This “3X Income Portfolio” Crushes Growth Stocks
If you want to know why the stock market is having a hard time sustaining a rally, take a few seconds to complete this pop quiz.
Question: How many companies in the S&P 500 currently pay a dividend yield higher than the yield on the 10-year Treasury note (which opened at 3.07% on Monday morning)?
Answer: 118 stocks — less than a quarter of the large-cap index — have a forward annual dividend yield of 3.08% or higher.
Of those 118 companies, only 30 of them earn a score of 8 or higher (on a scale of 1 – 10) from my IDEAL Stock Rating System. That’s more than double the average IDEAL score of 3.7 for the entire index. In addition to paying high dividends, these companies’ future earnings are priced at a steep discount to the market.
The average dividend yield for this elite group of stocks is 4.2%, slightly above what AAA-rated corporate bonds are paying these days. In short, these companies represent the “value” end of the spectrum so you won’t find momentum stocks like Tesla (NSDQ: TSLA), Netflix (NSDQ: NFLX) or Amazon (NSDQ: AMZN) among them.
Those overvalued momentum stocks trade at huge multiples and pay no dividends.
What you will find in my “3X Income Portfolio” are solid businesses that generate a lot of positive cash flow and are willing to share it with investors through dividends and stock buybacks. After all, that’s why the people that own stock in these companies are called “shareholders,” right?
Double Speak on China
On Monday, Treasury Secretary Steve Mnuchin confirmed during an interview on CNBC that the risk of a protracted trade war with China is still in play. Saying that recently enacted import restrictions and trade tariffs on Chinese goods had only been “suspended” pending the outcome of negotiations, Mnuchin appeared at one point to lay down the gauntlet when he stated, “If things aren’t fixed and we don’t get what we want, the president can always put the tariffs back on.”
However, Mnuchin expressed confidence that a deal would get done, saying that the glass is “completely half-full” when asked about the chances of avoiding a trade war. He knows that nothing would take the air out of momentum stocks faster than a full-blown trade war with China. At the same time, nothing could cause value stocks to come back into vogue quicker than jittery investors looking for a steady paycheck until relations with China are back on firmer footing.
The stock market rallied on Mnuchin’s guardedly optimistic outlook, pushing the S&P 500 Index up 0.74% that day. The tech-heavy NASDAQ Composite Index, with a paltry dividend yield of 0.8%, gained only 0.56% at the same time. Meanwhile, the value stocks in my 3X portfolio that yield 4.2% easily beat them both with a 0.93% rise.
Yielding to Pressure
That means income stocks outperformed momentum stocks on the heels of Mnuchin’s pro-growth commentary. If investors were as stoked as he claimed about the outcome of negotiations with China, then the high-multiple stocks comprising the QQQ should have responded more strongly than either the SPY or my 3X portfolio stocks to this news.
Instead, just the opposite occurred.
A year ago, a mixed message such as Mnuchin’s would have been construed by eager investors as a green light to double down on growth companies. Now, those same folks are more circumspect when taking action. They still want to own stocks, but prefer those that pay them back while they wait to see if China and the U.S. can make a deal.
Sure enough, negotiations between the U.S. and China crumbled on Tuesday, sending the main stock indices deeply into the red. The risk of trade war continues to loom over this stock market, ensuring a protracted period of volatility.
That’s why the companies like the ones in my 3X Income Portfolio should benefit the most from the gradual migration into value stocks. The high dividends they pay are money in the bank, while future profits from momentum stocks may end up being a glass half-empty.
Here’s another pop quiz: Do you have enough money saved for retirement? Most investors don’t. My colleague Ari Charney has developed a groundbreaking investment method that’s an income-generating machine. To learn how it works, click here.