What Is Behind The Market Sell-Off And Should We Worry?
Oct. 11, 2018 12:00 PM ET PART 2
What Assets are most at risk?
Here, I would like to add that the assets that are most at risk are long-term bonds. We have been avoiding those for the past 2 years and our portfolio has no direct exposure them. We have been allocating our funds to high yielding equities as opposed to fixed income (or bonds). They are revenue- and earnings-driven investments. As the economy grows, such stocks should see their revenue and cash flow grow, and are set to outperform.
Another strategy that investors should follow is overweight U.S. stocks, and this is exactly what we have been doing. The U.S. economy remains the strongest and fastest growing economy among developing nations, and U.S. equities remain the best place to be invested in.
Note that most high-yield stocks and sectors provide a pure U.S. exposure including Property REITs, BDCs, Mortgage REITs, and Midstream MLPs. We are overweight all of these sectors.
About High-Yield Stocks and Sectors
Yesterday, we saw the decline in high-yield stocks and sectors much lower than that of the general markets. In fact, at a time the S&P 500 index closed down by 3.3% and the Nasdaq by 4.1%, Property REITs were only down by 1.4%, Midstream MLPs by 1.9%, and BDCs by 1.3%. Most High-Yield sectors, are deep-value sectors today, because they are cheap and the downside risk tend to be limited when the markets are down or in case we see a market correction.
With the 3rd quarter earnings season kick-start in just a few days, I have very high expectations for several high yield stocks and sectors which are set to post some stellar earnings. I am most bullish on Business Development Companies ('BDCs'), and Midstream MLPs, and Property REITs, which are set to report record quarterly sales and earnings over the next six weeks. Also, I expect many Property REITs to boost their dividend yield.
I am very optimistic about these high yield sectors in the longer term. In today's very low interest rate environment, high-yielding stocks remain very attractive to income investors as there are very little alternatives to get such investment returns. Demand for dividend stocks will only increase in the future as the general population grows older and more people enter the retirement age.
In my opinion, the yields that we are seeing today will not last very long. As demand for high-yield products grows over the next few years, yields are bound to compress. Therefore it is my opinion that taking advantage of the high yields offered today is an opportunity.
Conclusion
I remain very bullish on the prospects of a strong 3rd quarter earnings season, as well as a continuation of the current bull market. I believe that income investors who are in the right high-yield stocks and sectors should see their portfolio outperform over the next few years. Again, investors should keep a long-term view and not get discouraged by the recent volatility. The general markets are still in a long-term uptrend, and this bull market is likely to continue. Long-term investors should be very well rewarded. The best aspect of investing in dividend stocks is that no matter what happens to equities in the short-term, we keep collecting high-income until the markets recover.
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