Just a few months ago, bond “experts” were all over the financial news networks predicting the yield curve would soon invert. An inverted curve, where short-term rates are higher than long-term rates, is a reliable indicator that the economy will go to negative growth – a recession. At that time the stock market was setting new records higher, even as the fears of a recession grew. Currently the rate curve is very flat, meaning short-term rates and long-term bond rates are not very different.
The interest rate news in late 2018 helped push the stock market into a steep decline. So, what is it to be? An economic recession with higher stock prices or a strong economy with lower stock prices? Or market and economic activity no one predicted? Will the yield curve flatten or steepen? What will they say next week?
The point is that an investor who invests based on the latest “expert” opinions is likely to get whipsawed into losing money in the stock market. In December, the stock market went into a deep correction. Many financial pundits took this as a prediction of an economic recession and continued stock price decline into a bear market. Stocks did just the opposite and so far, have gone up every week in 2019.
If you are an investor, and not a trader, and want to grow your portfolio value, you need an investment strategy that accounts for market corrections. Over the course of 2018, there were lots of predictions that a correction was coming. Now we have experienced the mental stress that comes with a steep market drop.
My plan, which I regularly share with my Dividend Hunter readers, is to focus on owning higher yield dividend stocks with potential for dividend growth. A dividend focused investment strategy provides three advantages when the stock market corrects.
- Quality companies will continue to pay dividends. You will earn dividend income right through the correction and recovery.
- Dividends are additional cash to put to work when share prices are down. Investors say they are waiting for a correction to invest. Reinvesting your dividends allows you to do that.
- Buying income stock shares when prices are down boost your portfolio yield, which you will continue to earn for as long as you own the shares.
Now that the major market indexes have lost almost 20%, there are lots of dividend stocks at very attractive valuations. However, my editor likes for me to highlight some attractive stocks with each article. Here are three that have monthly dividends and will pay well through a correction and provide you with nice gains when the market recovers.
EPR Properties (NYSE: EPR) is a very well-run net lease REIT that has done a great job of growing the business and generating above average dividend growth for investors.
With the triple net-lease (NNN) model, the tenants that lease the properties owned by EPR are responsible for all the operating costs like taxes, utilities and maintenance. EPR’s job is to collect the rent checks.
Typically, NNN leases are long term, for 10 years or more, with built-in rent escalations. EPR Properties separates itself from the rest of the triple net REIT pack by the highly focused types of properties the company owns. The EPR assets can be divided into the three categories of Entertainment –movie megaplex theaters, Recreation – golf and ski facilities, and Education – including private and charter schools, and early childhood centers. EPR just increased its dividend for the ninth consecutive year, boosting the payout by 4%.
The shares yield 6.1%.
Main Street Capital Corporation (NYSE: MAIN) is a business development company has been a tremendous stock for income focused investors.
A BDC is a closed-end investment company, like closed-end mutual funds (CEF). The difference is that a CEF owns stock shares and bonds, while a BDC makes direct investments into its client companies. A BDC will have hundreds of outstanding investments to spread the risk across many small companies. MAIN uses a two-tier approach to its portfolio. This unique strategy allows Main Street to generate a high level of interest income and capital gains from equity investments.
This company is one of just a small number of BDCs that has grown its dividends and net asset value per share. The monthly dividend has been increased five times in the last three years. MAIN has also been paying semi-annual special dividends that boost the realized yield above the current yield.
The stock currently yields 6.3%.
The Reaves Utility Income Fund (NYSE: UTG) is a closed end fund manage by Reaves Asset Management, an investment manager firm that solely focuses on the utility, telecom and infrastructure sectors.
I recommend UTG over individual utility stocks because it pays monthly dividends and has a higher yield than the typical utility stock. The UTG dividend has never been reduced. It has increased steadily and is now 75% higher than at the time of the fund’s IPO in 2004. No portion of the dividends paid have every been classified as return-of-capital.
Utilities are viewed as a safe haven stock sector, and UTG is a great way to invest in that sector.
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