Take advantage of the bargain prices that have lifted these stocks’ yields to new highs and lock in double-digit yields forever. This is a rare buying opportunity for three profitable and growing companies dragged down by the immense fear currently gripping the market.
Bear markets happen. It’s a fact of investing in the stock market. Yet, when share prices are going up we all tend to forget that the next bear market is out there somewhere in the future. Well, the future has arrived and the stock market is going through its first bear market event since 2009. Now that we are feeling the pain of a bear market, there are two points I would like you to remember. One: all bear markets end and the stock market recovers. And, two: income stock investors should have a different outlook about bear market events.
Keeping your wits about you through big down moves in the stock market is a tough one. It is hard to watch the values in your brokerage account go down, sometimes by a lot. You feel like you need to sell to prevent any further losses. The problem is that this will just lock in your losses and the market will have gained back most if not all of those losses before you have the guts to buy in again. You have to trust that history will repeat itself. There have been at least nine bear markets or short-term crashes in the U.S. stock market in the last 40 years. Over that same timeframe, the S&P 500 stock index has risen from less than 100 to just under 2000 today. In the shorter term, the market was down about 50% at the bottom of the 2008-2009 bear market. Yet an investment in the S&P 500 is now 45% higher than the peak value hit in 2007 before the last bear market. Any investments made before the 2007 peak or during that bear market fall are worth even more, much more.
As income stock investors, we should worry less about the ups and downs of share prices. A falling share price will not push a quality dividend paying company into a dividend rate reduction. When there are actual economic issues, such as the current low energy prices, there will be some dividend reductions, but again most companies will be able to sustain their dividend rates, and many will still be able to grow dividend payments. So as income stock investors we want to view a market correction/bear market as an opportunity to buy high-quality dividend stocks at even higher yields and lock in those yields for the long term. I tell you, I am digging in the sofa cushions to find change to send off to my brokerage account so I have as much cash as I can dig up to buy shares of some of my top pick income stocks.
With share prices down, there are some tremendous values in high-quality, high-yield stocks. Here are three, ranging from conservative to speculative:
Ship Finance International Limited (NYSE: SFL) has been a steady dividend payer for over 10 years. The company owns ships of all types and puts them out on long-term leases. Even though the company is very conservatively managed, the market does not understand the Ship Finance business operations. Currently, the dividend is being increased every quarter. With the share price down, SFL now yields 13.6%.
New Residential Investment Corp (NYSE: NRZ) is a specialty finance company operating in the residential real estate mortgage sector. However, it does not make mortgages or own agency mortgage-backed securities. New Residential takes advantage of mispricing or special knowledge of more abstract mortgage financial instruments. The company has been growing its dividend, but market fears have driven the share price down to give a current yield of over 18%.
Targa Resources Corp (NYSE: TRGP) is an energy infrastructure company with a history of very rapid dividend growth. The latest dividend was up 24% compared to a year earlier. The low energy prices will probably force Targa to reduce its dividend growth rate to 5% to 10% per year for the next few years. This energy stock has lost 90% of its value since mid-2014 and now yields over 22%. If you believe the world will still drive cars, transport goods, and heat and light their homes, infrastructure energy companies will continue to provide necessary services.
While these yields are somewhat mind-blowing, the real value here are the share price gains you will earn (while locking in these high yields forever) when the market figures out that the world will not end and companies like these have sustainable business operations.
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Position: Long SFL, NRZ, TRGP