Buy These 8% Yielding Blue-Chip Bargains Before Everyone Else Does
Summary
- The bear market is likely approaching its terminal phase, which involves almost everything selling off hard and fast and then bottoming.
- Whether this happens in the next week, or a month or two, doesn't ultimately matter to smart long-term investors.
- EPD, MMP, MPLX, BTI, LGGNY, and BASFY represent six of the safest ultra-high-yielding blue-chip bargains on Wall Street.
- They are 28% undervalued, yielding a very safe 8.0%, and analysts expect 4.7% long-term growth, and 12.7% long-term returns, similar to the 13.1% they delivered over the last 20 years.
- Combined with the right low-cost ETFs, you can create a diversified and prudently risk-managed 5.1% yielding Zen Ultra SWAN retirement portfolio that analysts expect to nearly triple a 60/40s returns over the coming 30 years while reducing volatility by 50%.
- Looking for a helping hand in the market? Members of The Dividend Kings get exclusive ideas and guidance to navigate any climate. Learn More Âť
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If it feels like 2022 has seen an especially bad start to the year, that's because it has.
According to Bloomberg, it's the worst start to the year since 1939.
YCharts
This article explains why the bear market is likely to persist for another few weeks and could bottom about 5% to 6% lower than we are now.
Basically, Morgan Stanley, along with JPMorgan and Citigroup, all believe this could be the terminal phase of this growth scare correction.
- growth is slowing but still far too strong to make a recession the most likely outcome
One of the biggest pieces of evidence for this "bear market is almost over" hypothesis is the fact that almost everything is now starting to sell-off.
- early in the year sector rotation offered investors someplace to hide
- in April only consumer staples went up (2%) and every other sector was down
In fact, it was the worst April for the S&P 500 since 1970, the worst April in 52 years.
When stocks fall beyond a certain point, margin calls for big institutions cause a cascade of forced liquidations of anything that's positive. This triggers the terminal collapse before the market bottoms.
Ben Carlson
It was the worst month for the Nasdaq since October 2008, and the 11th worst month in history.
But there is both good news and bad news about this bear market.
Ben Carlson
The bad news is that the correction is likely close to bottoming.
The good news is that the correction is likely close to bottoming. And historically speaking, returns following such historic declines tend to be very strong.
- assuming we don't get a recession
What does this mean for today's prudent income investor?
It's time to start bargain hunting the best ultra high-yielding blue-chips.
So here are six 8% yielding bargains for you to potentially buy before this bear market ends and a potentially very strong recovery rally (30% to 35% by year-end) commences.
8% Yielding Bear Market Bargains You Don't Want To Miss
DK Zen Research Terminal
- MPLX (MPLX) - uses a K-1 tax form
- Magellan Midstream Partners (MMP) - uses K-1 tax form
- BASF (OTCQX:BASFY)
- Legal & General (OTCPK:LGGNY)
- Enterprise Products Partners (EPD) - K-1 tax form
- British American Tobacco (BTI)
I've linked to articles exploring each company's safety, quality, growth outlook, risk profile, and valuation in more detail.
Note that BASF is trading at its lowest valuations due to concerns about the war in Ukraine potentially leading to a full gas embargo of Russia.
(Source: FactSet Research Terminal)
Management just reiterated guidance in Q1 earnings, citing strong pricing power to offset its own inflation costs.
Analysts expect modest but positive dividend growth (in Euros) in the coming years, though the growth outlook has fallen from 11% pre-invasion to 3.7%.
- the 8% yield still means potentially 11.7% long-term return potential
The bond market is modestly concerned about BASF's fundamental risk, with 1-year default risk tripling over the last six months.
However, rating agencies continue to rate it A-stable and the 30-year default risk is still in-line with A-rated companies.
- BASF isn't right for everyone
- but is trading at some of the best valuations in history
- 5.7X cash-adjusted earnings
Why am I confident in the safety of these 8% yielding bear market bargains?
Quality You Can Trust In Almost Any Economic Environment
DK Zen Research Terminal
We're not just talking about an 8% yield but a very safe 8% yield.
How safe?
| Rating | Dividend Kings Safety Score (161 Point Safety Model) | Approximate Dividend Cut Risk (Average Recession) | Approximate Dividend Cut Risk In Pandemic Level Recession |
| 1 - unsafe | 0% to 20% | over 4% | 16+% |
| 2- below average | 21% to 40% | over 2% | 8% to 16% |
| 3 - average | 41% to 60% | 2% | 4% to 8% |
| 4 - safe | 61% to 80% | 1% | 2% to 4% |
| 5- very safe | 81% to 100% | 0.5% | 1% to 2% |
| 8% Yielding Bargains | 82% | 0.5% | 2.00% |
| Risk Rating | Low-Risk (74th industry percentile risk-management consensus) | BBB+ Stable outlook credit rating 4.0% 30-year bankruptcy risk | 15% OR LESS Max Risk Cap Recommendation (each) |
During the average recession since WWII, the average risk of these 8% yielding bargains cutting their dividends is about 1 in 200.
