Less than one month ago, bond “experts” were all over the financial news networks predicting the yield curve would invert in 2018. An inverted curve, where short-term rates are higher than long-term rates, is a reliable indicator that the economy will go to negative growth – a recession. At that time the stock market was setting new records higher, even as the fears of a recession grew. Now interest rates are rising, the yield curve is turning more positive, and the “experts” claim it is due to stronger economic growth and rising inflation.
This most recent interest rates news has pushed the stock market into a steep decline. So, what is it to be? An economic recession with higher stock prices or a strong economy with lower stock prices? Will the yield curve flatten or steepen? What will they say next week?
The point is that an investor who invests based on the latest “expert” opinions is likely to get whipsawed into losing money in the stock market. We are now in a stock market correction. It has been about two years since the last one. In the second half of 2015 through mid-February 2016 the S&P 500 declined in a double-dip correction by 13%. It then took five months for the index to recover from the correction.
If you are an investor, and not a trader, and want to grow your portfolio value, you need an investment strategy that accounts for market corrections. Over the last six months, there have been lots of predictions that a correction was coming. Now it is here. My plan, which I regularly share with my newsletter subscribers, is to focus on owning higher yield dividend stocks with potential for dividend growth. A dividend focused investment strategy provides three advantages when the stock market corrects.
- Quality companies will continue to pay dividends. You will earn dividend income right through the correction and recovery.
- Dividends are additional cash to put to work when share prices are down. Investors say they are waiting for a correction to invest. Well, here it is. Reinvesting your dividends allows you to do that.
- Buying income stock shares when prices are down boost your portfolio yield, which you will continue to earn for as long as you own the shares.
Now that the major market indexes have lost 10%, there are lots of dividend stocks at very attractive valuations. However, my editor likes for me to highlight some attractive stocks with each article. Here are two that have monthly dividends and will pay well through a correction and provide you with nice gains when the market recovers.
EPR Properties (NYSE: EPR) is a very well-run net lease REIT that has done a great job of growing the business and generating above average dividend growth for investors. With the net-lease (NNN) model, the tenants that lease the properties owned by EPR are responsible for all the operating costs like taxes, utilities and maintenance. EPR's job is to collect the rent checks.
Typically, NNN leases are long term, for 10 years or more, with built-in rent escalations. EPR Properties separates itself from the rest of the triple net REIT pack by the highly focused types of properties the company owns. The EPR assets can be divided into the three categories of Entertainment –movie megaplex theaters, Recreation –golf and ski facilities, and Education –including private and charter schools, and early childhood centers.
EPR just increased its dividend for the eighth consecutive year, boosting the payout by 6%. The shares yield 7.7%.
Main Street Capital Corporation (NYSE: MAIN) is a business development company has been a tremendous stock for income focused investors. A BDC is a closed-end investment company, like closed-end mutual funds (CEF). The difference is that a CEF owns stock shares and bonds, while a BDC makes direct investments into its client companies.
A BDC will have up to hundreds of outstanding investments to spread the risk across many small companies. MAIN uses a two-tier approach to its portfolio. This unique strategy allows Main Street to generate a high level of interest income and capital gains from equity investments. This company is one of just a small number of BDCs that has grown its dividends and net asset value per share.
The monthly dividend has been increased five times in the last three years. MAIN has also been paying semi-annual special dividends that boost the realized yield above the current yield. The stock currently yields 6.25%.
Disclosure: I am/we are long MAIN, EPR.