The COVID-19 outbreak in the U.S. and subsequent shutdown of a large swath of the economy has proven there are no safe-haven investments, other than cash, which, in this period of near-zero interest rates, doesn’t provide a return, just safety. The strategies I use in my investment services focus on building an income cash flow from dividend-paying stocks and other high yield investments.
Although other factors in addition to the economic shutdown—the Saudi crude oil price war and a crash in energy sectors, for example—have led to the steep drop in high-yield investment values, the COVID-19–driven stock market crash has certainly affected these investments in a profound way.
Adding to the pain are the companies choosing to slash or suspend dividend payments. These companies have been directly affected by the COVID-19 shutdown, or fear its possible consequences. It is an understandable business decision, but not good news for income-focused investors. However, despite the pain felt by income investors, the COVID-19 crisis has planted the seeds of a tremendous opportunity.
I start with the assumption that the U.S. will eventually get the COVID-19 outbreak under control, and that life and the American economy will get back to “normal,” and companies that have been restricted by the shutdown will resume their regular business operations, if in different ways.
The opportunity is that we will find out which companies did the best job navigating the financial crisis and were able to reward investors with continued dividend payments through the crisis and recovery. Once this crisis is behind us, we will be able to look back and see which companies or investment products performed best through an unpredictable and unprecedented stressor on the American economy.
We have a chance to find those stocks and investments that will prove to give the power of endless monthly income through the worst financial crisis since the Great Depression. I will watch for dividend-paying companies that took care of investors in relation to the COVID-19 crisis. There are four priority tiers in which to classify these investments.
Tier One: Companies or other high-yield investments that sustained or even grew dividend payments through the period affected by the crisis. These stocks will likely be a minority, but once you know which investments these are, make them the core of an income-focused investment portfolio.
Tier Two: Companies that, out of caution, suspended or severely reduced dividend rates, but then quickly restored dividend payments once it was clear that business operations would return to normal. The better-run hotel REITs will likely fall into this tier.
Tier Three: Companies that slashed dividends, and will elect post-crisis to go with a measure dividend growth policy. For example, a hypothetical company cut its dividend from $0.50 down to $0.05. After regular business resumes, the Board elects to grow the dividend at a measured pace, for instance up $0.05 every quarter, or the board decides to wait a year and go with annual dividend increases. Companies that take the this path will be excellent long-term total return investment prospects. The growing dividend should help produce steady share price appreciation.
Tier Four: Companies that slashed dividends in the crisis and will decide not to do much to bring back higher payouts to investors. The companies may have a valid reason to find other uses for free cashflow. However, they would not be good picks for an Endless Monthly Income portfolio.
Now in the middle of the COVID-19 crisis, those stocks and investments that will prove to belong in the top three tiers are tremendously cheap. The challenge is, how quickly will each investment reveal its tier? When will be the time to invest in getting high yields and capital gains?