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Investors have obviously taken a beating so far in 2022.
Tech stocks, cryptocurrencies, and nearly everything that boomed during the era of free money, zero interest rates, crashed, while other market segments didn’t fare much better behaved.
Of course, this is not the first time in the recent past that stocks have fallen sharply. This happened towards the end of 2018 and, above all, at the start of the pandemic. But this crisis is longer and more severe, with the S&P 500 index suffering its worst six-month run to start a year since 1970.
For some young investors, this kind of decline could be a blessing. Valuations had stretched, and with some of the foam in the market, this could be a great opportunity to buy when prices are more reasonable.
After all, if you’re investing for retirement, the value of your portfolio today isn’t nearly as important as its value decades from now.
However, it’s a different story if you are approaching or are already in retirement.
Look for dividend payers in low-cost sectors
The recent downturn could have massive repercussions. This includes the millions of people who took early retirement during the pandemic, many of whom must generate a certain amount of investment income each month or face the prospect of having to re-enter the workforce.
Given this, a smart option for yield-hungry retired investors is traditional dividend-paying companies in cheap or defensive sectors. Large-cap US banks and energy companies remain cheap relative to other industries, and many of these companies pay above-average dividend yields.
For example, while JP Morgan Chase and Bank of America trade at below-average multiples, each pays an above-average dividend yield (3.5% and 2.7%, respectively).
Last week, JP Morgan was the first major bank to release its quarterly results. While many considered it a “failure,” there were positive signs: net interest income, net interest margins and loan growth showed improvement.
On its earnings call, management said consumer credit and spending had yet to weaken – which was validated by a retail sales report from the US Department of Commerce later in the week. . If the economy can avoid a recession in the coming months, current bank stock valuations – one and a half times tangible book value – will end up looking like bargains.
Energy stocks like Shell and Exxon are even cheaper, with both having dividend yields above 4.10%. Both of these stocks have recently retreated as recession worries triggered lower crude prices.
However, supply is tight while demand remains high. Shell is now trading at less than five times 2022 earnings estimates, while Exxon is trading at seven and a half times estimates.
Both stocks generate free cash flow returns in adolescence, much of which goes to shareholder returns and the transition to alternative energy sources.
Meanwhile, anyone concerned about further declines in cyclical groups like banks and energy can consider Abbvie, which has a dividend yield of 3.67% and trades at just 11x estimates for the year 2022. As a pharmaceutical company, Abbvie has virtually no supply chain risk and little economic sensitivity.
Companies are not likely to cut dividends
It is important to note that barring a massive recession, none of the companies mentioned are likely to cut their dividends, as this is one of the main reasons why so many institutional investors hold large positions there. . So, if a significant downturn were to occur, other cost-cutting measures would come first, including spending and headcount reductions.
Will “regular” investments like this help retirees who need to generate 7% to 9% returns stay that way? No. But neither are TIPS, I-bonds or any other so-called strategy that is often mentioned as a way to escape the current market meltdown.
Of course, there’s no free lunch, and if you invest like there is, you’ll be, at minimum, disappointed and, at worst, burned out.
— By Andrew Graham, Founder and Managing Partner of Jackson Square Capital