Charles B. Carlson, CFA
Charles B. Carlson, CFA, CEO of Horizon Investment Services, a financial advisory firm in Hammond, Indiana, and Chicago. He is author of nine books, including The Little Book of Big Dividends. HorizonInvestment.com
There are tough times ahead, as investors and consumers head into decades-high inflation, fast-rising interest rates and an economy teetering on recession. Bottom Line Personal asked six of our top financial experts for the shrewd moves that they are planning to take in 2023—and that you can, too—to take advantage of or defend against these developments…
Yields on fixed-income investments have soared and look attractive for the first time in years. The Federal Reserve has signaled its plans to continue hiking interest rates, and that will push down prices of existing bonds and extend 2022’s ugly bond bear market. Strategies…
Build a US Treasury bill ladder. For savers who want to maximize their returns on cash with virtually no risk, short-term Federal debt is a better option than bank deposit accounts or CDs. What to do: Schedule and stagger your purchase of Treasury bills that mature in 13 weeks (recent yield: 4.16%) and 26 weeks (recent yield: 4.43%). Then reinvest as each Treasury bill matures. Result: You benefit if yields on Treasuries continue to rise and maintain some access to your cash if you need it. Buy US Treasuries directly at TreasuryDirect.gov or through major brokerage firms, typically without fees or commissions. The income on Treasuries generally is exempt from state and local taxes, a significant advantage if you live in a high-tax state such as New York or California.
Buy preferred shares of high-quality companies. Although they trade just like common stocks, preferred stocks are more like bonds. Corporations sell them, typically at $25 per share, to raise cash. They pay regular dividends, usually quarterly, currently equating to 5% to 8% annual yields. Their value fluctuates less in down markets than riskier common stocks issued by the same companies. You can research preferred stocks at QuantumOnline.com. Your biggest risk when holding preferreds is when the issuer runs short of cash and is unable to pay the specified dividends.
Here are two preferreds unlikely to run into that problem…
Affiliated Managers Group 5.875% Junior Subordinated Notes, due 3/30/2059 (MGR). The investment-management company oversees nearly $700 billion in assets and owns boutique mutual fund companies such as Yacktman Asset Management and Parnassus Investments. Recent yield for new investors: 6.45%. Recent stock price: $22.15.
Brunswick Corp 6.375% Senior Notes, due 4/15/49 (BC-C) manufactures boats and marine engines through brand names such as Boston Whaler and Mercury. Recent yield for new investors: 6.78%. Recent stock price: $23.50.
Investors should be prepared for extensive volatility and further declines in the broad stock market if the economy slips into recession. Consider the following…
Look for “Hank Aaron” stocks. Hammerin’ Hank was one of those rare baseball players who hit for power and batting average. Many dividend-stock investors think they must choose between companies with high-yielding stocks but little or no ability to raise dividends each year…or companies that offer low yields but boost annual payouts. Investing in those rare companies with both high yields and dividend growth can help protect your portfolio against inflation and a recession. Two attractively valued Hank Aaron stocks now…
AbbVie (ABBV) is the eighth-largest drug company in the world. Although patent protection on its blockbuster arthritis drug, Humira, expires next year, the company will make up the lost revenue over time with similar drugs such as Rinvoq, which is taken as an oral pill instead of an injection, as well as products such as Botox for treating wrinkles. Recent yield: 3.94%. Recent stock price: $150.16.
OGE Energy (OGE) provides electricity to more than 800,000 customers in Oklahoma and Arkansas. Recent yield: 4.3%. Recent stock price: $38.40.
Buffer and cap your stock returns. Invest in defined-outcome exchange-traded funds (ETFs) to better control the risk and reward you earn from the stock market over the next year. Also known as buffer ETFs, they limit your losses in volatile markets by using financial derivatives such as options. Buffer ETFs also cap your upside potential. But they can be useful if you are near or in retirement and expect to draw on your portfolio for living expenses. Example: The Innovator US Equity Buffer ETF September Series (BSEP) protects you from the first 9% of losses in the S&P 500 over a year-long period and caps your gains at 24%. Recommended now…
Innovator Funds offers more than 50 defined-outcome ETFs tracking different indices and protecting you from annual market losses as steep as 30%. InnovatorETFs.com
Consumers under pressure from inflation and interest rates still can save thousands of dollars on major purchases…
Housing…
If you are a seller: You still are in a strong position. While the Fed’s moves have slowed the market, prices have only recently started to reflect big year-over-year drops in pending home sales and new listings. But don’t expect bidding wars from buyers or first-day sales. To get your asking price, you may need to make repairs and upgrades before you sell.
If you’re a buyer: Be patient, even if it means staying put until prices and mortgage rates fall. Affordability will be a problem next year with 30-year fixed mortgage rates cresting over 7%. Consider innovative mortgages, and run the numbers to see where your savings might be greatest. Example: Lenders are offering “inflation-buster” programs that cut the interest rate by one percentage point on a fixed-rate loan for the first year.
Automobiles…
Put off buying a new car until late 2023 or even 2024. Prices continue to rise—in October 2022, the average new car cost $48,281, up 4% since October 2021. Supply-chain bottlenecks caused by China’s COVID quarantine policies mean manufacturers can’t get the basic components needed to finish cars. If you must buy now: Expect to pay above the manufacturer’s suggested retail price (MSRP), and consider preordering. You’ll have to wait several months for delivery, but you might get the color and features you want. By the end of 2023, expect prices to trend downward because higher auto-loan rates and slower economic growth will curb some demand.
For used cars, consider less-in-demand makes and models. In October 2022, the average price of a three-to-four-year-old vehicle was 3.1% higher than in October 2021. The pace has started to slow, but used-car prices will remain inflated as frustrated new-car buyers seek alternatives. The best deals are on three-year-old luxury subcompacts and SUVs, large and mid-sized SUVs, and minivans. Examples: Audi A3…Chevrolet Blazer…Dodge Grand Caravan…Ford Expedition…and Nissan Murano.
