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I spent some time this past weekend running screens and looking for new ideas, given how bad things are looking for traditional investors right now. The S&P 500 has been sitting below its 200-day moving average for over a month, and rates on the 10-year treasury have leapt almost 80% higher since the first of the year.
At the start of April, it felt like the traditional 60-40 stocks-bonds portfolio might've been "slipping," but now it's in a greased-up express elevator to Hell's basement.
Reading what the fixed-income markets tell us indicates that we will be living with inflation longer than the pundits and politicians might have led us to believe. There is also every indication that the Fed will go too far in its efforts to reel it in, potentially tipping the economy into a slowdown or outright recession sometime in 2024.
That's a horrible scenario for pretty much all investors, but especially those who need to earn income from their portfolio. Fortunately, there's a way forward.
For most of my career, I have advocated using alternative income strategies. To create these portfolios, I look primarily at income-producing assets that are not all 100% correlated to each other, so we can earn above-average income while reducing volatility as much as possible.
I've written about this asset class in the past: closed-end funds, real estate investment trusts (REITs), master-limited partnerships (MLPs), business development companies (BDCs), and some operating businesses.
The point of this type of portfolio is to own assets that zig when others zag in order to protect profits and maintain an income stream. For instance, investors who have a good mix of energy MLPs and REITs in their portfolio are having a pretty good year despite all the downside activity the broader stock and bond markets have been experiencing.
I found two operating businesses that meet my criteria and I think are must-buys. Both of them have dividend yields of more than 5% each and are quite likely to pay out higher than they did last year. In addition, they're both financially solid enough to make it through a rough economic cycle, so you can buy more in a bad market to lock in a higher yield.
Here are the tickers...
This IT Infrastructure Provider Is Here to Stay
Cogent Communications Holdings Inc. (NASDAQ: CCOI) provides internet and private network connections for enterprises, and it carries internet traffic for internet service providers, content-producing companies, and other websites. Over 20% of the world's internet traffic is carried over Cogent's network.
Founder and CEO Dave Schaeffer built his business differently than his competitors. Rather than building out networks, he waited for rough spots in the economy and struck long-term lease deals with companies that already had fiber in the ground. The leases have an average remaining life of over 15 years.
Although the enterprises part of the business took some hits, and people worked from home during the pandemic, offices are starting to fill back up again. Their fast-growing data center business has taken up much of that slack, and Cogent now has more connections to data centers, including 54 owned centers, than any of its competitors.
Under Mr. Schaeffer's leadership, Cogent has been much smarter about buybacks than most companies. They tend to be buyers in bad markets and inactive when prices have been rising. That can build significant shareholder value over time.
The internet will be with us pretty much forever, and Cogent has positioned itself as a low-cost provider in the industry.
They have been generous to shareholders as well. The share yields 5.1%, and that dividend has grown at 15% annually for the past five years. Even if the stock price wobbles a bit, that dividend makes an excellent hedge.
The Best Regional Bank Stock to Buy Right Now
Those who have been reading my stuff for a while will not be shocked to know that my next pick is a bank. I have been hollering from the rooftops about Northwest Bancshares Inc. (NASDAQ: NWBI) for a few years now. The 126-year-old bank's home office is in Warren, Pennsylvania, in the western part of that state. Northeast Bancshares does business in its home state and Ohio, Western New York, and Indiana.
The bank has 172 branches and about $14 billion in assets.
They have a well-diversified loan portfolio, including residential and commercial real estate. They also have a strong indirect auto lending business that makes loans through a network of auto dealers.
They are pretty good at lending money, as their nonperforming assets ratio is just 1.09%, quite low for a regional bank.
It's one of my favorite kind of stocks in general - a company with a long history that's been quietly doing what it does for years. It survived countless recessions, the Great Depression, two World Wars, the internet bust, the housing market bubble burst, several more minor conflicts, multiple political messes... and it's still standing.
The bank has been very generous to its shareholders as the dividend yield is over 6% and has not been reduced since they completed their thrift conversion offering in 2009. The dividend has been growing at a little over 5% a year.
There's also an energy play here that makes it doubly attractive. Much of the bank's service area is in or near the Marcellus shale field in the Appalachian Basin. As the demand for natural gas continues to grow and prices climb, it's going to drive a lot of money into the region - that means more workers getting homes and car loans, which NWBI is ideally poised to provide.
Also, larger banks will once again be looking to expand into the region, which will raise the valuation multiples for all the banks in the area even if no one makes a direct offer to Northwest. So that dividend has a great backstop.
Stocks like these, with a strong dividend history, are simply a must for investors to own while the market is in a slump. You can wait until markets recover and the stock price returns to the old highs if you know the payout is coming in.
So buy some of these now, and plan on buying a lot more if we see the broader market pull back substantially.
It's more important than ever for investors to find solutions that can help counteract the volatility we've seen this year. As I mentioned above, banks are one area where investors are taking refuge.
But we've identified two other key market sectors where a new flood of buying is going to create opportunities for potentially massive profits, especially in small-cap stocks that often get overlooked by the major players.
Money Morning's chief investment strategist, Shah Gilani, has a strategy to narrow thousands of these stocks down to the few with the biggest potential to be the next market winners.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.