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Wiz Daily Journal

Consider These Dividend-Paying Stocks During Inflationary Times

Thursday, June 30th, 2022
During Current Inflationary Times Consider These Dividend-Paying Stocks 
Inflation came in hotter than expected in May (2022), as food, energy, and shelter costs put upward pressure on prices. Inflation has been high for the year (2022) and could continue to run on the high side for several more months. Regardless, an inflationary environment is likely to continue for much longer in general, as the FED slowly normalizes policy. As a result, many people are worried they may lose purchasing power as inflation eats into their savings. In the meantime, YOU, ME, WE the ATWWI FAMILY should consider the following stocks as hedges in our portfolios to protect our profits/wealth.

NOTE: These stocks have pricing power and pay a dividend yield of 5%+, which can help us reduce the impact of inflation.

Four stocks to consider:
AT&T (T)
AT&T is a company that provides a range of telecommunication services, including mobile and internet services, and is the largest telecommunications company in the United States. It could be a stock to consider as a part of our portfolio(s) to help weather the current inflationary environment.
AT&T currently provides a yield of 5.3% and trades at a relatively moderate valuation of 8 price-to-earnings (P/E). Analysts expect earnings-per-share to rise by 8-10% for the year (2022), which would make the current valuation relatively cheap compared to the broader market.
Furthermore, telecommunication companies have some pricing power, which would generally allow them to increase prices as inflationary pressures affect margins.
Finally, AT&T should also benefit from 5G as more and more consumers move away from their current 4G plan.

Kinder Morgan (KMI)
Kinder Morgan is an American midstream company that operates four segments: Natural Gas Pipelines, Product Pipelines, Terminals, and C02.
The Natural Gas Pipelines segment owns and operates intra and interstate pipelines, gathering systems, and processing/treatment facilities.
The Product Pipelines segment deals in refined products.
The Terminal segment deals in liquid and bulk terminals.
The stock currently provides a dividend yield of 5.75% and has a forward P/E of 20.
Midstream companies, especially those who own and operate storage and terminals for LNG, should benefit from the current environment as natural gas demand continues to increase.

NOTE: Higher energy prices don’t directly affect Midstream companies, which rely more on volume than price. While demand for oil should come down from its pandemic high, which could affect volume, the overall market remains relatively robust as the economy continues to normalize. The good news is that midstream companies tend to have relatively stable cash flow and offer safer positions than energy companies, which can be affected by large price fluctuations.

Southern Copper Corporation (SCCO)
Southern Copper engages in mining, exploring, smelting, and refining copper. Under the current environment, copper prices continue to remain elevated. Higher prices will result in improved earnings for South Copper.
Southern Copper operates several mines across the world, including in countries such as Mexico, Chile, and Argentina. Copper demand remains relatively robust, as industries that primarily require copper stay on a reasonably firm footing. Although demand from China remains a concern, demand from the rest of the world remains steady.
The stock currently trades at a forward P/E of 15, with a dividend yield of 8%. Considering the environment of inflation and low-interest rates, an 8% yield is very generous. On the other hand, if copper prices fall, the stock may be negatively affected, and the dividend may be cut. Southern Copper could just be the stock that proactively hedges our portfolio(s) during these inflationary times.

Manulife Financial Corporation (MFC)
Manulife provides various financial products in Asia, North America, and Worldwide. They operate multiple segments Wealth Management, Insurance, and Annuity Products, and other Corporate Services.
Manulife’s primary segment is its insurance division, and insurance products tend to hold up pretty well when inflation is running hot. On top of an inflationary adept business, Manulife offers a 5.7% dividend yield and trades at a modest valuation of 3.8 P/E.
Although the insurance and wealth management industry is slow-moving, it should benefit from the inflationary environment. Insurance also tends to be robust in economic downturns as well. All in all, the business is well-suited for the current climate.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Buffett Tips For Everyday Investors

Wednesday, June 29th, 2022
Buffett Tips For Everyday Investors

As one of the most successful investors of all time and one of the most wealthy person's on Earth, Warren Buffett has offered a lot of wisdom over the years. While there’s a lot of wise words to choose from, his timeless principles over the years have made his reputation in the investing community as good as "GOLD".

Rightfully so...Buffett’s Berkshire Hathaway investment portfolio has averaged staggering annual returns of 20% per year since 1965 — doubling the average annual return of the S&P 500 over the same period. In other words, every $100 invested with Buffett then would be worth nearly $1 million today.

With a track record like that, it’s worth examining some of Buffett’s "SAGE" investing advice to see how YOU, ME, WE the ATWWI FAMILY might improve our own portfolio performance(s).

