If You Think You Have Missed The Big Rally, You Have Not!
It has been a fantastic start for HDO in 2021. Across our portfolio, our common equity holdings have average year-to-date returns of 14.6%. This strong bull market should not come as a surprise, and I have been pounding the table for a year now that the equity markets will be soaring.
You will have "eternal bears" continuously scare you that the valuations are stretched and that we are heading for a pullback. Yet, we keep reaching new highs almost every week. The fact of the matter is that the big rally seen during the last few years was mainly driven by a few stocks that are major components of the general indexes (the S&P 500 and notably the NASDAQ).
The vast majority of stocks did not participate in the rally, and most remain cheap. This is especially true for "value stocks" and for "value high-dividend stocks" such as the ones we always target.
While many value stocks have started to rally since October 2020, the equity markets, in general, remain cheap. Remember that the best indicators for stock valuations are:
- Their relative valuations to interest rates (i.e., the 10-year Treasury yields). Based on this factor alone, stocks are not expensive.
- Importantly, the liquidity available in the markets. Today the world is awash with liquidity. It is estimated that there remains $6 trillion in cash sitting on the sidelines in CDs, bank deposits, and money markets, earning next to nothing. These excess funds are starting to slowly rotate into equities.
- Another interesting factor is that the long-bull market in bonds is suddenly over. Those who have been holding long-term treasuries such as the 10-year or the 20-year Treasury Notes have been seeing large losses as long-term interest rates start to creep up. We are seeing investors dumping treasuries in favor of equities, and these dollar amounts are enormous.
- Last but not least, more liquidity is being injected into the system by the new administration, with $1.9 trillion in new stimulus and other new stimulus and infrastructure spending planned for the year 2021.
At the end of the day, it is liquidity that is the ultimate driver for equities, and we are swimming with it. Today we are in a strong secular bull market, and investors should not be surprised to see the markets keep going higher. This setup above opens the door for one of the best market rallies that are likely to happen over the next two years.
What We Are Buying Today
While we are likely to see some short-term consolidation as the markets digest the recent gains and build up momentum to move higher, the medium and longer-term picture looks very bright. So what are we buying today?
- First, we are targeting economically sensitive stocks that are set to benefit from both an accelerating post-COVID economy and from government spending.
- Also as always, we keep focused on cheap high-dividend stocks that are set to reward investors with both high yields and long-term capital gains.
We share three of our top picks today.
1. W.P. Carey
W. P. Carey Inc. (NYSE:WPC)—Yield 6.1%—is one of the highest-yielding triple-net REITs and they have put the growth pedal to the metal. Triple-net REITs benefit when the economy is building up. Companies look to expand and that means increasing their real estate. These REITs have been borrowing at low prices and are now looking to buy. This will drive growth for many years to come.
WPC has raised their dividend every quarter for over 20 years, and they extended that yet another quarter with their first dividend of the year. WPC goes ex-dividend soon on Mar. 30.
2. AGNC Investment
AGNC Investment Corp. (NASDAQ:AGNC)—Yield 8.7%—is an agency mREITs that benefits from a steepening interest rate curve. They invest in assets that have long maturity dates, and they borrow funds for 60-90 days. So when near-term interest rates are near zero and long-term rates are heading up, you have the ideal conditions for making money.
AGNC reported their tangible net book value at $17.51/share as of the end of February, up by $0.10 since January. That included the drop in price on agency MBS that occurred the last week of February. So even as the price of their assets went down, AGNC's book value climbed. This is due to their hedges and out-earning their dividends.
We are ecstatic to be buying AGNC at a discount to book value. They are one of the highest quality mREITs that should be trading at a 5-10% premium to book. We will enjoy the upside as AGNC builds its book value, and when its taxable income rises. We expect a dividend hike soon!
3. Aries Capital
Ares Capital Corporation (NASDAQ:ARCC)—Yield 8.6%—is a true blue-chip in the BDC sector. They have not only survived but have thrived through various economic conditions including the Great Financial Crisis and now COVID.
BDCs lend money to the small to medium-sized businesses that drive the American economy. These are the kinds of businesses that will benefit most from the stimulus and will help rebuild the American economy.
When ARCC lends to a company, they are more than just a lender. Frequently they take an equity position in the company as well. So they are part lender, part investor in the company. ARCC profits not only from making good loans, but they also have consistently realized large gains from their equity positions.
During periods of economic recovery, ARCC will really be firing on all cylinders, realizing large gains which means larger dividends for us.
We keep reminding our investors not to "time the markets." During a bull market such as we are seeing today, the markets can always surprise you to the upside. Retail investors end up missing some of the best opportunities.
We are long-term investors focused on building a retirement portfolio that provides recurrent high income in both good and bad times. We also seek to identify the macro-trends and invest in areas that are likely to outperform for long-term capital gains. Now is a time to be opportunistic. Buy cheap dividend stocks with a strong outlook and, exceptionally high yields!Leave a comment