The Market Is Down, Our Income Is Up
Co-produced with Beyond Saving
The market is having a rough month, down about 8% month-to-date.
While not yet officially in “correction” range, it’s getting very close. Unlike the collapse we saw in March, this decline comes without any obvious significant move.
To put things in perspective, even with the current pullback, the market is still slightly up on the year.
Why I remain Bullish On Equities
This strong job recovery has been fantastic, blowing away all analysts’ estimates. This has resulted is a return of consumer spending, with retail sales continuing to advance strongly. The U.S. economy is based on consumer spending, and it’s why a strong economic recovery will probably not take long to achieve.
The housing markets are strong for both existing and new construction. So is the projected data for building permits and mortgage applications. The median existing home price was $304,100 recently, up 8.5% from a year ago. This marks the first time ever that median house prices in the United States have exceeded the $300,000 mark.
The auto market also is surging due as more people are buying cars. Importantly, many companies are currently working more efficiently, saving on rent and other operating expenses, and thus increasing their profit margins. The bottom line is that many companies should be seeing further gains in revenue and profits, which is bullish for equities.
The main problem with the markets today is that the S&P 500 index is weighted more toward technology, and the valuation of this sector is very expensive. However, the broader stock market that’s not related to the red-hot technology stocks is still cheap, and even very cheap in many instances.
This stark reality has been reflected in the prices of value stocks, but growth stocks have climbed this year and have been dragging all the indexes up.
For those who are worried about another market crash, it’s highly unlikely that will happen. Historically, we have not seen two bear markets in the same year. Importantly, the lack of liquidity that caused the market crash back in March is not an issue anymore. The Federal Reserve has pledged to keep the markets, with plenty of liquidity and supporting any kind of related market turbulence. Another factor to keep in mind is that interest rates are at all-time lows, and the Fed is determined to keep them that way, even at the expense of some inflation. There’s just no other alternative to get high yields than in equities, or in particular high dividend stocks.
While the market pullback started with weakening in a lot of growth/momentum style stocks, for the past week it has led to a few days where almost everything is sold off. However, nothing has happened that will dramatically impact the performance of various companies. This is unlike the ravages of COVID-19 which did have a material impact on most companies. For income investors, this is exactly the kind of sell-off we want to see. Broad red across the indexes is an opportunity to buy income cheaper today than it was last week.
The market is down, but our income continues to climb. At High Dividend Opportunities, we quickly updated members on some of the best income opportunities to buy now and grow your income stream. A list of more than a dozen strong buys was posted on Thursday with yields ranging from 5% to well over 10%. Today, we share with our followers and readers 3 of these picks.
Pick #1: Healthcare Trust of America (HTA) – Yield 5.0%
We first wrote about HTA back in June. They buy and lease medical office buildings, a growing sector that has been very strong. What has happened since we wrote about it?
HTA raised their dividend by 1.6%. This is HTA’s seventh consecutive annual increase. We love high yield when you can start with a high-yield and get regular dividend increases on top, you can just sit back and watch your income grow.
HTA issued new debt, refinancing 3.7% Unsecured Notes with 2.0% Unsecured Notes due 2031. For REITs, the cost of capital is a main driver of their profits. Being able to borrow 1.7% cheaper is huge and will drive FFO growth. Cheaper debt means higher cash-flow and higher future dividends.
Finally, HTS has started a new share buyback program. Buying back shares when they are at low prices helps improve per/share metrics and provides more flexibility with issuing new shares when the share price recovers.
All of this is great news, yet the market is selling off HTA with everything else. With prices coming back down, this is a position that we are adding to.
Pick #2: The GEO Group, Inc. (GEO) – Yield 12.7%
GEO is trading only a little above its 52-week lows. This despite GEO raising the midpoint of guidance at Q2 earnings and the reality that they provide a service that is a necessity for the government. Whatever the next president’s views on reforming the justice system, GEO provides a whole host of services that are integral to the American justice system.
From temporary holding for ICE where they detain people until they can have their day in court, to their secured services where GEO handles the population overflow from aging and over-populated public facilities to their community re-entry services where GEO provides everything from electronic monitoring to transitional living facilities. GEO is involved at every step of the way, and whether the government decides to emphasize one area or another, GEO will be willing and able to supply the facilities and expertise that the government needs.
GEO will be declaring their dividend soon, and we believe there will be no surprises. GEO already disclosed that the dividend will be $0.34/quarter.
There’s little doubt that the political environment is playing a major role in GEO’s struggles, and with the election only a little over a month away, we believe that GEO’s share price is going to have a strong recovery regardless of who wins the election! GEO thrived under eight years of President Obama. This is one of the best opportunities available in the markets today.
Pick #3: PIMCO Corporate & Income Opportunity Fund (PTY) – Yield 9.8%
PTY is one of our favorite “go-to” picks when the market gets volatile. While the S&P is down over 8% month-to-date, PTY’s NAV is down only 2%.
This stability is because PTY is invested primarily in debt. Debt saw a huge impact in March due to the liquidity crunch that had institutions selling everything in order to raise cash. With the Fed’s involvement, that is not an issue today, so we expect that debt will remain far more stable than equities.
PTY is a fund that has been tested through the GFC and has routinely come out on top in the long run. This is because it’s an actively-managed fund the focuses on finding mis-pricings during turbulent times. The turmoil creates opportunities for PIMCO to buy assets at discounts, just like we are doing today.
In our weekly updates to our members, we have been warning that there would be volatility and a probable pullback. This is why recently we have been recommending to invest mostly in mispriced preferred stocks and baby bonds to boost our yields. Now that common equities have come down, opportunities abound!
The markets are likely to remain very volatile in the near term. To the downside, the 3200 level provides massive support. At a worse-case scenario, in my opinion we can see the S&P index go down to the 3100-3150 range which corresponds to the 200-day moving average. This is about 3% lower from where the S&P 500 closed recently.
One other important reason to remain bullish is that the globe is awash with liquidity. Many investors have missed on the huge gains because they were scared to put their money at work into equities as they did not believe in this market. These investors kept their funds in CDs and Treasuries earning next to nothing. I would expect that these investors use the dip to put their money to work. This will create a big support for the market. So I expect that we will be in consolidation mode before we start to go much higher. It’s time to load up on solid high-dividend stocks.
Remember, always buy in small bites, set your price and be patient. When adding to your portfolio, we recommend that you start with looking at your sector allocations and look for opportunities where you are underweight.
When everything turns red, the natural human response is to worry over what is “lost.” The response investors should have is to start looking for deals. The lower you can buy high dividend stocks, the less you are paying for your income stream. This is the big opportunity for your income to go up as the markets go down!
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Which Dividend Stocks To Buy?
The above report includes 3 of many recommendations that we posted to our members in a special report posted on Thursday September 24. We invite you for a 2-week free trial to have a look at our comprehensive buy list.
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Disclosure: I am/we are long HTA, GEO, PTY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities.