Investors Alley

The Best Inflation Hedge

Kroger: Inflation Hedge

There is no doubt that in an inflationary environment—such as the one in which we find ourselves now—consumer spending habits are affected. As prices continue to rise, people will stop to consider the things they really need versus the things they would like to have.

For example, when it comes to food, people simply must have it. Still, this doesn’t mean consumers will continue with the same food shopping habits they had when prices were low and stable.

Investors will also find that their spending habits need to change. Instead of pursuing growth stocks at any price, investors need to look to stocks that can offer at least a partial hedge against inflation.

Grocery Store Stocks

One such safe harbor against an inflationary storm you may want to consider is the grocery store sector.

Regardless of what happens in the economy, food is a necessity. That allows grocers to pass along their higher costs from inflation to the consumer. For instance, if you go to the grocery store and the cost of milk is 10% higher, you may buy less of it at a time, but you still need milk so you will buy it.

With inflation still hovering near 40-year highs, consumers are cutting back on discretionary spending to focus on essentials. Many are eating out less and cooking more at home. This is helping to boost grocery store sales. Plus, shoppers are changing what they buy. Rising prices have encouraged consumers to switch to the stores’ cheaper private label brands.

Another reason grocery stocks tend to perform better than the overall market when inflation rises is that most grocery stocks pay a decent dividend to investors.

My favorite company in the sector is Kroger (KR). Here’s why…

Kroger Thriving

The company is the largest standalone grocer in the U.S. It operated about 2,700 retail supermarkets and multi-department stores in 35 states at the end of its 2022 fiscal year.

Kroger’s latest earnings results, which were reported on September 9, 2022, were outstanding. Total company sales were $34.6 billion in the second quarter, compared to $31.7 billion for the same period last year. Excluding fuel, sales increased 5.2% compared to the same period last year. Gross margin was 20.9% of sales for the second quarter. Kroger’s 3.2% quarterly adjusted operating margin rose 22 basis points despite rising labor and product costs.

Management also lifted full-year guidance for the second time in six months. The company now expects $3.95–$4.05 in adjusted diluted EPS ($0.10 higher), with identical sales without fuel to be in the range of 4.0% to 4.5%.

Consumers are switching to the company’s cheaper private label brands. Like-for-like sales of owned store brands rose 10.2% in the second quarter compared with the aforementioned total growth of 5.2%. Despite being sold at a lower price point, private label products tend to yield fatter margins. This was reflected in the 14% jump in Kroger’s operating profit for the quarter.

Kroger continues to generate strong free cash flow and is maintaining its current investment grade debt rating while returning excess free cash flow to shareholders via share repurchases and a growing dividend over time. The company’s net total debt to adjusted EBITDA ratio is 1.63, compared to 1.78 a year ago.

Kroger’s Outlook

I remain very optimistic on Kroger’s outlook going forward. Here is what Morningstar said:

We are encouraged that management indicates Kroger’s pricing relative to competitors is on solid footing, and the company’s increasing reliance on personalized promotions should improve efficiency in its customer acquisition and retention efforts. Kroger has also done well to use its omnichannel flexibility to engage customers across channels, with 8% digital expansion in the quarter. The company’s efforts to extend its digital reach into new markets (spearheaded by its fulfillment centers operated with the U.K.’s Ocado) have met with success according to customer surveys. We continue to believe such work will allow Kroger to realize profitable growth without having to build a store presence in new markets, with the rollout of its Boost program (bundling delivery and additional fuel rewards for $59-$99 per year), building loyalty while contributing to its data analytics strength.

None of this has been lost on investors.

Kroger shares are up around 12% this year, compared to a decline of about 15% for the wider S&P 500. The grocer’s market value has swelled to $36.2 billion.

Yet Kroger is currently trading at a mere 12 times forward earnings. Compare that to big box store competitors, Walmart and Costco, with much racier multiples of 22 times and 38 times respectively.

Turning to the dividend, the stock’s 2.06% dividend yield is higher than Walmart’s and more than double Costco’s!

Earlier this quarter, Kroger increased its dividend by 24%, marking the 16th consecutive year of dividend increases. It pays around 25% of earnings on average as dividends.

Additionally, during the quarter, Kroger repurchased $309 million in shares; year-to-date, it has repurchased $975 million in shares. In fact, the company has repurchased more than $6.5 billion worth of shares over the past five years. And on September 9, the Board of Directors authorized a new $1 billion share repurchase program.

Of course, competition is fierce when it comes to selling food and household essentials. There is Walmart, Target, and Costco—not to mention all of the dollar stores.

But Kroger is showing it can hold its own. High inflation is not going away for a while. This should mean more upside for Kroger stock and a higher dividend payout. The stock is a buy anywhere in the range of $50 to $53 per share.
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The 2 Best Stocks for Even Higher Interest Rates

After the inflation numbers came out last Tuesday, the Dow Jones Industrial Average (DJIA) futures dropped by 700 points in minutes—from above 200 points to the positive to more than 500 points down.

The inflation rate of 8.3% was higher than the expected 8.1%. As one TV expert noted: “The future is messy.”

