Insanity is doing the same thing over and over again, while expecting a different result. And by that definition, the Federal Reserve is proving certifiable.
Focusing on inflation is reasonable. But reining it in by making borrowing unaffordable is clobbering investment, thereby worsening the long-term forces responsible.
There’s still a lot of happy talk about a “soft landing” and eventual interest rate cuts. But there’s also absolutely no sign the Fed is planning anything but more of the same. One governor declared last week “further rate hikes will likely be needed to return inflation to 2 percent in a timely way.”
That means less investment for everything from housing and energy to replacing fraying supply chains with China. The gap between long-term demand and supply is growing, the age old formula for higher prices and inflation. And near term, rising rates raise recession risk, as the cost of existing debt eats into spending by businesses, consumers and even governments.
Investors understandably soured on bonds last week, as the 10-year Treasury note yield surged to its highest level since 2007 and other borrowing rates followed it up. But crushing investment isn’t good for stocks either. And last week, we had a taste of things to come, with the S&P 500 dropping roughly -3 percent led by selling of big technology stocks.
In my post a week ago, I urged investors to invest like it’s 1999. That is, to consider a switch from tech to dividend stocks.
Market and economic conditions are now eerily similar to 1999. And 2000 was a year of record returns for dividend stocks, even as it was the beginning of the Great Tech Wreck from which the Nasdaq 100 would need more than 15 years to recover.
I’m still advising the switch. But there’s an even more important reason to make a move.
I’ve known Lowell Miller—founder of the iconic mid-sized firm Miller Howard Investments —since the early 1990s. He’s been a subscriber of my utility stock advisory for longer than that. And his book “The Single Best Investment” is the best I’ve read on the stock market.
For the past decade, I’ve served as an independent director on his closed-end fund Miller Howard High Income Equity (NYSE: HIE). And while he’s since retired, we still get together to share ideas. We did so this week. And per usual, he had one worth chewing over:
It’s not the dividends that make high yielding stocks the single best investment. It’s the fact there’s no more reliable sign of high company quality than sustaining a generous and growing dividend. And systematic investment in best in class stocks is the surest way to build real wealth over time.
To put that into current market context, there are thousands of stocks yielding more than the S&P 500’s 1.6 percent. And there are hundreds paying more than the iShares Select Dividend ETF’s (NYSE: DVY) 3 percent. But only a fraction of those can be considered “high quality companies,” able to keep growing with strong balance sheets come what may.
It’s a subtle difference but a crucial one. It’s fundamentally why I shy away from most ETFs, which by definition have to own good and bad. And it’s why those making the switch to dividends from tech will need good stock picking practices to succeed.
We spend a lot of time in our www.capitalisttimes.com advisories focusing on how to find quality stocks, and companies we’ve determined stack up best. So does Lowell in The Single Best Investment. And it’s fair to say criteria for making choices vary at least somewhat from sector to sector. But here are a few to guide your search:
* Balance Sheet—Not all of us have studied accounting. And even major credit raters like S&P and Moody’s get it wrong sometimes. But cash flow and debt are two critical concepts we can apply from our daily lives. And companies that can manage their debt and capital spending without having to borrow are going to fare best in tough economic and market conditions.
* Reliability of Revenue—In good times, all too many investors ignore where a company’s revenue comes from, i.e. how willing/able its customers will be to keep paying for products and services if money gets tighter. And there are massive differences between, for example, regulated utilities and luxury goods retailers. Stock prices of most cyclical companies already reflect considerable recession risk. But to buy now, there should be offsetting circumstances, such as balance sheet strength.
* Regulatory and Legal Concerns—Federal regulation has tightened under the Biden Administration in multiple areas. And increasingly well-funded interest groups are willing to challenge any action they disagree with in court. The bigger companies become, the less likely they’ll wholly avoid litigation and/or regulatory challenges. The key for investors is to be aware of them.
So what’s a good example of a high quality, dividend-paying stock selling cheaply right now?
The answer I typically give anyone asking me that question is a list of companies. That’s not because I don’t want to be pinned out. Rather, diversification and balance in a portfolio are even more important than stock picking. And I always find at least a dozen companies that look attractive for purchase.
But NextEra Energy (NYSE: NEE) stands out on all things quality in this market. That’s a very strong balance sheet, extremely reliable revenue from its Florida utility and nationally leading contracted renewable energy business, and few significant legal and regulatory concerns. And there’s no company better placed to take advantage of tax credits in the Inflation Reduction Act.
The chart admittedly looks terrible. But that’s no different from other high quality dividend stocks. The price/earnings multiple is the lowest and the dividend yield the highest in five years. Insiders are buying and Wall Street increasingly bullish.
When the market does turn, NextEra is precisely the kind of high quality dividend stock to benefit most. And investors will lock in another 10 percent plus dividend increase next year.