (NYSE: BLK), stocks with high dividends outperform non-dividend payers in all economic conditions, rising more than companies without dividends in bull markets and posting smaller declines in bear markets.

Here are the key factors to consider, when seeking the best high-dividend stocks for your portfolio:

Look beyond yield. A high yield can be a good place to start evaluating stocks with high dividends, but it should never be the only reason you buy. You need to dig deeper and look for companies that can clearly maintain, and preferably grow, dividends over time.

Pay close attention to the company’s dividend history. You want to zero in on the stocks that have paid dividends over long periods. This is a key factor not only in judging the safety of dividends but the quality of the company as a whole.

After all, a company capable of sustaining its dividend for the long term and growing it at regular intervals is supported by an underlying business that’s capable of generating solid and expanding cash flows.

In addition, a company of this caliber probably has a disciplined management team that shows great care in how it makes use of this cash flow in its capital investment decisions, cost controls and debt management.

I look for companies that have had no dividend cuts in at least the last 10 years, which shows their ability to weather difficult times.

Beware of high payout ratios. Perhaps the most important piece of data for income investors, if we had to identify just one, is the payout ratio. It is calculated by dividing the indicated quarterly distribution rate by the previous quarter’s income per share and is a comparison of dividends to the profits that make them possible.

Generally speaking, the higher profits are relative to the dividend, the better protected that dividend is from setbacks at companies. A low payout ratio, which is the dividend as a percentage of earnings, is consequently the best possible sign that the dividend is indeed safe. Conversely, a high payout ratio is a sure sign of an endangered dividend. I look for a payout ratio of no more than 80%.

Look for rising profits. It goes without saying that you’ll want to make sure the dividend stock you’re considering has a history of steady, or better yet, rising profits. But pay attention to its forecasts for profit growth, as well.

I like to see a projected year-over-year earnings increase of at least 5%. That lets profits and dividends beat inflation and withstand the worst of any future interest rate hikes.

Take the long view. If you’re investing for income, your focus should always be on the health of the underlying business. The best dividend stocks are the ones that are in good shape and growing, so they can maintain and raise their payouts.

Over time, stock prices will follow those dividends higher, so you’ll also pocket capital gains by buying and holding. This approach also leads to less-frequent trading, which cuts your brokerage fees.

Focus on revenue reliability. Have the stock’s revenue and dividends held up well during past downturns, such as the 2008 financial crisis? If so, that’s a pretty good reason to be confident of their durability in future market storms.

Examples of dividend-paying sectors with reliable revenues include regulated electric, gas and water utilities, fee-generating energy midstream companies, such as pipelines, and big U.S. telecom firms.

Note that energy companies generally don’t produce consistently reliable revenues, due to their exposure to unpredictable oil and gas prices. However, there are some exceptions, such as large cap oil stocks whose massive scale gives them a big edge when it comes to weathering downturns.

Don’t overlook debt. The payout ratio is important. However, something that’s also crucial to dividend stability is debt. You’ll want to look for companies with healthy balance sheets, including significant cash holdings and low debt.

It’s important to keep in mind that what is considered a high debt level varies by industry. Utilities, for example, typically have higher debt loads because of the large sums they must invest to maintain and grow their operations. However, as noted above, they tend to benefit from more reliable revenue streams.

Additional Portfolio Protection Measures

During this period of uncertainty, you should also diversify your portfolio with safe-haven assets such as government bonds or gold.

Gold is a time-tested hedge against crises, which are multiplying with each passing day. During the Great Recession of 2007–09, the worst economic downturn since the 1930s, gold prices rallied from $840 per ounce at the end of 2007 to over $1,200/oz by the end of 2008, even though inflation over this period stayed in check.

The rule of thumb is that gold should make up 5%–10% of total portfolio assets. The yellow metal has been soaring in price this year and it’s upward momentum is likely to continue. Amid the backdrop of war and inflation, investors will increasingly turn to gold.

No one can say when Putin’s misadventure in Ukraine will end, or when the Middle East crisis will wane. But until the world’s flashpoints cool down, just remember that geopolitical turmoil invariably favors the Midas metal.

You should also consider cryptocurrency. That’s right…crypto. Think crypto is too dangerous an investment? Think again.

Crypto is making ordinary investors rich…and it also serves as a hedge against geopolitical risks. The price movements of cryptocurrencies are less vulnerable to overseas turmoil. Bitcoin (BTC), for example, is similar to gold in that it may be used as a store of value and a hedge against economic volatility.

But you need to make your move now, because the fuse is lit on this market. And every day you wait is literally costing you thousands in profits.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.