Listed below are a few of Buffett tips for everyday investors... 

 

1. “If a business does well, the stock eventually follows.”
Don’t just buy stock if you want strong returns. Buy shares in a business you’d be proud to own, and be prepared to reap the rewards. Much of Buffett’s investing success has come from buying well-managed companies with solid economic moats (i.e. lasting competitive advantages), consistently high return on equity (ROE), and low debt. He also admires companies with leaders that readily admit mistakes, have the interests of shareholders at heart, and own a large portion of the company themselves. (You can see Buffett’s full criteria on page 23 of his 2014 shareholder letter.)

2. “Investment must be rational; if you don’t understand it, don’t do it.”
Buffett advocates owning established companies with household name brands and understandable business models. One look at Berkshire Hathaway’s portfolio should illustrate this point, as well-known and simple companies like Coca-Cola (KO) and American Express (AXP) continue to be some of its largest holdings, making the firm ten times (or more) than the original investment.
It doesn’t always work out, though… Buffett famously missed out on the initial big run-up in tech stocks like Apple and Amazon — but that’s because he always admitted that he didn’t quite understand tech. It was only years later after bringing on trusted, experienced money managers into the firm that he later decided to invest in Apple, for example. The point is most investors would be better off knowing when to “stay in their lane” and avoid what they don’t know, too.

3. “Diversification is protection against ignorance."

Yes, it’s true Buffett recommends that non-professional investors buy shares in diversified, low-cost S&P 500 index funds to avoid risk. BUT, how can you beat the broader market when your portfolio is the market?
Buffett compares this to putting Lebron James on the bench during a basketball game: “If it’s your game, diversification doesn’t make sense. It’s crazy to put money into your 20th choice rather than your 1st choice. It’s the ‘LeBron James’ analogy. If you have basketball phenom LeBron James on your team, don’t take him out of the game just to make room for someone else.”
In other words, if you know an industry well (or work in it), you may have a better-than-average chance of spotting a good company and thus a potentially market-beating stock. And if you’re picking your own stocks, then it’s far more likely you’ve come up with only one or two really good ideas than a dozen. So as long as you’re aware of the risks, it can really pay to be “overweight” on your best ideas.

The Takeaway
We can argue whether Berkshire Hathaway itself is a “BUY” today, BUT there’s no denying that we can all profit from Buffett’s wisdom. Learn from the man himself and try to adapt his principles to form a sound, profitable investing strategy.
In short: Buy well-managed companies with wide moats, understandable business models, and in industries that you know well.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Get "P.A.I.D." From Rising Rates Utilizing These Unique Securities

Tuesday, June 28th, 2022
Get "P.A.I.D." From Rising Rates Utilizing These Unique Securities

You gotta hand it to them, it’s good to be a "BANKER".

Aside from getting an inordinate number of paid holidays (Columbus Day, Flag Day, Arbor Day), you must admit they have a pretty great business model. Many banks pay 0.06% to savings-account depositors and then immediately loans out the proceeds to home buyers at around 5% — or credit card holders at 18%.

Multiply that by tens of thousands of customers, and pretty soon you’re talking about "REAL" money.

It’s a good time to be a "LENDER". But you don’t rack up profits like that by being overly generous. Even after a couple of interest rate hikes, the average rate on a 2-year CD is still an anemic 0.27%. But fear not, there’s a way to put yourself on the other side of the table.

If you don’t like the idea of settling for what the bank gives, then invest in what it receives…

Your Chance To Be The Banker
You might have heard of "BANK LOAN FUNDS". They are sometimes referred to as senior loans, prime rate loans, syndicated loans, or floating-rate loans. Whatever you call them, they can help buoy your portfolio over the next 12 to 18 months.

So how can individual investors participate in bank loans? Well, once upon a time this asset class was only open to hedge funds and other institutional investors. But since the 1990s, a variety of mutual funds, closed-end funds and even exchange-traded funds (ETFs) have been launched with the sole purpose of holding packaged pools of bank debt.

These loans are typically made to sub-investment-grade companies with less than stellar credit. Because the borrowers don’t have the strongest balance sheets, there is some credit risk involved. BUT that risk is mitigated by two factors…

First, the lenders are protected by restrictive covenants, which prevent the borrowers from taking any action that the bank feels is detrimental to getting its principal back. Second, whereas most bonds are unsecured, these are backed by tangible collateral such as property, equipment and inventory.

