When the Fed bailed out the banks at the expense of seniors and savers, interest rates tanked while investors sought out solid dividend-paying stocks.
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Interest rates are now rising, and the Fed remains hell-bent with continuing their aggressive monetary policies. Many pundits predict the market is due for a major correction. With a new Congress, there is much uncertainty on the horizon for 2019.
Tim is a terrific analyst. He’s in the trenches every day looking for opportunities and is very close with his readers. Tim’s publication, The Dividend Hunter, has produced some excellent results.
DENNIS: Tim, let’s get right to it.
With the recent tax cuts, many companies are using the windfall to not only pay dividends but also buy back their stock – hoping to drive stock prices higher – as opposed to investing in their company to generate additional profits. I’d imagine that presents a real challenge for true dividend hunters.
How are you sorting through these issues to find good opportunities for your subscribers?
TIM: I am not against stock buy-backs when they make sense for the long-term health of dividend payments and dividend growth. In the high-yield stock universe, I follow several companies where management believes the share price is undervalued and using free cash to buy shares enhances the future value for shareholders. Reducing the outstanding share count mathematically increases the free cash flow per share and improves dividend stability.
I would not be a fan of any company that borrows money to buy back shares. That’s taking on a long-term debt, for a short-term benefit. Bad business in my book.
DENNIS: With the Fed hell-bent on raising rates, some of the Real Estate Investment Trusts (REIT) and Master Limited Partnerships (MLP) might be affected as they are highly leveraged. Can you tell our readers how you decide which to buy, sell or hold? My guess is that takes a lot of heavy research.
TIM: The high yield universe is very much a story of individual companies. Each one has its own business model and management priorities. Since the world was planning for higher interest rates for at least the last half-decade, many companies are well set up to profit from higher rates. This is a time to stick with REITs and MLPs that have lower leverage and can raise rates on their offered services to match higher interest rates.
DENNIS: With the recent changes in the congressional power structure, no one knows if that means gridlock, chaos or how it will affect the market. Congress working together for the common good of the people has not existed for quite some time. What do you see on the horizon? Are there any industries that you feel are vulnerable, or perhaps presenting good opportunities?
TIM: It is my personal belief that watching and discussing politics has become a full-time national pastime. Not sure it’s a productive use of time. Congress is going to do what they do, and the rest of us have to figure out whether it affects our personal lives.
U.S. businesses are as a whole, tremendously well-run and will react to whatever government regulations and rules aimed at their operations. Recently, I was thinking how elected officials would change what they do if they were responsible to shareholders and a Board of Directors.
To answer the question, I am leery of the healthcare sector. As the government gets more and more control over healthcare, Congress will accumulate enough power to force price cuts. Deep ones.
DENNIS: Tim, we have discussed stop losses in the past. Some investors do not have the time, or emotional stamina to ride out a long market downturn. At the same time, as a Dividend Hunter subscriber myself, I know you stay on top of your holdings and have alerted readers to exit some of their positions recently.
As a former fighter pilot, you seem to switch from offense to defense fairly quickly. What advice do you have for those who deep down want to buy and hold, and collect their dividends? I had many friends that let their emotions get carried away and capitulated at the worst possible moment in the last downturn.
TIM: My primary message is to let investors know that in the short to intermediate term share prices can become disconnected from business fundamentals. If the share price of a dividend paying stock goes down, and the business fundamentals show the dividend is secure, I want to be a buyer, not a seller. Focusing on building an income stream makes it easier for an investor to be able to buy low and sell high.
My recommendations to sell occur when I see a company that is not generating cash flow, or my outlook gives a forecast of shrinking cash flow per share. It’s a dividend rate at risk that triggers a sell recommendation.
Much like your earlier question about REIT’s and MLP’s, some companies are ahead of the curve and will fare very well in tough times. It takes a lot of time and research to sort through all the hype and analyze each company individually.
Dennis, I am not a “buy and hold” type analyst. It’s more like “buy and hold as long as the company is running their business effectively in the market.” If I see changes, I try to be ahead of the game and tell my subscribers to sell.
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DENNIS: I know you issue sell orders regularly. I loved the “Dump These 3 High-Yield Turkeys Now” recommendation the day before Thanksgiving. It was a good education about finding companies that can sustain their dividend.
One final question. Legendary investor Benjamin Graham put 1/3 of his portfolio in the market, 1/3 in safe interest rate investments and the remaining 1/3 would float back and forth based on interest rates and how much he felt the market was over/undervalued.
Thanks to the Fed, we no longer have a true free market when it comes to interest rates.
Do you ever see free market interest rates returning? At what point would you advise baby boomers to take some money off the table and be satisfied with safe interest offered by CDs?
TIM: One of my perceived life truths is that everything goes in cycles. At the same time, it is human nature to extrapolate a linear future. The Benjamin Graham strategy fits well with these conflicting ideas.
I have started, and will push it further in 2019, to discuss a larger portion of fixed income investments in a portfolio. The challenge is that if rates do continue to rise, it results in a permanent share price reduction for open-end packaged bond products such as mutual funds and ETFs. Sticking with short-maturity funds doesn’t really help.
I have recommended that subscribers be aware of what their cash balances are earning. Money market funds are now paying around 2%, which is much better than a quarter of a percent of just a few years ago. I also recently became aware of the Invesco BulletShares bond ETFs. These fixed-maturity bond funds let investors avoid the rising rate effect on bond prices risk. I have an ongoing discussion with subscribers on how to incorporate some BulletShares holdings into their portfolios.
DENNIS: On behalf of our readers, thank you very much for sharing your insights.
TIM: My pleasure Dennis, any time.
Dennis here again. No one knows what 2019 will bring. The market has been volatile and is likely to remain so until things settle down. In good times and bad, holding solid dividend payers is a good thing – providing you stay on top of things. If anything appears on the horizon that could affect their cash flow and ability to sustain their dividends it may be time to sell.
This article originally appeared on MillerOnTheMoney.com.