The Achilles’ Heel of Some Safe Havens (And a Better Alternative for You)

The North Korea crisis finally got the market’s attention last week. On Thursday alone, the Nasdaq Composite Index tanked more than 135 points, the CBOE VIX Index surged 42%, and “safe haven” plays jumped in value. The Dow also knifed back down through the 22,000 level it had captured a few days earlier.

I shared my initial thoughts on the tempest last Friday. And I explained that things like volatility ETFs or gold miners are fine for a quick trade in times of conflict, but that they often give their gains back just as quickly. What I didn’t have room to address (until now) is the true Achilles’ Heel of these so-called “safe havens” – they don’t offer you any yield!

Look, it should be no secret that I’m a huge fan of investing in stocks, ETFs, and mutual funds that pay market-beating, yet reliable, dividends. That’s exactly what investors need in a world where yields on many income-generating investments remain mired in the muck, despite a handful of Fed rate hikes.

But those investments don’t just help you build more wealth in the good times. They help you protect it better during the bad! Consider the following …

==> Since the late 1920s, there have been 46 times when stocks dropped at least 10% for two consecutive months. If you look at how the two groups of stocks paying the highest dividends performed during those corrections and bear markets, you’ll find they crushed non-dividend-payers. The difference in performance? About 12 percentage points on average.

==> Companies are also extremely reluctant to cut dividend payouts, even in times of significant stress on earnings. During the five major recessions from 1973 through 2009, S&P 500 earnings per share plunged by an average of 42%. But dividends per share only dipped 8%. In three of those recessions, dividends were reduced by 1% or less … even as earnings tanked anywhere from 15% to 32%.

Now you might think “Well, I’ll combine the best of both worlds. I’ll buy gold mining shares that pay nice dividends and get twice the benefits.” But most of the mining sector is a dividend wasteland!

I screened our vast Weiss Ratings database of covered stocks to find all materials stocks with the word “gold” in their name and a Rating of BUY or HOLD. They also needed to have a market capitalization of more than $50 million and shares traded on a U.S. market with decent liquidity.

Only 13 gold miners made the cut, and only three of those had a yield that beat the SPDR S&P 500 ETF (SPY, Rated “B”). But all three of those also had double-digit negative year-to-date performance, with the worst down more than 41%!

A measly 10 silver stocks passed a similar screen, and only two of them paid a dividend at all. The best yield was just 0.64%, and both have lagged the S&P 500 so far in 2017.

Bottom line: If you’re looking for safety now — and the prospect for real, sustainable gains later — I think the best course of action is clear.

Stick with “Heel Free” investments that offer a dividend cushion, a solid Weiss Rating, and that pass all the other screens I use in my High Yield Investing newsletter.

Until next time,

Mike