As the Fed Sends Rates Higher – Here’s How to Invest Next

By TradeSmith Editorial Staff

Listen to this post
The Federal Reserve raised its key interest rate yesterday by 0.25 percentage points — to almost no one’s surprise.

But when it comes to money and investing, it’s what the Fed does next that matters.

Central bank watchers and investors alike are already hard at work attempting to figure out what that “next” move will be.

And because no one has a stock-market crystal ball or tea leaves that can reveal all, guessing wrong is common — and costly.

As a result, you can take a real “haircut” — Wall Street lingo for a steep (and sometimes avoidable) loss.

But rather than risk a painful downturn, there’s a better, proven way to profit from what the Fed does next… and it’s a specialty of TradeSmith Senior Analyst Mike Burnick.

No guesswork required.

The “Pay-Me-Now” Method

Mike’s advice: Buy “quality companies” — those that embrace the shareholder trifecta: dividends, buybacks, and growth.

In a career spanning more than 30 years, Mike has seen everything. From the bubble… to the housing collapse… to the NFT craze… there’s no situation that can surprise him.

But just because Mike’s “old school” doesn’t mean he’s “old fashioned.”

Mike understands the financial metrics that spotlight “quality” companies. And he uses the latest technologies — including TradeSmith’s core competency in machine learning — to make sure those metrics are coming in at the right amount and at the right time. — And those strategies are paying off for Mike’s followers.

Take his trading service, Dividends on Demand, where Mike focuses on “Pay-Me-Now” stocks.

It’s a strategy that lets you generate income on your schedule — without a stock even having to rise in price.

And that brings us back to the Fed rate hike…

While a growing number of market mavens are calling for a major economic slowdown — if not an outright recession — Mike believes the worst of any downturn is in the rearview mirror.

Little wonder he’s dubbed it “the recession that nobody noticed.” But there is always the possibility that policymakers — and their rate-hikes-at-all-costs strategy — could have inflicted damage on the United States that could be felt in the months ahead.

That means you still have to position yourself accordingly.

The Goal: Survive and Thrive

If we are hit by a recession this year, you’ll need to be more focused than ever on risk.

This isn’t the time to bet on companies that aren’t delivering. You want the companies that are making money in the here and now — meaning they’re able to generate cash flow and use that cash to buy back shares and boost dividends on a consistent-and-predictable basis.

But even if the worst is behind us as Mike has suggested, you still want high-quality, dividend-paying companies in your portfolio for a key reason.

Just take a look at the chart below from Hartford Funds:

With a $10,000 investment in 1962, your money would have exploded to $641,091 by 2022 by only following the S&P 500 index price.

Not bad… but it could be better.

That same $10,000 with reinvesting dividends turned into over $4 million — 532% higher than the returns from just the S&P index price.

The lesson being…

If the Fed’s decisions push us into a deep recession in the next few months — or by the end of the year…

You will want to own high-quality, dividend-paying companies.

But even if the worst is behind us…

You still want to own high-quality, dividend-paying companies.

Earlier this week in Inside TradeSmith, a bonus weekly newsletter that paid-up members of services like Dividends on Demand receive that highlights how to use our tools and services, Mike shared eight stocks that fit the bill.

Mike Burnick,
TradeSmith Senior Analyst

During economic uncertainty, one tried-and-true strategy has been to own dividend-paying shares of high-quality companies. That’s because cash — or, more accurately, cash flow — truly is king.

If we really are headed for a deeper downturn, the stocks that have been the most consistent winners share one trait: cash. This includes companies with plenty of cash on their balance sheets. Companies that pay and grow their dividends. And companies that return cash directly to shareholders through stock buybacks.

More specifically, Bank of America researchers found that stocks with high free cash flow (FCF) relative to their stock price and relative to the enterprise value (EV) of the entire company are consistent winners in tough economic times.

And fortunately, TradeSmith has “an app” for that.

Over the past year, our global team of quantitative analysts dedicated an entire project to developing our unique Business Quality Score (BQS). With a single number, we can rate every one of the thousands of stocks in our database. We can directly compare one stock to another — based on quality. The higher the BQS, the better the quality.

Our research team identified the key metrics that identify a “quality” stock. And they discovered that these quality factors fall into four broad categories: growth, profitability, safety, and payout.

Growth includes factors like consistently expanding sales and profits. Plus, stocks with strong and growing returns on equity (ROE) — and, of course, cash-flow growth.

Profitability factors include key metrics like profit margins and, again, cash flow compared with the company’s assets.

With safety metrics, we examine a stock’s historical volatility compared to the broader market. Plus, stocks with low debt and consistent earnings growth earn high marks here.

Finally, payout includes metrics that tell us whether or not a stock gets high marks for sharing the wealth with its shareholders.

We don’t stand pat, either. We employ machine learning to make sure these metrics are updated, remain relevant, and increase their effectiveness.

Twenty-one leading quality metrics are blended together and constantly updated as new data comes out. With the BQS, you can single out stocks that deliver efficient growth. These are the most likely stocks to beat the market over the long haul.

And that’s especially true when the economy slows, and growth is tough to come by.

Just for you — and with that in mind — I ran a brand-new stock screener built primarily around our TradeSmith BQS but included several additional filters to narrow the list.

Let me show you how I built this screener — so you can do it, too.

Be sure you are logged in to your TradeSmith Finance account. Then, as shown below, click on the Invest tab at the top, then Screener. Next, click on “+ Create new screener.” Now you are ready to start adding filters. And for my screener, I added several, shown below, to look only at cream-of-the-crop stocks.

First, I’m only interested in healthy Green Zone stocks, so I added the Health Status filter and clicked on Green Zone.

I also want healthy stocks that are already trending higher — or, at worst, are moving sideways — by adding the Trend filter and checking “Up” and “Sideways.” And be sure to select the Asset Type filter and click on “Stock.”

You know by now how much I love to get PAID — to collect dividends — while I wait for the stock to move higher. So, I added a filter for Trailing Dividend Yield, and set it to more than “2.5%.”

Next, select the TradeSmith Baskets filter, scroll down to locate “Top Cash-Flow Generators,” and check it.

To zero in on stocks that are most likely poised to move higher in price, I add our Cycle Turn Area timing filter. Check both “Upcoming Valley” and “Valley.”

Finally, for BQS as I mentioned above, higher is better. So, add the Business Quality Score filter and set it to more than “70.” That will narrow the list down to stocks that are roughly in the top 30% of all stocks we rate for quality.

Now, be sure to save your work by clicking on “Save As New” so you can revisit this screen later. I named mine “High BQS Cash Flow Kings.”

Now it’s time to Run Screener to see what we get, shown below.

Click on image to enlarge

As you can see, it’s a VERY select list — with just eight stocks making the cut. But that’s ok by me. After all, I’m after QUALITY here, not quantity.

Bottom line: Dividends were an afterthought for many investors for many years, but everyone over the last year started to see the power of generating income through owning quality companies. Mike has been in finance for a long time and has been able to help a lot of people with the wisdom he has shared — wisdom like what you were just reading.