As the senior lender, the bank originating these loans is entitled to recover its money ahead of other creditors in the event of non-payment. So, it’s first in line. But that’s normally not an issue, because defaults are pretty rare, running around 2% for the S&P/LSTA Leveraged Loan Index.

Even then, a Moody’s 15-year study found that recovery rates average 80.3%. That means even the few loans that go belly-up still return 80 cents on the dollar after assets are liquidated. But what really makes this group shine in the current environment is that the rates on these loans are variable (or floating) rather than fixed. Most are linked to a short-term benchmark such as the London inter-bank offered rate (LIBOR) plus an extra 4%.

The 3-month LIBOR has risen dramatically in recent month, from a low of 0.2% in January to 1.6% in May, meaning many bank loans are now paying 5.6%. And if short-term rates continue to rise, so will bank loan yields — considering their interest rates reset every 30 to 90 days.

Of course, the reverse is also true in a falling rate environment. BUT the odds of a rate decrease anytime soon are slim to none.

Make Rising Interest Rates Your Friend
With a traditional corporate or government bond, you are locked into a fixed coupon rate for the life of the instrument. As such, holders can only watch helplessly as interest rates rise and they’re locked in for the next five or 10 years. They are faced with an unpleasant choice: stick with the below-market rates until maturity or sell the bond early for a loss.

By contrast, yields on outstanding bank loans ratchet higher within a matter of days. These funds can also reinvest distributions into new securities with higher yields, thereby generating stronger distributions for shareholders.

So this asset class isn’t just immune to rate hikes — it actually welcomes them.

And keep in mind, we’re still emerging from the lowest rates on record. It will take another several more hikes from the FED for rates to even begin to resemble what we normally see in a healthy economy. The benchmark 10-Year Treasury at 2.8% is still near the low end of the historical spectrum.

So, with muted credit risk and almost zero interest rate risk, bank loan funds are remarkably stable even in tumultuous times. There have been stretches in previous years where net asset values (NAVs) went months without deviating by more than a few pennies per share in either direction.

Closing Thoughts

There’s a reason why variable rate mortgages scare the heck out of people. The higher and faster rates rise, the more interest you pay to the bank. BANK LOAN FUNDS allow you to turn the tables and flip that scenario.

Here are some names to consider:

– Nuveen Floating Rate ( JRO)
– First Trust Senior Loan ETF (FTSL)
– SPDR Blackstone Senior Loan ETF (SRLN)

Even if rates stay flat, these funds still offer enticing yields. JRO yields nearly 8% right now. That blows a 10-year Treasury out of the water — and you don’t have to tie up your money until 2032 to get that rate — you can leave anytime.

Bottom line, any ATWWI FAMILY member who’s worried about rising interest rates and wants to earn a solid income stream should be looking at bank loan funds.

 

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

The U.S. Already Has Double-Digit Inflation

Monday June 27th, 2022
The U.S. Already Has Double-Digit Inflation

A year ago, Federal Reserve Chairman Jerome Powell said that rising inflation was temporary.
He told us not to worry.
He wasn’t even convinced that inflation would sustain a rate of more than 2%.
I didn’t believe him…
I predicted that we would see a steady string of headline inflation numbers that would be much, much higher than anything we had seen in a long time.
Regrettably, I was correct...

Inflation has not only hit and surpassed 2% but also reached a sustained level that is multiples of 2%.
The 8.58% year-over-year increase in the consumer price index (CPI) that was posted in May was the highest reading we have had since 1981.
For added perspective, if you were 25 years old in 1981, then you’re now 66 years old.
The vast majority of working adults and investors have no experience with this kind of environment.

It Looks Bad, but It’s Even Worse
Seeing inflation readings hit this level is scary…
But the reality is that May’s 8.58% reading is significantly understating how bad inflation really is.
A whopping third of the CPI is tied to the cost of shelter, which includes the cost of homes both for sale and for rent.
But the CPI doesn’t factor in actual housing prices.
Instead, it attempts to capture the change in homeowners’ estimated proceeds from renting their dwellings.

NOTE: Buying a house is considered an investment. Renting is considered consumption, therefore making it relevant to the CPI.
In May 2022, the rate of inflation tied to shelter in the CPI was 5.5%.

That’s well under the total CPI reading of 8.58%.
That means the CPI rate of inflation tied to shelter is pulling down the total CPI rate of inflation.
Without shelter coming in at 5.5%, the 8.58% CPI number would have been much higher in May.
But everyone in the country knows that the cost of housing and rent has increased by far more than 5.5% over the past year.
Nationwide, rents are up by 15% since May 2021 AND home prices are up even more…
May (2022) saw housing prices increase by 20.6% year over year.