Truer words were never spoken.

Even if the future is messy and it’s hard to guess what will happen, there are investment strategies that will get you through the next couple of years and beyond.

Let’s take a look at my favorite one…

Stubborn inflation (which very much was the case for August) will force the Federal Reserve to increase interest rates aggressively. I expect short-term rates to reach at least 4.0%. The current federal funds rate sits at 2.5%. With the potential for two 75 basis point increases this year, it is very probable that we will go into 2023 with the Fed funds rate at that 4.0% level.

One takeaway about investing in a world with 4% to 6% interest rates is that investment strategies that worked for the last bull market, from 2009 until the end of 2021, will not work out nearly as well in the messy future.

My long-running Dividend Hunter strategy focuses on building a high-yield income stream. If you invest for income, you will see your portfolio income stable and growing quarter after quarter—no matter what happens in the “messy” stock market. In fact, once you get your high-yield investment strategy up and running, the market downturns become opportunities to grow that income even faster.

For individual investment ideas, look for companies that benefit from higher interest rates. These are not tech companies. You want to find lenders or money management companies that use variable rate loans to lend money and have low leverage, fixed-rate debt.

By law, business development companies (BDCs) must keep leverage low and pay out 90% of their net investment income as dividends. Most BDCs lend with variable rate loans, which means as rates go higher, so will net investment income and the dividends BDCs pay.

Here are a couple of examples in the BDC universe:

Blackstone Secured Lending Fund (BXSL) is a newer BDC that launched about a year ago after Blackstone rolled together a couple of smaller BDCs. On September 7, BXSL announced a 13% dividend increase; the shares currently yield 10%.

Hercules Capital (HTGC) pays a regular quarterly dividend and will pay supplemental dividends on top of its regular payout. This year HTGC increased its regular dividend by 6% and announced special dividends equal to an additional two-quarters of its regular dividend rate. On the regular dividend alone, HTGC yields 9.9%.

Because of the war between inflation and the Fed, I expect stock prices to remain messy, choppy, and volatile well into 2023. It will be an excellent period to build up an income portfolio, taking advantage of lower share prices and higher yields.
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Grow Your Income 3x Faster Than Inflation

I enjoy reading and listening to the advice and opinions presented in financial news outlets. The discussions mainly focus on hot stocks for short-term gains. The ideas are interesting but rarely apply to investors who want to build long-term wealth. Last week, however, a Wall Street Journal article acknowledged the power of investing for dividends.

The headline?

The Best Ways to Jump into Dividend Stocks

With this sub-headline:

Lured by the prospect of steady income, investors are pouring billions into these inflation hedges without always understanding how they work

Then the article gets to the best part, which is this graphic…

In a nutshell, S&P 500 dividends have grown three times faster than inflation since 2000. About 400 of the 500 stocks pay dividends, and the index has a current average yield of 1.7%. The yield has stayed in a 1.3% to low-two percent range through the years.

Dividends have been the focus of my investment services since we launched the Dividend Hunter more than eight years ago. For this service, the recommended investments focus on high yield. Year in and year out, the yield averages around 8%.

Reinvesting the dividends will grow your portfolio income by 8%, compounding yearly. Many of the portfolio investments also organically grow their dividend rates. Investing for cash income lets you naturally load up on high-yield shares when the markets are down, which turns into higher income and wealth when stock prices recover. Take a look for yourself – now is a perfect time to get started, as you can lock in more income for less.

In my Monthly Dividend Multiplier service, the portfolio and strategy focus on stocks with growing dividends. The graphic above shows that dividend growth builds long-term income and wealth. The Monthly Dividend Multiplier portfolio yield of 4.6% is more than double the S&P 500. Interestingly, the portfolio returns consistently come in about double the S&P 500 returns. Click here to see how make that happen for your portfolio, too.

For investors like those discussed in the article, who are now getting into dividend-focused investing, my newsletters will give you a blueprint and the stocks to be successful.

6 Surprisingly Lucrative Investments You Can Make in a Self-Directed IRA

What is a Self-directed IRA?

A self-directed IRA is a type of individual retirement account designed to allow investors to diversify their retirement nest egg beyond traditional investments like stocks, bonds, ETFs and other high-risk alternatives. This individual retirement account is legally structured to work just like a Roth IRA and so, a self-directed IRA has the same contribution limits and tax advantages. However, a self-directed IRA does not restrict investors to conventional investment options because there are multiple nontraditional choices outside of the mainstream.

Investments Allowed in a Self-directed IRA

If you want to expand your investment horizon and boost your retirement reserve, you can consider these 6 rewarding options:

Gold, Silvers and other Precious Metals

Gold, silver and other valuable metals are popular alternatives because they are considered to be real money which keeps your retirement covered against inflation. For this reasons, investors often diversify their financial portfolio with precious metals. While valuable metals won’t get you rich overnight, these are investments that yield attractive rewards in the long run.

Real-estate

Owning property, whether it is residential or commercial is a great way to diversify your retirement savings. While real-estate investments are subject to market fluctuations from time to time, they are sure to offer rich returns over the long haul. Investing in real-estate with a self-directed IRA is one of the most effective ways to maximize your retirement nest egg and enjoy greater profits. Self-directed IRA is an ideal solution if you are investing in real-estate because it brings you the flexibility to make your own investment choices along with checkbook control!

