It's hard to be an investor when the market is falling, but investors need to accept that down markets are just as much a part of the process as up markets. The key is to find a way to live through the bad patches so you can benefit from the good times. The way I do it is by selecting companies that I think are well run (and that pay handsome dividends) so I can be comfortable sticking with them through thick and thin.
Three standouts in my portfolio are real estate investment trust (REIT) W.P. Carey (WPC 2.85%), steelmaker Nucor (NUE 0.31%), and North American banking giant Toronto-Dominion Bank (TD 1.47%). Here's why I'm never planning to sell this trio of stocks.
1. W.P. Carey: Spreading my bets
I believe strongly that diversification is one of the most important tools an investor can use to reduce risk. I look at REITs as managing portfolios of property investments, which means diversification is important for these companies, too. W.P. Carey is easily one of the most diversified REITs you can find, with assets spread across the industrial (26% of rents), warehouse (24%), office (20%), retail (16%), and self-storage (5%) sectors, with a significant "other" category rounding things out. On top of that, around 33% of the REIT's rents come from Europe, adding to the portfolio's diversification.
Management tends to be opportunistic as well, often using sale/leaseback transactions to get access to a tenant's financials. That allows W.P. Carey to do a deep dive into the earnings, cash flow, and balance sheet data so it can be comfortable working with lower-credit-quality companies. But the key is that the REIT isn't locked into one sector -- it is looking across multiple property types and geographic regions. Thus it can put cash to work anywhere it sees the best opportunities. The success of this approach shows up in the company's 24-year string of annual dividend increases. That's every year since the REIT went public in 1998. If you are looking for a one-stop shop in the property market W.P. Carey and its generous 6.2% yield should be on your shortlist. It's already in my portfolio, and I might even buy more if the stock gets hit hard enough in this bear market.
2. Nucor: Simply the best
Although Nucor only makes steel products, it is the largest and most diversified (by product type) steel mill in North America. That said, steel is a highly cyclical industry that rises and falls along with the economy. So investors have to go in expecting occasional bad times. But economic soft patches create opportunity if you can think long-term because eventually downturns turn into upturns. What's most notable here, however, is that despite the cyclical nature of its business, Nucor has increased its dividend annually for roughly five decades. You don't achieve a record like that in a cyclical business by accident.
The key is management. As noted, the production portfolio is spread across multiple product categories. Nucor also makes use of its own steel to produce higher-margin finished products, like industrial building parts. On top of that, it has a unique pay structure that includes profit sharing. Thus, it rewards its employees well when times are good, but the company gets a break on the salary line when times are tough (because profit-sharing expenses decline). In addition, Nucor has a long history of investing in growth, particularly during industry downturns. That allows it to come out the other side a stronger company. Nucor's dividend yield is only around 1.7% today, so the stock isn't really that cheap. But I'm not selling it even as it drops. Indeed, if it falls far enough, I might even step in to buy more.
3. TD Bank: A solid northern base
Toronto-Dominion Bank, or TD for short, is one of the largest banks in North America. Its stock offers a generous 4.2% yield. But the key here is the company's Canadian exposure, at around 57% of earnings.
The Canadian banking sector is conservative by nature and highly regulated, which has left a small number of entrenched names as leaders. TD is one of these companies, so it has a very strong foundation for its business. The problem is that Canada is a mature banking market that is growing relatively slowly. That is why TD has been investing in the United States, an area where it is a large player but still has plenty of room for growth. All in, TD is a top-10 North American bank.
That said, owning a bank as the world is worried about a recession can be hard. That's where the Tier 1 Capital Ratio comes into play. This number shows how well a bank is likely to handle adversity, with higher numbers being better. TD Bank's Tier 1 ratio is 14.9%. That number doesn't mean much on its own, but it happens to be the second-highest ratio in North America. In other words, there's only one bank in North America that's better prepared for a recession than TD. I'm comfortable with that, and I'm comfortable collecting a fat dividend yield from one of the region's largest and most conservative banks. In fact, a recession, if there is one, could actually be a great time to buy this top bank.
I'm holding on, and you might want to buy
The stories behind W.P. Carey, Nucor, and TD Bank are pretty similar. They are all industry-leading names with strong and diversified businesses. I own them and have no plans to sell them even though the bear market has taken each of them down a notch. That said, all three are starting to look more and more attractive. W.P. Carey is probably the most attractive today, with TD somewhere in the middle, and Nucor still a bit pricey (but if the downturn continues that could easily change). If you are a long-term dividend-focused investor like me, each of these stocks is worth a closer look today.