In a severe Pandemic level downturn, it's about 1 in 50.
DK Zen Research Terminal
These are well-covered payouts with debt/capital that rating agencies consider safe for their respective industries and cash flow stability profiles.
In fact, their average credit rating from S&P is BBB+ stable, indicating an average 30-year bankruptcy risk of 4%.
- junk bonds yield 4.4% and have a 37% bankruptcy risk according to S&P
Wonderful Companies At Amazing Valuations
Just how undervalued are these blue-chips (average quality Super SWAN)?
Well, the 8% very safe yield is one hint they are potentially screaming bargains.
DK Zen Research Terminal
The S&P 500 is still 4% historically overvalued, but these 8% yielding bear market bargains are 28% undervalued.
They trade at an average price/cash flow/PE of 7.9, literally anti-bubble valuations that the S&P 500 hasn't seen in 40 years!
That's why analysts expect an average 12-month return of 36% and 51% total returns are justified by their fundamentals.
Ok, so now you know what I trust these 8% yielding blue-chips, and why you might want to buy some today.
But here's why these 8% yielding bargains are potential retirement dream stocks.
Long-Term Return Fundamentals That Rich Retirements Are Made Of
DK Zen Research Terminal
Do you know how many 8% yielding stocks offer almost 5% long-term growth and 13% return potential? Almost none, because yields this high are generally the realm of the no-growth mREIT.
| Investment Strategy | Yield | LT Consensus Growth | LT Consensus Total Return Potential | Long-Term Risk-Adjusted Expected Return | Long-Term Inflation And Risk-Adjusted Expected Returns | Years To Double Your Inflation & Risk-Adjusted Wealth | 10 Year Inflation And Risk-Adjusted Return |
| 8% Yielding Bargains | 8.0% | 4.7% | 12.7% | 8.9% | 6.4% | 11.3 | 1.86 |
| Safe Midstream | 5.2% | 6.0% | 11.2% | 7.8% | 5.3% | 13.5 | 1.68 |
| Adam's Planned Correction Buys | 3.9% | 18.9% | 22.8% | 16.0% | 13.5% | 5.3 | 3.54 |
| 10-Year US Treasury | 3.0% | 0.0% | 3.0% | 2.1% | 0.5% | 146.9 | 1.05 |
| High-Yield | 2.8% | 10.3% | 13.1% | 9.2% | 6.7% | 10.8 | 1.91 |
| REITs | 2.8% | 6.5% | 9.3% | 6.5% | 4.0% | 17.9 | 1.48 |
(Source: Morningstar, FactSet, YCharts)
What does 8% yield and 4.7% long-term growth potentially mean for you?
Inflation-Adjusted Consensus Total Return Potential: $1K Initial Investment
| Time Frame (Years) | 7.5% CAGR Inflation-Adjusted S&P Consensus | 8.6% Inflation-Adjusted Aristocrat Consensus | 10.2% CAGR Inflation-Adjusted 8% Yielding Bargain Consensus | Difference Between Inflation Adjusted 8% Yielding Bargain Consensus And S&P Consensus |
| 5 | $1,436.30 | $1,511.29 | $1,625.94 | $189.64 |
| 10 | $2,062.95 | $2,284.01 | $2,643.69 | $580.74 |
| 15 | $2,963.01 | $3,451.81 | $4,298.48 | $1,335.47 |
| 20 | $4,255.76 | $5,216.70 | $6,989.08 | $2,733.32 |
| 25 | $6,112.54 | $7,883.98 | $11,363.84 | $5,251.30 |
| 30 | $8,779.42 | $11,915.01 | $18,476.94 | $9,697.52 |
(Source: DK Research Terminal, FactSet)
Analysts think these 8% yielding bargains could deliver 18.5X inflation-adjusted returns over the next 30 years.
| Time Frame (Years) | Ratio Aristocrats/S&P | Ratio Inflation-Adjusted 8% Yielding Bargain Consensus And S&P Consensus |
| 5 | 1.05 | 1.13 |
| 10 | 1.11 | 1.28 |
| 15 | 1.16 | 1.45 |
| 20 | 1.23 | 1.64 |
| 25 | 1.29 | 1.86 |
| 30 | 1.36 | 2.10 |
(Source: DK Research Terminal, FactSet)
That's potentially 2X the inflation-adjusted returns of the S&P 500 over the next three decades.
What evidence is there that these 8% yielding bargains can actually deliver something like 12% to 13% long-term returns?
Historical Return Since 2002 (Annual Rebalancing)
The future doesn't repeat, but it often rhymes." - Mark Twain
Past performance is no guarantee of future results, but studies show that blue-chips with relatively stable fundamentals over time offer predictable returns based on yield, growth, and valuation mean reversion.
Bank of America So let's take a look at how these 8% yielding bargains have performed over the last 20 years when 91% of total returns were the result of fundamentals, not luck. Portfolio Visualizer Premium
Over the last 20 years, these high-yield blue-chips delivered 13.1% returns, basically what analysts expect in the future.
