RF - Nothing Is Safe!

2023-10-13 07:35:00 ET

Summary

• The market keeps proving that it's not your friend or ally.
• Investors see government action as untrustworthy.
• I frequently get asked why nothing in the market seems safe anymore.

Co-authored by Treading Softly.

A desire to feel safe, secure, and comfortable is extremely common among all of humanity. Only a few cultures or civilizations thrive when the vast majority of their citizens are considered unsafe. Having a level of safety ensures that there is an ability to thrive, grow, and succeed. This is why, among Maslow's basic needs, there is a need for shelter before you can start reaching higher levels, including self-actualization. If you do not have one of these bare minimums, you can't proceed forward effectively.

Throughout 2020, many of us felt unsafe; COVID caused so many of us to fight an unknown disease with unknown tools. Later, there were riots, a rise in crime, and the fact that in many cities, an ambulance wouldn't pick you up because there was no room in a hospital. A sense of a lack of safety was prevalent around the globe - so many struggled.

When it comes to the market, we have seen recently, amongst dividend growth investments, a high degree of uncertainty and fear with the recent dividend cut by W. P. Carey ( WPC ) and the reduction in growth expectations by NextEra Energy Partners ( NEP ). There is a rising concern that there is no safe place.

Piling on top of all of this, the rapidly rising U.S. debt and the constant overhanging threat of either a debt default or government shutdown causing the U.S. to miss an interest payment which would have unfathomable consequences globally. Investors are starting to wonder what really is "safe." For many risk-averse investors, safety was Treasury notes, but those are now in question; safety was gold, but now there's the question of whether that precious metal will even be usable should everything else fall apart. It's leading many novice and young investors to simply declare that there is no safe place anymore. Even for those of us who are the oldest and most risk-averse, holding strictly cash is a losing proposition. They understand that money is a Fiat and is only as valuable as the government's ability to pay its debts (and the interest at these higher rates). So, every government shutdown and every debt default crisis that they read about on the news further erodes their confidence in the U.S. dollar.

So I often get asked, as a professional income investor who desires to unlock passive income from the market, what I see as a place of relative safety, but also, what do I do to help protect and insulate my portfolio from blows that may come?

Let's talk about it.

Safety In Numbers

I frequently encourage investors to hold a wide array of investments. It's also just as frequent that I receive pushback from individuals feeling that recommending 42 individual investments at minimum is far too many. Yet, when safety is at risk, more is usually better. A portfolio of only 10 holdings feels a dividend cut much more sharply than a portfolio of 50 holdings - assuming they're equal weight.

Take a moment to harken back to our history when supplies were needed to cross the Atlantic Ocean during World War 2; they moved in a convoy system - many ships grouped together instead of alone. This made it harder for Axis submarines to engage them and also ensured a great amount of supplies successfully crossed the ocean - a lone vessel was an easy target.

Your retirement portfolio is that convoy of vessels making a potentially dangerous trek. Throughout your journey, you will have holdings that cut, go bankrupt, or otherwise disappoint. The less one failure impacts the entire fleet, the better! - especially from a risk-adjusted safety standpoint. The goal is income from the market to your wallet - the more sources, the safer it will be.

Get Fixated on Fixed Income

The biggest immediate pitfall in my mind for novice or even experienced dividend investors is assumed future raises. Many dividend-paying stalwarts trade at a premium to peers if investors can assume or do assume future dividend growth.

NEP traded at a premium compared to peer Atlantica Sustainable Infrastructure plc ( AY ) largely because of the premium tied to assumed future dividend growth. When that assumption was abruptly altered, their yields changed rapidly:

Even with its dividend growth occurring, AY never carried the same premium pricing due to NEP's higher expected dividend growth. Now that NEP has trimmed that guidance, the price fell as disenchanted investors moved on.

I don't recommend investing in companies at a premium to peers today because of a hope for more income tomorrow. As a professional income investor, I want cash in hand today. I see investing in hope of a higher price or higher dividend later as a land ripe with pitfalls.

One way to help ensure a steady cash flow into your coffers is to buy up fixed-income preferred securities or baby bonds from excellent companies. You can lock in a reliable income stream for decades to come. What about income growth, you may ask? Create it organically through dividend reinvestment.

Regions Financial Corp., 4.45% Series E Non-Cumulative Preferred Stock ( RF.PR.E ) currently offers an attractive 7% yield for as long as it is trading. The low yield at PAR helps ensure Regions Financial Corporation ( RF ) will be disinclined to redeem it anytime soon.

Worried About The USA? Think North

If you're worried about the stability of the United States of America, investors can easily hold various large Canadian firms in their IRA (without tax issues), and they trade on U.S. exchanges, making them easy to buy and sell.

You can also invest in CEFs (Closed-End Funds) that hold international exposure in them to diversify your risk as well.

While I do not see any immediate need to do so for the average investor, it never hurts to add some diversification to your portfolio as a hedge.

Conclusion

Worried about the market and dividend cuts? I respect that. With my unique Income Method, we prioritize a diverse and abundant stream of income pouring into your account. This is diverse in its source and location - providing a greater degree of safety.

I also strongly encourage investors to stop investing in the present with blind hope for the future. Low-yielders like Kraft Heinz ( KHC ) or mid-yielders like WPC can equally cut their dividend unexpectedly. I encourage you to consider climbing higher in the capital stack and get excellent income today at a steady required rate from companies. You will get hit with a cut or two eventually; minimize its impact by having an entire fleet of income generators, not a handful.

When it comes to retirement, you need income to meet your expenses head-on. While a promise of more income tomorrow sounds nice, and we've been taught that delayed gratification is a good thing, many put too much faith in the hands of management teams who will do the best for themselves. Instead, collect great income today, reinvest as needed to get more tomorrow, and make those management teams beholden to you. Be the boss, get paid.

That's the beauty of my Income Method. That's the beauty of income investing.

For further details see: