Have you noticed your retirement account bleeding money lately?
Sure, the market is down… but something seems off.
It feels like you’re losing money faster than the market is dropping.
Guess what? You’re not just imagining things.
Many Americans invested in typically “safe” plays are seeing their accounts do FAR WORSE than the stock market.
No matter what they try, the problem just keeps getting worse.
But they can’t sit by and do nothing.
We analyzed this problem front to back.
It turns out the culprits behind your portfolio collapse are those safe “payer” stocks and bonds you’ve been told to hold.
But there’s one sector that’s performed far worse than any other.
And if you don’t purge it from your portfolio soon, you may never recover.
We’ll tell you which one is holding you back, why you need to kick it to the curb and what you can replace it with to keep those regular dividend payouts coming.
The Unseen Pitfalls of the ____Sector
The stock market can be a fickle beast.
And this year, it’s biting back hard, particularly in the utilities sector, which faces three interrelated problems.
Known as “safety” stocks, these companies were once the shining stars in the investment universe due to their high dividend payments.
Not so much.
Why is that? Don’t people need to use electricity no matter what?
Yes and no.
There is a base level of demand that never goes away.
However, the excess tied to industry waxes and wanes with the economy.
And we all know the Fed wants to drive us into a recession.
So, investors are betting this will take a bite out of utility revenues.
But that’s one problem facing the utility sector.
The second deals directly with U.S. Treasuries.
Treasuries are fixed-income instruments that pay regular interest until maturity (unless you get zero-interest bonds).
Since the U.S. government backs this debt, it’s considered risk-free, or as close to risk-free as you can get.
Lately, U.S. Treasury bonds have been losing value… a lot of value.
While they’re still paying that cash, the principals have fallen faster than Bud Light’s sales.
Just look at the TLT ETF, which invests in 20+ year maturing debt.
It’s down more than 50% from its highs in 2020… and is probably heading lower.
Utility dividend yields price themselves relative to U.S. Treasuries.
If a 10-year Treasury pays 5%, a utility would likely pay 5% + 3% for company risk = 8%.
That’s why when Treasuries fall, utilities aren’t usually far behind.
The third problem is a bit more subtle but far more damaging.
Utility companies fund their operations and dividends with heavy amounts of debt.
The cost to service that debt goes up when the price of Treasuries falls.
That means on top of everything else, these utility companies earn less because their interest payments go up.
This is why we’ve seen the XLU ETF drop almost nonstop for the past year.
We think there’s further to fall, given that XLU pays a dividend yield of 3.77% and Treasuries pay 5% or more.
If a recession is around the bend, then the smart move is to kick these stocks from your portfolio before they kick you.
Do This Instead
Two high-paying dividend stocks we like are Altria Group (MO) and Verizon (VZ), which are paying a 9.5% and 8.4% dividend, respectively.
Generally speaking, high yields signal potential problems.
But we looked into the financials for each company.
Both admittedly don’t have sales growth.
Altria made a bad investment in July, and Verizon has seen sales flatline.
In Altria’s case, it may never see sales recover unless it finds its way into cannabis, should it become legal nationwide.
Verizon, on the other hand, grows with the economy.
Both companies generate enormous amounts of cash from their respective businesses.
In Verizon’s case, that’s $37.5 billion a year, with capital expenditures of $23 billion per year.
That leaves more than enough capital to cover the $10 billion dividend payouts and even pay down its debt, most of which doesn’t come due until 2064 (and it pays 3.5% on it in total).
Altria generates $8.8 billion in cash from operations, with hardly any capital expenditures. This means it can easily pay down debt, cover its $6.7 billion annual dividend and even have some leftover to buy back more than $1 billion in stock every year.
Would we keep these as the only two stocks in a portfolio?
Can they replace utility stocks you own?
How to Protect Yourself
We can’t rely on the “typical” strategies and ideas we learned in Econ 101.
The markets have changed.
We spent 15 years with interest rates close to zero.
Now, it’s time to get used to a normalized rate environment, which will feel…abnormal.
Some of you might not know what that looks like or how to navigate these new market dynamics.
This article has shown you how a little bit of homework and common sense can yield better results than your 401(k) fund.
But maybe you want to take things a step further.
Maybe you’re interested in ensuring your retirement can withstand the new economy.
For that, there’s no one better than Bob Carlson.
As the editor of Retirement Watch, Bob’s helped folks build and protect their retirement accounts, adapting to markets as they change.
Bob’s been trusted by thousands of investors, including the Fairfax County Employees Retirement System and the Virginia Retirement System Board of Trustees, where he helped safeguard the pensions for countless individuals.
All this is to say that when Bob speaks, we listen.
And it’s his latest insights about the current market that really piqued our interest.
These profound ideas could very well reshape the way you look at retirement.
But don’t take our word for it.