My retirement account is balanced between two key groups.
The first group contains stocks I buy primarily for their price appreciation. Like many investors, it’s weighted toward growth companies with long-term prospects.
The other contains dividend payers. It’s a mix of companies, real estate investment trusts, closed-end funds and exchange-traded funds.
For the calendar year 2020, both groups of stocks beat the S&P 500.
We all remember how well growth stocks did throughout 2021.
Now, at the midway point of 2022, growth stocks have fallen off a cliff. Multiple years of returns have evaporated in months. Meanwhile, my dividend payers are actually trouncing the market in total return.
That’s real-world evidence of how a “slow and steady” approach can win out in the long term.
But it’s also a strong indicator of what’s ahead — as markets enter increasingly dangerous territory…
Like a Flock of Birds
If you’re an investor, you’ve almost certainly heard the term “flight to safety.”
That’s what happens when the market suddenly abandons its optimistic bets and retreats to defensive tried-and-true assets.
For me, it evokes a typical scene from the African bush … a flock of playful Cape turtledoves disappearing into the trees as a hungry Verreaux’s eagle circles overhead.
Hungry predators are circling your portfolio right now.
We’ve got the highest inflation in almost 40 years. Rate hikes that no one under the age of 60 is prepared for. And a recession seems almost certain, possibly before the end of the year.
The mere suggestion of these predators was enough to send most investors rushing for cover like so many turtledoves. Growth stocks were dumped at unprecedented rates, and the biggest winners of the last few years became the biggest losers of 2022’s first half.
Yet many investors still hold out hope.
Just last week it was reported that Cathie Wood’s ARK Innovation ETF (NYSE: ARKK) had taken in $600 million in fresh investment in roughly two weeks.
That means investors still believe in growth stocks and expect they’ll be among the first to bounce back.
Unfortunately, they may be sorely mistaken.
When the Trend Isn’t Your Friend
The last few years’ run-up in growth stocks — largely companies that have never turned a profit, but which can tell a good story — was all about sentiment.
Part of that sentiment was that low interest rates were good for growth stocks.
It’s true, they were.
But as we’ve seen over the last few months, low interest rates weren’t that good for growth stocks. Their primary contribution was to give particularly aggressive bulls an excuse to pile into them. That produced valuations all out of proportion to any reasonable metric.
Just take a look at the spike in forward price-to-earnings ratios for the S&P 500:
Federal Reserve-fueled sentiment sent valuations rocketing after the pandemic. But that fuel has run out. Valuations are gradually gliding back down to Earth. And as a new reality sets in for investors, their appetites are shifting.
So where are investors headed next?
Coasting to Safety With 40% Dividends
Bauman Letter subscribers already know I’m extremely fond of dividend-paying stocks and other income investments.
Their appeal is simple. You get paid, rain or shine. No matter whether the market is rising, falling or even making any sense at all. The returns may have seemed “boring” compared to runaway tech stocks or crypto just last year, but the flight to safety is transforming the way investors think.
And some may soon realize, as I have, that you don’t have to settle for paltry 2% to 5% dividend yields (that won’t even beat inflation right now).
Instead, you can take advantage of this opportunity to “Buy Low, Yield High” and lock in Extreme Dividends of up to 40% as the market craters.