Portfolio Visualizer Premium
These high-yield blue-chips delivered 2.5X the market's inflation-adjusted returns over the last 20 years.
And what about income? The entire point of owning these companies?
| Portfolio | 2002 Income Per $1,000 Investment | 2021 Income Per $1,000 Investment | Annual Income Growth | Starting Yield | 2021 Yield On Cost |
| 8% Yielding Bargains | $54 | $854 | 15.64% | 5.4% | 85.4% |
(Source: Portfolio Visualizer Premium)
Thanks to reinvesting dividends through many bear markets, these ultra-high-yielders were able to deliver 16% annual income growth over the last two decades.
A 5.4% yield today is now an 85.4% yield on cost.
What about the future?
| Analyst Consensus Income Growth Forecast | Risk-Adjusted Expected Income Growth | Risk And Tax-Adjusted Expected Income Growth | Risk, Inflation, And Tax Adjusted Income Growth Consensus |
| 15.2% | 10.6% | 9.0% | 6.6% |
(Source: DK Research Terminal, FactSet)
Analysts expect 15.2% income growth in the future, which is 6.6% when adjusted for the risk of these companies not growing as expected, inflation, and taxes.
Now compare that to what they expect from the S&P 500.
| Time Frame | S&P Inflation-Adjusted Dividend Growth | S&P Inflation-Adjusted Earnings Growth |
| 1871-2021 | 1.6% | 2.1% |
| 1945-2021 | 2.4% | 3.5% |
| 1981-2021 (Modern Falling Rate Era) | 2.8% | 3.8% |
| 2008-2021 (Modern Low Rate Era) | 3.5% | 6.2% |
| FactSet Future Consensus | 2.0% | 5.2% |
(Sources: S&P, FactSet, Multipl.com)
What about a 60/40 retirement portfolio?
- 0.5% consensus inflation, risk, and tax-adjusted income growth.
In other words, these 8% yielding blue-chip bargains offer
- almost 6X the market's yield (and a much safer yield at that)
- over 3X its long-term inflation-adjusted consensus income growth potential
- 13X better long-term inflation-adjusted income growth than a 60/40 retirement portfolio
Bottom Line: This Bear Market Could End Soon, So Don't Miss Out On These Incredible 8% Yielding Bargains
I can't tell you what's going to happen with the market in the next week, month, or year, no one can.
All we can say is what's potentially going to happen based on the best available data we have now.
- financial science is statistical and probabilistic in nature
But here's what I can tell you about EPD, BTI, MMP, MPLX, BASFY, and LGGNY.
- 8.0% very safe yield
- average BBB+ stable credit rating
- 4.7% long-term growth potential
- 12.7% long-term return potential (vs 13.1% over the last 20 years)
- better long-term return potential than the dividend aristocrats
- 28% undervalued
To paraphrase Casablanca:
If the market leaves the ground and you haven't bought some blue-chip bargains, you'll regret it. Maybe not today. Maybe not tomorrow, but soon and for the rest of your life.
The market might sell off a bit more, but chances are good that, barring a recession, we're approaching the final bottom of this correction.
That means that anyone waiting to time the bottom is risking a lot of potential regret in the future.
It's better to be approximately right than precisely wrong." - Warren Buffett
Last quarter, during the worst start to any year since 1939, Warren Buffett bought $41 billion worth of stocks.
April was a historically terrible month for the market, the worst in 52 years.
And this is precisely the kind of historical sell-off that you want to put your savings to work in the highest quality ultra-high yielding blue-chips.
This is precisely the kind of sell-off that the greatest investor in history doesn't want to miss, and neither do I.
Not because we're likely to see a face-ripping 30% to 50% rally in the next year (through these blue-chips' fundamentals justify that). But because we can lock in a very safe 8% yield today while waiting to retire in safety and splendor in the years and decades to come.
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This article was written by
Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).
I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.
My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.
With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.
Analystâs Disclosure: I/we have a beneficial long position in the shares of EPD, MMP, BTI, LGGNY, BASFY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Dividend Kings owns EPD, MMP, BTI, LGGNY, and BASFY in our portfolios.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (30)
Ultra SWANs: 71st
BTI: 72nd
ENB: 73rd
CMI: 82nd
LMT: 85thAccording to rating agencies, TSLA is a worse ESG stock than BTI, ENB, CMI, and LMT. Our Strong ESG list (70th industry percentile or better consensus from all 6 agencies) averages 85th percentile. It includes a lot of companies that many people would consider "evil" but personal opinion has no place in business. Big institutions quantify risk and judge companies based on how they manage it. ESG is used as a religion by some but is actually a measure of risk management. Like credit ratings though of course, they are looking at hundreds or even 1000+ factors, so the ratings can vary wildly. Thus why we use the consensus from six major agencies.
Cut in 2011
Cut in 2012
Cut in 2014
Cut in 2015
Cut in 2020Not a reliable dividend stock.
