2023-10-17 07:05:00 ET
Summary
- The economy, interest rates, and corporate earnings are impossible to forecast with precision. If your strategy requires perfection, you're gambling not investing.
- A-rated companies are those with fortress balance sheets, with a 2.5% or less risk of bankruptcy within 30 years, including five economic cycles.
- These 8%-yielding A-rated blue chips are perfect for these uncertain times.
- They are 37% historically undervalued coiled springs. If we avoid recession, they likely soar. If we get recession, those 8% dividends should still be secure.
- In the next two years, these 8%-yielding A-rated blue chips offer almost 100% upside potential or 32% annually. The last time they were this undervalued, they soared 10X in the next 15 years.
What's the economy going to do next?
Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.”
— Peter Lynch.
Of course, no one knows what the economy will do next. The economy isn't some machine someone controls.
The economy is like the human body, consisting of 28 to 36 trillion cells, roughly half of which are gut bacteria.
Each cell has tens of thousands of chemicals, enzymes, proteins, minerals, vitamins, etc., working together in hundreds of processes.
Each cell forms tissues, which form organs, which form organ systems, which work together in a magnificent symphony of homeostasis as your body works to keep you healthy.
The economy is the same way. Dozens of competing desires, emotions, and goals drive each person.
People form communities like cities, states, and countries.
They form companies, corporations, NGOs, and governments.
There are over 350,000 large companies worldwide, approximately the same number as plant species on Earth.
58,200 of those are publicly traded corporations, and about 10,000 are big enough to be the dominant names in our stock market indexes.
How many interactions happen between over 8 billion people and hundreds of millions of small businesses each year? It's impossible to estimate, literally no one ever has.
But for context, there are now 26.5 million e-commerce sites worldwide, roughly 50% in the U.S. In 2019, there were just 9.2 million e-commerce sites in the world!
Markingblog
Did you know that the e-commerce revolution is so large that in New Zealand, a country with 5.2 million people, there are over 100,000 e-commerce sites? One for every 50 people in the country!
The Pandemic led to an explosion of online sales sites, and that's just 21% of global retail sales.
And retail sales are just 65% of the U.S. economy. And the U.S. economy is just 20% of the global economy.
Corporate sales, government sales, NGO sales.
According to some sources, people make up to 35,000 decisions per day. A Cornell University study found that people make 226 decisions per day on what to eat alone. However, when asked how many decisions they can remember at the end of a day, people typically respond with 10 to 15." Dr. Joel Hoomans, Roberts Wesleyan University .
35,000 decisions per day for over 8 billion people is 280 trillion decisions per day by individual humans.
How long would it take to count to 280 trillion? If you counted once per second, 8.8 million years!
Humans have only existed in our current form for approximately 200,000 years.
Our corporations, churches, and governments? There are 377,000 towns and cities in the world alone, and each has its own government.
The interaction between all of us is incomprehensible to the human brain.
Now, imagine asking an economist to tell you how the Fed hiking one more time in November will affect the economy.
And how will that affect corporate profits?
And how will that affect stock prices? The S&P? Each individual company? All 3000 U.S. corporate stock prices?
Now, suppose you have an investing strategy that requires perfect precision. Something like this.
"I will only own stocks if the economy is growing this fast, otherwise I'll be in bonds."
This can't work, and it hasn't in the past, and it never will in the future.
Perfectly predicting the economy can't predict the stock market.
Have you heard that "good news can be bad news and bad news can be good news"?
Good luck guessing how the market will react on any given day.
There is a saying in medicine.
Half of what we know is wrong, we just don't know which half."
Do you think the market is rational in the short term? Think again.
Time Frame (Years) | Total Returns Explained By Fundamentals/Valuations |
1 Day | 0.02% |
1 month | 0.33% |
3 month | 1.0% |
6 months | 2.0% |
1 | 5% |
2 | 10% |
3 | 15% |
4 | 28% |
5 | 36% |
6 | 47% |
7 | 58% |
8 | 68% |
9 | 79% |
10+ | 90% |
20+ | 91% |
30+ | 97% |
(Sources; DK S&P Valuation Tool, JPMorgan, Bank of America, Fidelity, RIA, Princeton.)
On any given day 99.98% of the stock market's moves are pure randomness.
Over 3 years? Its 15% sentiment and luck.
Heck, it takes 7 years for over half of stock price moves to be mostly fundamentals-driven!
On Wall Street, the big secret, that everyone knows and no one talks about, is that everything is probability curves.
Have you ever watched CNBC or Bloomberg and heard someone from BlackRock Fidelity or JPMorgan say, "the probability of the Fed not hiking in November is 90%?"?
This is where they are getting it from, the Fed futures data from CME Group, where billions of dollars are hedging interest rates every day.
This is the "smart money" on Wall Street. Taking into account all available data in real-time, but even it can only give us probabilities.
There is a 4.5% chance of no recession next year according to this bond market data.
And yet 43% of economists think a recession is coming in 2025.
Who is right? Some economists think the recession is coming...in 2026.
Smart Investing: Heads I Win, Tails I Don't Lose
If your investment strategy is so one-sided that it's an all-or-nothing bet on interest rates or the economy or an election outcome doing one thing, you're not investing - you are speculating.
There are two times in a man's life he should not speculate. When he can't afford to, and when he can." - Mark Twain.
Investing is about buying great businesses for the long term. It's a bet on the adaptability of world-beater companies run by skilled and trustworthy management.
Speculation is about buying a symbol on a screen to flip it for a quick profit in a few minutes, days, or weeks.
S&P
Credit ratings are as close to a perfect bankruptcy risk proxy as exists, Buffett's fundamental risk.
Nothing is perfect, but these ratings are based on over 100 years of real-life bankruptcy data.
