VIDEO INTERVIEW: How to “Bullet Proof” Your Portfolio
Welcome to my video presentation for Friday, February 9. As the Federal Reserve ends its tightening cycle and gets ready to cut interest rates in 2024, where can you turn for reliable and safe high yields?
With that overarching question in mind, I interviewed my colleague Nathan Slaughter, chief investment strategist of High-Yield Investing and Takeover Trader. Those two advisories are published by Investing Daily’s subsidiary, Street Authority.
Below is a transcript (edited for concision) of the video interview. My questions are in bold.
Nathan, you’re a big proponent of high-yield stocks, for growth, income and safety. You’ve referred to the best picks in this asset class as “bullet proof.” How do you define a high-yield stock?
We’ve all had to re-examine the definition of high yield in recent years. When I first broke into this business back in the late ‘90s, you could collect a risk-free 6.5% payout on U.S. Treasuries and get 8% on AAA-rated investment-grade corporate bonds. Not anymore. But we’ve never lowered our criteria.
Where do you cast your net for high yields? I assume you often venture beyond the boundaries of the S&P 500.
That’s right. Besides, people don’t subscribe to my newsletter to hear about familiar, widely held stocks like Walmart (NYSE: WMT).
We get off the beaten path and look for yields in obscure corners of the market that don’t always get a lot of coverage from Wall Street. I’m talking about closed-end funds, master limited partnerships, real estate trusts, business development companies, preferred stocks, convertible bonds. Higher yields are out there, you just have to find them.
What does the international arena offer yield-hunting investors these days?
About 80% of the world’s publicly traded companies are based overseas. Four out of five. Limiting your portfolio to domestic stocks is like shopping at the grocery store and only browsing every fifth aisle. You’re missing out on a lot of opportunities.
More importantly, dividend yields are richer in many foreign countries. Valuations are often more attractive too. If you’re worried about runaway government debt, rising inflation and policies that devalue the dollar, those concerns are less of a threat in many foreign markets. That’s why I have an entire portfolio dedicated strictly to foreign securities.
What are the major criteria that you apply to a high-yield stock before you consider it a buy?
Great question. I could probably spend an hour on this subject. But to summarize, this is not a trading service where we buy a stock at $18 and flip it the next day at $19. We look for dependable income-producing securities that can systematically build wealth over time.
That starts with a macro, top-down approach to identify sectors and industries that have strong fundamentals and tailwinds. Then I handicap those races to try to pick the best-in-class winners.
Obviously, we dig into financial statements to evaluate operating margins, cash flows and capital expenditures. But I believe it’s the qualitative factors that drive the quantitative.
If a stock fails to meet even one of your exacting standards, you won’t put it into your High-Yield Investing portfolio?
Well, no company is perfect. I’m usually willing to overlook minor blemishes. As a contrarian, I’m not afraid to buy quality stocks that other investors have abandoned because of some temporary issue. That’s how you get a dollar’s worth of assets for 50 or 60 cents. But there’s a big difference between a bargain and a value trap.
Stock market valuations are high and we’re probably facing temporary sell-offs this year. Why do high-yield stocks offer protection during market downturns?
When selling becomes indiscriminate, investors panic and run for the exits. They dump the good with the bad.
You reach a point where the payout starts to look increasingly tempting, assuming the distributions are sustainable. That’s not always the case. But most of the holdings in our portfolio have not only maintained dividends during prior economic slumps, but also increased them.
From a high-yield standpoint, which sectors look the most appealing to you right now and why?
I really like the shipping sector. Global trade is accelerating and there aren’t enough containers and ships to move cargo from port to port. Rates have moved sharply higher. Considering the long lead time to build new vessels, this imbalance isn’t going away anytime soon.
I also think we’re on the cusp of a commodities super-cycle, as copper, cobalt, zinc, and other critical natural resources are on track for widening supply deficits.
What are some of the common perils of seeking high-yield equities?
One of the biggest is simply following the herd and selling because others are selling or buying because others are buying. Pay attention to what the business is doing, not the people around you.
Another is being too narrowly focused on the income statement without paying more attention to the balance sheet. But the biggest mistake is just blindly chasing yield at the expense of due diligence. Total return is what matters. A 10% yield doesn’t help you much if the shares drop 30%.
Thanks for your time, Nathan.
PS: Has Nathan Slaughter whetted your appetite for high-yield stocks? For details about his publication, High-Yield Investing, click here.
John Persinos is the editorial director of Investing Daily.