However, it is important to know that the real-estate investments in self-directed IRA cannot be used for residential living, either part-time or full-time. Also, all your real-estate IRA investments, expenses, taxes and insurance covers must be paid from your own individual retirement account.

Private Businesses

You can also invest in private businesses either entirely or in part through a self-directed IRA. For instance, if you want to invest the funds from your self-directed IRA in a convenience store, you can do that. However, you should also be aware of the rules that govern the ownership of businesses within a self-directed IRA. It is best to seek expert advice from a professional before you make any decision because you need to make sure that your IRA-owned business yields returns when you retire and not immediately.

Private Mortgages

Another lesser-known yet lucrative self-directed IRA investment is mortgage. Buying a mortgage makes you the banker for the property. Your IRA can then lend a borrower and the loan remains secured by the property. But, since you don’t own the property you don’t get the profits even if the value goes up. But, your investment is always backed by an actual asset and gives you real good returns. So while the risk of foreclosure crisis cannot be eliminated, the returns are higher than average!

Debt Instruments

You can also invest in various debt instruments including tax liens and loans through a self-directed IRA. You can choose from different debt-investing platforms that are reputed and reliable for buying short-term real-estate loans. You can invest as low as $1,000 and generate significant income in interest if your investment is sheltered through a self-directed IRA.

Digital Currencies

Bitcoin and other digital currencies are relatively new in the market but most people view them as the future of cash since they are capital assets. However, digital currencies are subject to taxes when sold at a profitable margin. This is why holding digital currencies in a tax-advantaged account like a self-directed IRA makes a wise investment decision.

Why Self-directed IRA 

With employer-sponsored 401(k) and other retirement plans, you are restricted in terms of investment options and this greatly reduces your returns. If you want to compound your retirement reserve further and at a faster rate, self-directed IRAs should be your top choice. It allows you to make your own investment decisions at the right time by giving you checkbook control. So, if you want to make the most of your time and money now and enjoy a richer retirement reserve later, consider investments in self-directed IRA.

Click here to take charge of your financial future.

black metal current posts

The #1 Stock for the World’s Energy Crisis

There has been a series of flawed assumptions followed by lousy planning from the governments of the world as they have continued their push to reduce carbon emissions by replacing current energy sources with renewables, primarily wind and solar.

This discussion will not take the path you may be imagining.

The enormous and wrong assumption is that we must build renewable production to replace carbon-based energy sources. So far, that has not come to pass.

Here’s what the “energy transition” will actually look like – and how income investors can profit from it…

This quote from Manhattan Institute Senior Fellow comes from a recent Wall Street Journal article:

Mr. Mills asks readers to “consider that years of hypertrophied rhetoric and trillions of dollars of spending and subsidies on a transition have not significantly changed the energy landscape.”

Civilization still depends on hydrocarbons for 84% of all energy, a mere two percentage points lower than two decades ago. Solar and wind technologies today supply barely 5% of global energy. Electric vehicles still offset less than 0.5% of world oil demand.

Mr. Mills explains that energy consumption continues to grow with the increasing technology we use. It takes 1,000 times more energy per pound to produce products of the digital age compared to what we manufactured in the 20th century. Put another way, it takes as much energy to produce a smartphone as it does to manufacture a refrigerator.

The proponents of a massive push for carbon-free energy underestimate the amount of power the world will demand as technology becomes a more significant part of the economy. Also, vast swaths of the world will need massively more energy to move from third-world status to second- or first-world. Mills notes that more than 80% of the world’s population has not been on an airplane flight.

My reading of this and the rest of the article points out that to transition to renewable energy that works, renewables must be the majority of new energy. Still, they cannot be used to replace the current carbon-based base energy level. Oil, coal, and natural gas are currently the most reliable energy sources, and current renewable technologies cannot match the transport and storage features of these carbon-based energy sources.

Unfortunately, global leaders will need to be smacked with freezing, starving citizens before they shift gears on the idea of pushing renewables to replace carbon fuels. That smack may come this winter in Europe. In Germany electricity costs 1,000% more than it did a year ago. In England, many restaurants will close for good because they cannot afford that country’s energy costs.

From an investing angle, I am always looking for renewable energy companies that are profitable and pay growing dividends. NextEra Energy Partners (NEP) is a great example and has been a long-term holding in my Monthly Dividend Multiplier portfolio.

Also, because of the political climate (and the climate climate), I expect crude oil and natural gas prices to stay high. This means traditional energy companies will remain profitable and be able to pay big dividends. In recent months, I have added two new oil and gas royalty companies to my Dividend Hunter portfolio. I expect these will do very well for my subscribers.
But using them, I can beat the market 2-to-1 while collecting 2-10X MORE yield from regular dividend stocks.I learned this trick while I was rubbing elbows with some of the biggest fund managers in US history. They too are buying these little known funds, cashing in huge discounts and collecting income while they do it.Click here to learn the secret yourself.