Missed the Dip in Stocks? Where to Find Yields of 3% to 6%.

I sneezed, and missed the buying opportunity in stocks. The


S&P 500

was down 13% at one point this year. It ended the first quarter with a loss of just 4.6%, including dividends. But all of the bad stuff is still happening: war, rampant inflation, interest-rate increases. Actors now appear to be slapping comedians, and if that’s not upsetting enough, some short-term bonds have recently paid more than long-term ones.

The world has gone mad, so there should be no end of good investment deals. But I see plenty of new tops and some unsightly bottoms.




Apple

(ticker: AAPL), prosperous as ever and pushing a $3 trillion market value, goes for 28 times earnings, and is seen growing by only single-digit yearly percentages from here.




DraftKings

(DKNG), down 68% in a year, operates in a business where the casino always wins, yet it somehow isn’t expected to generate free cash for years, even though it doesn’t even have to build casinos.

Then again, maybe free cash flow won’t matter for now because there’s a flight back to la-la land forming.




GameStop

(GME) recently topped $180, up more than $100 since the middle of last month, before settling back to $165. The company just announced it would pursue a stock split.




AMC Entertainment Holdings

(AMC) has had a similar run. Which inside joke will go vertical next? I’d be tempted to go all-in on the wrong Zoom stock if it hadn’t been delisted.

At this point, I can’t tell whether investors are betting on the Fed to succeed or fail in quelling inflation while preserving growth. And I’m apparently not alone.

“I can’t remember a more uncertain time in my career,” says Michael Fredericks, who oversees teams at BlackRock that shop for income across asset classes, including in the


BlackRock Multi-Asset Income Portfolio

(BIICX). He points out that Wall Street forecasts for the 10-year Treasury yield by mid-2024 recently ranged from 1.7% to 4.5%. The most bullish forecast is that the U.S. economy will expand by 3% that year after inflation, and the most bearish is that it will shrink by 1%.

“It makes it really hard to take heroic bets,” Fredericks says. He’s struck by how little stocks have fallen this year, relative to bonds—high-grade corporates lost 7.5% during the first quarter—which leads him to think that stocks might tread water from here, and some extra portfolio income will be welcome.

Start with common dividends. Five years ago, the S&P 500 index traded at 18 times forward earnings, and the index’s high-yield stocks went for about the same price. Now, investors can pay 20 times this year’s earnings for the index, or 13 times for its high-yielders. One fund that tracks them is the


SPDR Portfolio S&P 500 High Dividend

exchange-traded fund (SPYD). It yields 3.8%.

Historically, high-dividend stocks have been viewed as too similar to bonds to buy when interest rates are rising. But things have changed. The broad stock market is dominated by pricey growth stocks, which also tend to be sensitive to interest rates. The


Nasdaq 100’s

correlation to the 10-year Treasury yield over the past year has been well above its 20-year average, says Fredericks. Dividend payers, meanwhile, include plenty of energy and defensive companies, which seem well positioned now. The correlation between the S&P 500 High Dividend index and interest rates has been weak in recent years, suggesting that high-dividend stocks can do better than expected as rates rise.

Preferred stocks issued by top-quality banks yield around 4.5% to 5%. Bank balance sheets are strong, but don’t overdo exposure to preferreds, or reach too far for yields, because share price movements can turn volatile. One option is the


Fidelity Preferred Securities & Income

ETF (FPFD), which launched last June at $25 a share, and now sells for less than $23, with a 4.5% yield. Top holdings include issues from




Ally Financial

(ALLY),




Wells Fargo

(WFC), and




Morgan Stanley

(MS).

Fredericks isn’t keen on business development companies, which invest in small and midsize companies, often private ones, or mortgage real estate investment trusts, which unlike most REITs, invest in financing rather than property. Both use too much leverage for his tastes. He has invested in master limited partnerships in the past, but not so much now, because returns for many of them can depend upon the price of oil, which is difficult to forecast.

Bonds are looking less loathsome. It’s better now to boost yields by dipping modestly on credit quality than by going long on duration. The two-year and 10-year Treasuries both recently yielded only about 2.3%. Inflation was last clocked at 7.9% for the 12 months through February. It will likely be lower in the year ahead, if only because we are now beginning to lap last year’s price surge, but even so, buy Treasuries only dutifully, not eagerly. High-grade corporate bonds are slightly more interesting, in the way that butter pecan ice cream is racier than vanilla. The


Vanguard Intermediate-Term Corporate Bond

ETF (VCIT) yields 3.4% and has an average duration of 6.4 years.

Junk bonds pay around 5% just below investment grade, at BB ratings, and 6.25% a little further down, at B. You can plumb murkier depths inhabited by 8%-yielders, but Fredericks doesn’t recommend it. He expects the higher tiers of junk to perform well as the economy remains healthy. “We think about 15 percent of the high yield universe is actually going to get upgraded,” he says.

Finally, don’t forget about options. They’re not just for message-board meme-riders looking to lever up on GameStop’s moon voyage. Investors who hold individual stocks for dividends can enhance their income by writing covered calls, or selling upside bets to gamblers. The risk is that stocks have a great rest of the year, and call-writers miss out on some gains. But if stocks stall from here, the extra income will delight like butter pecan, bordering on maple walnut.

Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.

Source: https://www.barrons.com/articles/stocks-yields-51648852945?siteid=yhoof2&yptr=yahoo