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A few weeks ago, we talked to you about the 2023 stock market outlooks from a number of Wall Street strategists. By and large, those experts were more optimistic about this year than last, but many believe we’ll still have to ensure more turbulence before reaching clearer skies.
This week, we’ll discuss one way to navigate this kind of market scenario—including a few defensive stocks to consider.
Dividends For Stability, Safety In A Mixed Market
One of the biggest risks to your investment portfolio is…well, yourself. When the market is extremely volatile and losses start to pile up, like they did in 2022 and 2020, some investors begin “panic selling.” In other words, they don’t look at each investment to determine whether they think they’ll fall farther—they simply see all the stock losses they’ve already piled up, and sell to avoid more.
Dividends For Stability, Safety In A Mixed Market
YATI Tip: Before every buy and sell, do your research. These sites can help.
Dividends For Stability, Safety In A Mixed Market
Now, most of those people sell out with the idea that they’ll jump back in when things are less volatile. But no one exactly knows when the market will do what it’s going to do. And many people that panic-sell miss out on some of the best-performing months as the market recovers.
Dividends For Stability, Safety In A Mixed Market
Bank of America’s Merrill unit studied the cost of trying to “time the market.” Here are three scenarios for how much money an investor would’ve made over a 20-year period—from the beginning of 1992 to the end of 2021—if they had put just $1,000 into the stock market.
Dividends For Stability, Safety In A Mixed Market
In other words, you’ll typically get the best results from simply buying and holding.
That’s easier said than done when, again, those losses start piling up. So one way to steady your hand is to invest in stocks with one or two (or both) traits:
A combination of knowing that you’re still getting some returns from your stocks, even if their prices are going lower, as well as seeing some of your stocks move less drastically than the rest of the market, can help keep you calm and prevent you from making rash portfolio decisions.
YATI Tip: Another way to cut down on volatility? Spread your risk across several index funds.
To help you out with that, we’ve talked to Austin Graff, CFA, Co-CIO and Portfolio Manager of the TrueShares Low Volatility Equity Income ETF (DIVZ), about how to position your portfolio to better withstand the occasional market whiplash.
“We don’t really come up with market forecasts too frequently because it’s a great way of being wrong,” Graff says. “So what we do is try to figure out what the market’s telling us.”
Right now, the market is sending several mixed signs. For one, Graff says, the bond market is signaling rough waters ahead, but the Federal Reserve is effectively saying things are OK and we can keep rates higher for longer. “Our expectation is somewhere in the middle,” he says.
Same thing goes with the equity market. Prices are recovering somewhat, indicating things are fine. “But management teams are saying differently,” Graff says. “Across the board in Q4 conference calls, management is saying 2023 will be tough.”
What do you do about that from a portfolio management perspective?
“It makes place to play the middle, then weight yourself a little toward the side you think is more likely,” he says. “We’ve shifted ourselves toward the slowing-down side because we think management has a better view of what’s coming up.”
Right now, America’s “real economy” (basically, goods and services) is slowing down, but we’re also experiencing higher interest rates than we’ve seen in a long time.
“From a slowing economic perspective, you want to avoid the more cyclical names,” Graff says. “Stay away from transportation stocks, and other companies that are heavily dependent on economic growth to generate earnings and cash flow,” he says.
Instead, favor traits like high barriers to entry, products that can be sold in various economic environments, and business models that can perform in rough waters.
What does Graff like right now?
“Then you look at the other side of things: valuations,” Graff says. “Interest rates have a significant impact on valuations. Now that we have interest rates returning to a normalized level, people have to think about valuations again. You can’t just go buy an expensive consumer staples company and expect it to keep getting more expensive. You need a balance between defensive names and attractive prices.”
Graff says that the top 10 holdings of his DIVZ ETF are all names that he anticipates the fund will hold for at least the next three to five years.
“We have a long time frame in the fund,” he says. “We have high-quality companies that have attractive returns on capital and very shareholder-friendly capital return policies. Those dynamics create companies that are good for holding over the long term.”
But we asked Graff to describe the opportunity in a few holdings. Among them:
While dividend stocks do help protect against price downside, there is such a thing as too high of a dividend yield. So investors seeking out safety in dividends should keep their eyes out for “yield traps.”
YATI Tip: Looking for safe sources of high yield? Here are few ideas.
“‘Yield trap'” is a pretty common term for us in the dividend space,” Graff says. “It means getting lured in by a high yield that a company’s paying just for them to go and cut the dividend. You thought you had valuation protection, and it disappears because they cut the dividend.”
One of the ways to protect yourself is to find companies that generate significantly more cash flow than what they pay out in dividends.
“If you see a company paying a double-digit dividend yield, be skeptical,” Graff says. “The market is very efficient. If a double-digit yield exists, a cut is likely happening. You usually won’t find double-digit yields in companies with very high cash flow.”
Riley & Kyle
Young & The Invested
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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