Very Good News For Big Dividend Stock Investors

seekingalpha05-26

High-yield stocks have underperformed the broader market considerably over the past few years.However, there is some very good news for high-yield investors in the face of this negativity.We share ...

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Moreover, it appears that this inflation is likely to remain sticky for the foreseeable future, which will likely mean interest rates will remain higher for longer without the Federal Reserve cutting interest rates. This has had secondary impacts on various sectors, including putting pressure on counterparties in the BDC sector (BIZD), as Ares Capital Corporation's (ARCC) CEO recently discussed. Moreover, it is weakening the balance sheets of consumers, as consumer debt levels are quite elevated and interest payments on this debt are rising due to higher interest rates. Utilities (XLU) and yieldcos (BEP)(BEPC) are also struggling to raise sufficiently attractively priced capital to fuel their growth runways, which is weighing significantly on that sector. Last but not least, the commercial property sector (VNQ)(BXP) and regional banks (KRE) face a wall of maturing debt that was financed at much lower rates years ago, which could very possibly lead to a sharp spike in property defaults. This, in turn, could really hurt regional banks that are heavily exposed to these loans, potentially sending them to a similar fate as what New York Community Bancorp (NYCB) has recently gone through, or even worse. That being said, there is a major silver lining to all this. These headwinds, while persistent and certainly weighing on stock prices in the high-yield space, are giving investors in big dividend stocks a golden opportunity to scoop up these companies on the cheap. There are three major reasons why this is such a great opportunity. The Very Good News For Big Dividend Stock Investors First and foremost, it means that investors are buying these stocks at a higher yield on cost. If you're a dividend investor like me, your biggest concern is stable and rising dividends over time, knowing that the stock price will likely follow in the long run. As a result, the higher the yield you can buy the stock, the better, even if it means short-term underperformance of your overall portfolio. In the long term, you're confident that you will generate more attractive total returns if you get a higher yield on cost. Additionally, when you buy stocks at discounted values like they are now due to concerns about higher-for-longer interest rates, you have much greater potential for future valuation multiple expansion in the event that interest rate headwinds eventually dissipate. This can lead to significant total return outperformance. Finally, it also gives the companies themselves the option of buying back their own stock at cheaper prices than would have otherwise been available to them if interest rates were not elevated right now. This can create more value for long-term shareholders by enabling the company to buy back more stock, which not only increases the intrinsic value of each share but also reduces the payout ratio on a per-share basis, making the dividends safer and giving the company greater room to grow them in the future. Some Great Opportunities That Are Available For Big Dividend Investors In addition to this very good news for big dividend investors, there are also some great opportunities to invest right now on a sector basis. For example, the basic materials sector has enormous upside potential both in the precious metals and the copper arenas. Gold (GLD) is enjoying strong tailwinds from booming demand from Chinese retail investors due to the high geopolitical uncertainty there, as well as aggressive buying by central banks across the world. Moreover, gold could benefit from three major potential catalysts moving forward. First, if a major geopolitical flare-up occurs in the Middle East or in the Far East, gold would likely surge in value due to a flight to safety trade. Second, the widening U.S. deficits and a growing lack of confidence in the dollar as a store of value could serve as a strong tailwind for gold. If central banks and other institutional investors, as well as individual investors, lose increasing confidence in the dollar's ability to serve as a long-term store of value, they are likely to at least in part move to gold. Third, if/when the Fed finally cuts interest rates, that should also serve as a major tailwind for gold prices, likely sending them higher. Overall, we see the risk-reward for being very attractive to the yellow metal. Silver (SLV) also benefits from some of these same tailwinds, though to a lesser degree, but also benefits from strong industrial demand. Copper, meanwhile, is also experiencing strong demand due to the drive for electrification and the lack of sufficient supply. Silver is also dealing with a lack of supply right now, which could push the prices of both metals higher. We think that there are some great opportunities to buy quality miners who have exposure to gold and copper at discounted valuations, such as Newmont Corporation (NEM) and Barrick Gold (GOLD). Another sector that has enormous tailwinds right now is the infrastructure space (UTF), which is seeing trillions of dollars in capital flow into it from institutional investors, with much more likely to come. This is due to numerous trends, such as the fourth industrial revolution AI boom, which is driving massive demand for increased data centers, communication, and electricity power generation infrastructure. One of our favorite plays in this space right now is Brookfield Infrastructure Partners (BIP)(BIPC), which is involved in both electric power generation and data infrastructure spaces. We also are bullish on the midstream sector (AMLP). The strong balance sheets in that space make them largely immune to the current interest rate headwinds, while the growing demand for energy across the world and the increasing difficulty in developing new midstream infrastructure make blue-chip companies with strategically located existing asset portfolios even more valuable than normal. Some of our top picks at the moment include Enterprise Products Partners (EPD), Energy Transfer (ET), and Enbridge (ENB). Finally, we think asset managers dealing in all these sectors, such as Blackstone (BX) and Brookfield (BAM)(BN), offer very attractive long-term growth profiles. While they may not be discounted at the moment, investors who buy and hold for the long term are likely to do just fine and enjoy significant dividend growth in the process. Investor Takeaway  In conclusion, while there are numerous headwinds facing the high-yield space right now and it's hard to know when they will dissipate, there is very good news for big dividend investors in the sense that now is a great time to buy high-quality dividend stocks at discounted valuations and higher yields than would likely be available otherwise. Moreover, there are several sectors where value is present, but the headwinds from higher-for-longer interest rates are either largely not felt or are being offset to a degree where these picks are still likely to generate very attractive risk-adjusted returns over the long term. This is where we have been allocating most of our capital during this period of higher interest rates and have enjoyed significant outperformance as a result.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438864718"}