The CPI isn’t reflecting it yet, but we already have double-digit inflation in the United States.
There’s a delay in when true shelter figures get reflected in the CPI.
It generally takes about five quarters for trend changes in measured rental and home prices to appear in the CPI data.
So in the coming months, the housing component is going to start pushing the CPI inflation reading higher to match reality, even if some of the other inflationary pressures ease.

Be prepared for many months of tough inflation numbers.
This is far from over...
However, YOU, ME, WE, the ATWWI FAMILY shall continue to "THRIVE" not merely survive utilizing our various ATWWI stratgies and techniques as we get "P.A.I.D." during the current and upcoming "INFLATIONARY" times.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Thinking Outside the Box to Counter Inflation Utilizing "OPTIONS"

Friday, June 24th, 2022
Thinking Outside the Box to Counter Inflation Utilizing "OPTIONS"

There’s no way to sugarcoat it: inflation is all around us. From groceries to gasoline to utility bills, everything is getting more expensive.
High inflation hits retired folks and others living off a fixed income especially hard. Due to higher prices, the same amount of dollars can buy less and less.

Inflation: Not Easy to Counter
Putting your money in the bank or buying CDs is "SAFE", but you won’t earn much interest. In real terms (adjusted for inflation), your return will be negative.
You can buy bonds. Some bonds even adjust the interest they pay based on the inflation rate, but you usually have to pay a premium to buy them compared to bonds that pay a fixed interest rate. During high inflation, the value of the bond typically falls, so if you had to sell the bond before maturity, chances are you will suffer a capital loss.
Even stocks, which HIStorically have offered superior returns compared to bonds, as a group are in the red this year. Tech stocks, which have been big winners in recent years, no longer offer “easy money” because high P/E stocks usually don’t do well during high inflation.
Value stocks, especially ones that pay a safe and growing dividend, offer refuge. However, the highest quality stocks usually don’t offer particularly high yields—3% to 4% is a reasonable expectation. Unless the dividend growth is at least in the mid-to-high single digits, the dividend income probably won’t offset very much what inflation takes out of your wallet.
Of course, there’s real estate, which usually does offer protection from inflation. But you will need to have lots of cash to invest. Even if you do have the money, real-estate transactions take months to complete, so you won’t be able to pull your money out when you need it (limited liquidity).

Using Options to Boost Income
It takes a little bit of thinking "OUTSIDE THE BOX", but if you already trade/invest in stocks and you are interested in boosting your income, you should consider using "OPTIONS".
You have probably heard that options are “risky.” They are indeed riskier than the underlying stocks in terms of how much and how quickly the price can change in percentage terms. However, compared to stocks, options require less money to trade and they are very flexible. Experienced traders often use various option combinations to manage "RISK".
Furthermore, options can be used to generate income by writing, or short selling, them.

Instant "CASH DIVIDEND"
By selling a "CALL" option, you are selling to the buyer the right to buy from you 100 shares of the underlying stock per contract at the strike price at or before expiration of the contract.
Buy selling a "PUT" option, you are selling to the buyer the right to sell to you 100 shares of the underlying stock per contract at the strike price at or before expiration of the contract.
In both cases, the cash you receive for selling the stock is called the "PREMIUM". That cash is yours to keep no matter what, and works effectively as a "CASH DIVIDEND". For a regular cash dividend, you have to wait until the company pays out the dividend on a predetermined date, but when you short sell an option, you get the cash right away.
If the underlying stock moves in your favor and the option expires worthless, then great, you are scot free. Keep in mind that there is a risk that the stock moves against you. In this case, you could decide to buy to close the position (even if at a loss) or just let the option exercise.

Factors to Consider
In the case of "CALL" writing, it helps to already have shares of the underlying stock but it is not mandatory. Selling "CALLS" against a stock you already owned is a "COVERED CALL". The worst-case scenario here is that you are forced to sell the stock at a below-market price. So it helps to choose a strike price at which you would have been comfortable to sell the stock anyway.
In the case of "PUT" writing, it helps to sell "PUTS" against stocks you like and pick a strike price at which you would have considered buying the stock anyway. This way, even if the put is exercised, you end up buying a stock you like at a price you thought was fair anyway (even if you paid above-market price).
Due to the potential volatility of options, it’s important to closely monitor and manage your positions. But by selectively and continually selling options, it’s quite possible to generate double-digit yields to help mitigate the corrosive effects of inflation.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

The Ask The Wiz Wealth Institute is not an investment advisor. We strive to be educational and informative community servants.
 

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