These risk models include hundreds of metrics (S&P's over 1,000) for each company.
Did you even know there were over 1,000 kinds of business risks?
Just some of S&P's business risks they include in their credit ratings.
- supply chain management
- crisis management
- cyber-security
- privacy protection
- efficiency
- R&D efficiency
- innovation management
- labor relations
- talent retention
- worker training/skills improvement
- occupational health & safety
- customer relationship management
- business ethics
- climate strategy adaptation
- sustainable agricultural practices
- corporate governance
- brand management
- about 1,000 more.
Do you think S&P gives a tinker's darn about what the S&P 500 is doing this year? Or when the Fed is going to cut? Or if the recession arrives in 2024, 2025, or 2026?
Their ratings are for the next 30 years! That's 5 economic cycles.
That's the traditional retirement time frame.
That's a time frame over which 97% of stock returns are based on fundamentals and valuations and just 3% luck, sentiment, and momentum.
In the short term? Over, say 12 months? Luck is 20X as powerful as fundamentals.
Over 30 years? Fundamentals are 33X as powerful as luck.
And that's why I won't tell you what's coming next. I know the probability curves, but for smart investors looking out over the next 10+ years? What happens next won't matter.
How To Invest Smart Today For An Uncertain Tomorrow
Here is how I have used our Zen Research Terminal to find the best 8% yielding blue chips to buy no matter what happens next with the economy.
From 504 stocks in our Master List to four 5+% yielding non-speculative investment grade, non-speculative REITs.
All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.
Step | Screening Criteria | Companies Remaining | % Of Master List |
1 | Blue-Chip Quality (10+ quality score) Or Better | 469 | 93.80% |
2 | Non-Speculative (No Turnaround Stocks, investment grade) | 411 | 82.20% |
3 | BHS Rating "reasonable buy, good buy, strong buy, very strong buy, ultra value buy." | 312 | 62.40% |
4 | A-Credit Rating Or Higher | 132 | 26.40% |
5 | Safety Score 11+% (safe 2% or less dividend cut risk) | 131 | 26.20% |
6 | Sorted By Yield | 0.00% | |
7 | Select Top 5 In "Tickers" To Create your Personal Watchlist | 5 | 1.00% |
Total Time | 1 minute |
So let me show you the highest A-rated yield blue chips for whatever is coming next.
Our Pick Of 8%-Yielding Blue Chips For The Current Market
Dividend Kings Zen Research Terminal
I sorted these by yield and linked them to further research reading.
- Legal & General Group (LGGNF)(LGGNY)
- Truist Financial ( TFC )
- Enterprise Products Partners ( EPD ) - K1 tax form
- Simon Property Group ( SPG )
- Bank of Nova Scotia aka Scotiabank ( BNS ).
Fundamentals Summary
- yield: 7.7% (5X S&P 500)
- dividend safety: 86% very safe (1.7% dividend cut risk)
- overall quality: 81% medium-risk Super SWAN
- credit rating: A- stable (2.5% 30-year bankruptcy risk)
- long-term growth consensus: 4.2%
- long-term total return potential: 11.9% vs 10.2% S&P 500
- discount to fair value: 37% discount (very strong buy) vs 5% overvaluation on S&P
- 10-year valuation boost: 4.7% annually
- 10-year consensus total return potential: 7.7% yield + 4.2% growth + 4.7% valuation boost = 16.6% vs 10.1% S&P
- 10-year consensus total return potential: = 364 % vs 160% S&P 500.
Historical Returns Since 1998
Portfolio Visualizer Premium Portfolio Visualizer Premium
How realistic is a 16% long-term return at a 37% discount? or 11.9% long-term returns? It's historical returns over the last quarter century.
11.3% Annual Income Growth For A Quarter Century
Future consensus dividend growth is 10% to 14%.
Consensus Total Return Potential Through 2025
- if and only if each company grows as analysts expect
- and returns to historical market-determined fair value
- this is what you will make.
Legal & General
Truist Financial
Enterprise Products Partners
Simon Property Group
Scotiabank
S&P 500
S&P 500 (SP500) offs 9% annual return potential, or 21% through the end of 2025.
These 8% yielding A-rated blue chips offer 32% annual return potential or 83%.
That's 4X the total return potential over the next 2 years.
Bottom Line: Consider Buying These 8% Yielding Blue-Chips
The data is always changing because the world is always changing.
But this is where our 3,000-point safety and quality model, running on over 1,000 metrics, developed over 8 years with 20,000 people hours and $1 million in R&D, comes in.
No model is perfect, but ours is 95% accurate at catching dividend cuts before they happen. And that's almost as good as the odds of success from long-term investing in general (97%).
I can't tell you what the stock market or economy will do with precision.
Anyone who says they can is either a fool, a liar, or trying to sell you something. Sometimes, its all three!
I can tell that A-rated ultra-high-yield blue chips like LGGNY, EPD, TFC, SPG, and BNS are wonderful companies to buy right now.
Why? Because if the economy goes into recession, their strong balance sheets and proven management teams will keep their dividend safe.
If we avoid recession, these cyclical businesses will likely soar since they are almost 40% undervalued and yielding 8%.
The Last Time These A-Rated Blue-Chips Were This Undervalued
Time Frame (Years) | Annual Returns | Total Returns |
1 | 95% | 95% |
3 | 40% | 175% |
5 | 30% | 269% |
7 | 24% | 362% |
10 | 18% | 419% |
15 | 17% | 927% |
(Source: Portfolio Visualizer Premium.)
And what if they just trade flat? What if we have stagflation, no recession, and no economic boom?
Then you are earning a safe and growing 8% yield.
That's what I call smart investing, heads you win, tails you don't lose.
For further details see:
8%-Yielding Blue Chips Perfect For What's Coming Next