Video Update: 7 Rules for Investing During the Pandemic
This is John Persinos with a video update for Tuesday, July 14.
Think the coronavirus crisis is over? Many investors seem to think so, judging by the rebound in equities from their March lows. But this confidence flies in the face of soaring cases and deaths in the United States from the pandemic. My following video provides a concise summary of how to invest amid the challenges ahead.
Investors got a reality check Monday, as worrisome coronavirus developments sank the stock market in the final hour of trading. The three main U.S. indices were trading firmly in the green for most of the session when investors suddenly lost heart after California announced rollbacks of its economic reopening. The Dow Jones Industrial Average had surged as high as 563 points but reversed direction to close with a gain of only 10.50 points or 0.04%. The S&P 500 lost 29.82 points (-0.94%) and the tech-heavy NASDAQ tumbled 226.60 points (-2.13%).
In pre-market futures trading Tuesday morning, the three main stock benchmarks were poised to open higher, as second-quarter earnings season kicks into high gear and investors hope for reassuring results. But if Monday is any guide, you can expect the roller-coaster to continue.
The undeniable science…
The consensus of health experts is that we have a long way to go before the virus is contained. The economy and financial markets still face enormous uncertainties and headwinds from the pandemic. According to the latest estimates from the Centers for Disease Control, there will likely be between 140,000 and 160,000 total reported COVID-19 deaths by August 1. That equates to about 14,000 additional deaths between now and the end of July.
The politicians and television pundits who currently downplay the coronavirus are the same people who were telling us back in February that the pandemic was “contained” and the economy would be fine. They were wrong…dead wrong.
Meanwhile, the recession caused by the coronavirus has led to the largest decline in health coverage on record: An estimated 5.4 million American workers lost their health insurance between February and May, according to a new study released on July 13 by the non-partisan research group Families USA. Without a confident consumer, we can’t have a strong economy.
Make your investment decisions based on hard data, not political rhetoric. Investors who deny science will lose money. Take a look at the following chart. The health statistics tell a grim story:
Make no mistake: You should stay invested. But in the midst of this “Fear of Missing Out” rally, you should at least get cautious.
Shelter from the storm…
The smart move now is to increase your exposure to dividend stocks. This asset class provides higher safety, but with plenty of growth and income.
Below, I outline seven time-tested rules to picking the best dividend payers. To be sure, many companies have cut their dividends this year, due to the economic damage caused by the pandemic. However, the following criteria can help you find not only the safest dividends, but also those that are likely to be restored after this economic rough patch is behind us.
For fundamentally sound companies that meet my criteria, reducing the dividend was a prudent, precautionary move that positioned the company for a robust post-COVID rebound. The kicker is that many of these inherently strong income payers currently trade at a bargain.
Not only are top-quality dividend payers attractive sources of steady income, they’re value plays that offer the potential for strong growth. Income, value and growth: that’s an unbeatable combination.
According to research from BlackRock, 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.
Your Checklist for Greater Wealth
Here are the key factors to consider, when seeking the best high-dividend stocks for your portfolio:
Rule #1: 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.
Rule #2: 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%.
Rule #3: 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.
Rule #4: 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.
Take a steady-as-she goes stance, even during market downturns. As Warren Buffett once said: “Lethargy bordering on sloth remains the cornerstone of our investment style.”
Rule #5: 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.
Rule #6: 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.
Rule #7: Keep it simple! This tip applies to all investments, not just dividend stocks. Peter Lynch said it best in his 1994 book Beating the Street: “Never invest in anything that you can’t illustrate with a crayon.”
Regulated, U.S.-based utilities stocks are good proxies for dividend growth. Utilities provide essential services, a virtue that tends to make their stocks recession-resistant. During this pandemic-induced economic contraction, people still need electricity. Utilities also are insulated from overseas shocks, such as tariff wars. Investors seem to have forgotten that the Sino-American trade war isn’t over.
For the best utilities stocks to buy, click here now. These companies are cash cows that generate juicy double-digit yields, year in and year out. If you’re looking for sleep-well-at-night investments, these stocks are for you.
Questions about portfolio protection? Drop me a line: firstname.lastname@example.org
John Persinos is the editorial director of Investing Daily. He also edits the premium trading service, Utility Forecaster.