In the age of meme trades and rampant speculation, income stocks don’t exactly get the juices flowing. Generally defined as equity units of publicly traded companies that feature consistent (and hopefully rising) dividend payouts, we should be honest and admit that this investment class isn’t exactly sexy. But it’s also one of the more important sectors to consider given the present context.
For one thing, income stocks provide a strong measure of stability. As you know, one of the hottest sectors over the trailing year has been cryptocurrencies. When things are going well, you’re on top of the world. When they’re not, you want to find the deepest hole so you can crawl into it. With companies that pay dividends, though, you can always rely on something even when the market doesn’t go your way.
Second, the biggest threat to the equities sector and the economy could be deflation, which would favor income stocks over growth names. Now, I understand the social media chatter that scream incredulity when this topic comes out. I look at it this way. If inflation was the paradigm-shifting threat that we should worry about, then how come the Dow Jones Industrial Average has been flat to negative since early May?
Even more telling, why is the gold price down during the same period? Surely, in an inflationary environment, hard assets of intrinsic value should soar to the moon. Even if we don’t have inflation now, just the concept of professional investors anticipating it — and by the way, seemingly everybody is talking about inflation — should result in higher gold prices. If anything, we’re seeing lower prices, which should make you think about income stocks.
And that’s the point. Nobody has a crystal ball on this stuff, so you don’t want to swing for the fences toward any one narrative. But when everyone bets on the same horse, the possibility of great disappointment rises. Therefore, here are some income stocks to consider.
Again, I want to reiterate that no one knows for sure how the next several months will play out. But based on high-level indicators — for instance, record levels of stock trading on margin — having some exposure to defensive income stocks is wise.
Once a transformative entity featuring equity units that traded for mere pennies, the days of Microsoft being a massive growth name are probably over. Don’t get me wrong, it pokes its head up every now and then. But certainly, people are not getting involved with MSFT stock as if it was the next hot cryptocurrency.
Instead, Microsoft is one of the income stocks you can depend on. True, even from a defensive angle, MSFT isn’t something to write home about. Presently, shares have a forward annualized yield of 0.82%, which is pedestrian compared to other dividend plays. Nevertheless, this consumer technology firm has attributes similar to consumer staples.
For instance, the business world runs on Microsoft’s software as a service (SaaS) platform. From word processors to spreadsheets to presentation slides to databases, Microsoft has you covered. If you don’t know how to work your way around its programs, you’re really at a disadvantage.
Also, Microsoft is a big name in the video game industry with its Xbox platform. With video games and the gig economy both increasing in relevance as a consequence of the Covid-19 pandemic, you can trust MSFT as one of your core income stocks.
Personally, I’m reluctant to buy into investments that are already well into a bullish rally. The thinking is that you’re going to buy at or near a high, only to watch the position crumble. But when it comes to big-box retailers, those who focus on income stocks may want to consider Target over rival Walmart (NYSE:WMT).
Yes, WMT is on a discount relative to its all-time high. In comparison, TGT stock is on a tear, posting record after record. Admittedly, there’s always that risk that a correction could take place, sending shares careening. Still, an argument exists that Target deserves its premium valuation.
Primarily, Target’s customers on average make more money than some of its rivals. In 2015, Target shoppers enjoyed a household income of $66,800, whereas the average Walmart shopper had a household salary of $56,000. That’s a sizable 19% gap, which may play a significant role moving forward.
That’s because we don’t know how this economic recovery will play out. If circumstances go awry, it’s better to be exposed to income stocks which are tied to a more resilient consumer base.
Kimberly Clark (KMB)
Likely one of the most defensive income stocks you can buy for July — or perhaps any month of this year — buying Kimberly Clark is almost akin to acquiescence. In my opinion, by going long on KMB stock, you’re giving up the probability of attaining capital gains. Instead, you’re going for a steady stream of passive income.
Why am I so down on Kimberly Clark? Rest assured, it has nothing to do with the underlying business. But the reality is that Covid-19 played a major role in KMB’s resurgence last year. In the first quarter of 2020, the company generated revenue of just over $5 billion. In Q1 of this year, top-line sales were notably down at $4.74 billion, or a decline of more than 5%.
Obviously, with toilet paper and other household goods no longer a precious commodity, the panic buying of products undergirding KMB stock evaporated. Still, these are products that people need to buy no matter what. And that makes Kimberly Clark appealing as we head toward the unknown.
Also, let’s appreciate that KMB features a forward annualized yield of 3.4% and boasts 49 consecutive years of dividend increases.
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