By Andrey Dashkov, analyst, Casey Research
The Ukraine-Russia conflict is threatening to send commodity prices to multidecade highs…
And the recent lockdowns in China’s largest manufacturing centers, such as Shenzhen, could result in lower energy demand.
These developments point to low growth and high inflation… also known as stagflation.
What’s more… there’s a new omicron variant spreading faster than the one we just dealt with.
In the past, I told you that holding gold is one of the best ways to deal with stagflation.
But that’s just one strategy.
In a moment, I’ll talk about what else you can do to withstand – and even profit from – this turbulence.
Introducing the Barbell Strategy
Imagine a barbell with two sets of plates on each side.
This is how a “barbell portfolio” looks in terms of risk and reward.
On the right, you have higher-risk, higher-reward investments.
On the left, it’s the opposite. Lower-risk, steady reward.
On the “right,” you could have potentially high-growth stocks with little to no income. The company could operate at a loss, meaning it’s spending more than it’s earning. Or even generate no revenue, like some junior mining companies and tech start-ups.
This is the “high-risk, potentially high-reward” end of the barbell.
Traditional asset managers would also add any crypto holdings here. There’s quite a bit of volatility in that area. But some investors have reaped massive rewards by buying and holding crypto. So generally, it fits the “high-risk, high-reward” description.
On the “left,” you have the stocks that would be low-risk and potentially low-return.
Think companies with massive cash flow… paying high dividends… or short-term bonds that are liquid and safer than their longer-term counterparts.
In other words, you’re looking at companies that can return your capital as soon as possible. They can return it as dividends or share buybacks. And they generate enough cash to pay their shareholders back easily.
I’m talking about the “dividend payout ratio.” It tells you whether a company can really afford the dividends it pays.
For example, if a company made $100 million in net income in the recent quarter and paid $50 million in dividends, its payout ratio is 50/100=50%. It can easily afford these dividends.
If the payout ratio goes above 100%, the company can no longer easily afford its dividends, which could spell trouble if the situation persists.
Looking for “Barbell Bets”
Overall, you want to keep both ends of your barbell balanced.
There’s more to this strategy than dividend yields and payout ratios… but looking for stocks that pay a high yield (and can afford to do so) is a good start.
I’ve looked for companies with a dividend yield between 5% and 10%… and a payout ratio of 60% or below.
The table below lists some companies that can afford to pay high dividends according to their payout ratios.
|Company Name||Symbol||Dividend Yield||Payout Ratio||Market Cap, Billion USD|
|Annaly Capital Management, Inc.||NLY||13%||57%||10.4|
|FS KKR Capital Corp.||FSK||11%||33%||6.2|
|Chimera Investment Corporation||CIM||11%||56%||2.9|
|New Residential Investment Corp.||NRZ||10%||57%||4.8|
|Old Republic International Corporation||ORI||10%||17%||7.7|
|Lumen Technologies, Inc.||LUMN||9%||54%||11.0|
|Prospect Capital Corp.||PSEC||9%||25%||3.1|
|Ares Capital Corp.||ARCC||9%||44%||9.4|
|Golub Capital BDC, Inc.||GBDC||8%||47%||2.5|
Source: Capital IQ
Now is a good time to create a defensive strategy for your portfolio.
That’s because I see stagflation coming… and it could test how resilient your portfolio is to a possible economic slowdown and a period of high inflation.
Analyst, Casey Research
P.S. Look out for my next piece… I’ll provide you with more ideas on how to weather the storm.
In the meantime, check out our expert Dave Forest’s recent emergency briefing right here. He’ll give you step by step instructions on what to buy… sell… and stock up on during this period of massive inflation and shortages.