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Boom or Bust: 2 High-Yield Dividend Stocks You Need

Good Morning, Income Investors!


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The latest economic news showed mixed indicators, leading to different interpretations of the economic condition. The S&P Global US PMI rose to 51.3 for May, while the ISM Manufacturing PMI fell to 48.7. In the Jobs Report, the number of jobs added was more than expected at 272,000, while in the same report, unemployment ticked up to 4.0%.


How is it possible that we have different reports that are theoretically measuring the same thing to come up with such different results? You can either conclude that the economy is strong or that a recession is imminent if you look at only one report. 


Which PMI To Believe?


The S&P Global US PMI basically says all is well, while the ISM Manufacturing PMI has been below 50 since October 2022 (for March 2024).


Which one predicts a recession better? Neither. The S&P Global measurement is relatively new. It didn't exist for the Dot-Com bust or before the GFC. Despite the ISM PMI’s long track record, its ability to predict recessions has not been strong. It always goes down during recessions. PMI stands for "Purchasing Manager's Index," and it surveys purchasing managers, asking them if things are "higher," "lower," or "the same" as last month. The results reflect the direction of change, not the magnitude, making the indices volatile. Thus, even in a booming economy, businesses might report slower months, negatively affecting the PMI. The best use of the ISM reports is to understand the underlying trends, not predict a recession.


Evaluating Jobs Report 


Similarly, the Jobs Report has significant market implications. While 272,000 jobs were added in May, this figure is not exceptionally high compared to recent months. The average monthly gain over the past year is 232,000. While the 272,000 jobs added are higher than the average, these numbers are often revised later. For instance, January’s initial report of 353,000 jobs added was later revised down to 229,000.


It can be confusing when you have two data points in the same report that say opposite things. The Jobs Report stated that 272,000 jobs were added, but at the same time, unemployment rose to 4%. How can both be true? They can't be. One is wrong. This is just one aspect of the economy being large and difficult to measure. 


Whether the economy is strong or crashing, balance your portfolio so that some stocks perform well during a bear market and some perform well in a bull market so that no matter the condition, your portfolio is generating income. 


Pick 1: ARCC - Yield 8.9%


Ares Capital Corporation (ARCC) is a BDC (Business Development Company). Its basic business model is to borrow at fixed interest rates and make secured floating-rate loans to borrowers—a fantastic strategy in a rising interest rate environment. BDCs lend to small and medium-sized businesses, and rising interest rates have provided strong tailwinds for ARCC's earnings.


ARCC has been having a great run, pumping out plenty of dividends while the share price is closing in on all-time highs. The main driver of this recent success is "higher-for-longer" interest rates.


Regardless of the interest rate policy, we note that ARCC is one of the oldest BDCs with a proven track record of prudent loan underwriting and risk management, beating the S&5 500 handsomely over the long term.

 The BDC remains well-positioned to reward shareholders through good and bad economic conditions.


Pick 2 AGNC - Yield 15%


AGNC Investment Corp (AGNC) is a mortgage REIT that primarily invests in "agency Mortgage Backed Securities". They basically invest in mortgages that are guaranteed by government agencies – Fannie Mae, Freddie Mac, and Ginny Mae.


If an agency mortgage defaults, the agency buys it back at par. If the borrower refinances, the mortgage is repaid at par. As a result, the prices of MBS and US Treasuries tend to go up (yields come down) during periods of uncertainty and fear. They are in higher demand when investors are scared and are looking for something that is certain, like during a recession or the fear of one. Take a look at how AGNC has tremendously outperformed the market index during the Great Financial Crisis.

I'm not buying AGNC because it will outperform the S&P 500; it might, it might not. I'm buying AGNC because the agency MBS that AGNC invests in is a premium asset class during times of economic turmoil and recession. When the rest of the market crashes, AGNC will be the green island delivering massive dividends left and right.


Conclusion


The month-to-month economic data oscillates and isn't always clear. Jobs added are reported higher than the 1-year average but unemployment is climbing. The S&P Global US PMI rose to 51.3, while the ISM Manufacturing PMI fell to 48.7. These metrics are confusing and do not serve to predict the future direction of the market. Hence, our recommendation is to focus on what you can control and build your portfolio to produce income no matter the circumstances. 


At High Dividend Opportunities, we insist on having at least 42 holdings that can help us balance our portfolio and combat any market condition. Some of our holdings do well in a raging bull market, while others provide portfolio defense and stability during bear markets and recessions. By targeting a +9% overall yield, our portfolio is well-positioned to weather whatever is coming next while delivering regular dividends along the way.


Economies are complex, with many variables and unique cycles. The one thing I am most confident about is that whatever the future brings, we will keep our income growing. This is the beauty of income investing.

 

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