In today’s Money Morning…adaptability is the answer…for the best yields, think small…my point in all of this is to highlight this often overlooked opportunity…and more…
Inflation is at a 40-year high in the US.
In a surprise for the UK this week, inflation there also hit a 30-year peak.
And as for Europe as a whole, it isn’t far behind, with inflation steadily rising.
None of this should be that surprising, though, by now. After all, inflation was one of the biggest stories of last year.
But, down here in Australia, I don’t think a lot of people are taking it all that seriously. Perhaps because such a dry topic is difficult to resonate with everyday people. Or maybe because we’ve yet to see inflation really start to bite here.
Either way, I think inflation — and, more importantly, interest rates — is something that smart investors should stay aware of. Because no matter what people may or may not think about these forces, the reality is it will likely impact us all.
Your average consumer may not care all that much about inflation as a topic, but they sure as hell care about seeing prices go up on everyday goods. Similarly, for interest rates, I don’t know if most Aussies really understand the gravity of what higher rates could do.
After all, the last time the RBA raised rates was more than a decade ago…
Adaptability is the answer
Now, whereas some pundits — including some of my own colleagues — would tell you that this is all bad news for investors, I take a somewhat different stance.
Yes, rising interest rates will put pressure on property prices and some stocks — no one is going to argue against that.
The good news, though, at least in my view, is that rising rates will open the door for elite stock pickers. A chance for people who really know the market to find the best opportunities. Something that particularly favours investors sifting through the multitude of choice in the highly-volatile small-cap space.
It is simply going to require investors to be adaptable — willing to take chances on high-risk stocks that may have been largely ignored in recent years. Perhaps even exploring a more value-oriented strategy to hedge against volatility.
How to Limit Your Risks While Trading Volatile Stocks. Learn more.
Does that mean growth stocks are dead in a high interest rate world?
No, of course not.
What you can expect, though, is that mainly the great growth stocks will thrive — companies that can handle a market that is a little tighter when it comes to getting a hold of capital.
You could even argue that rising rates will benefit a lot of growth stocks. Because while it may bring into question valuations for a lot of pre-revenue companies, those that are making money could reap more reward. Higher prices do after all translate into higher revenues.
In fact, there is one group of small-caps that I believe will really thrive in this higher rate future.,/p>
For the best yields, think small
Dividend-paying companies have long been a favourite for Aussie investors. It’s a great way to generate a steady income from (usually) pretty safe investments.
However, when most people think dividends, they think of the big banks or miners — the household names that have become synonymous with income investing.
What most investors don’t realise, though, is that the best dividend yields often don’t come from these large-caps. Instead, it is a far more mixed bag of small- and mid-cap companies doing a lot of the lifting.
Let me show you…
Here are the 10 highest estimated dividend payers for the current financial year:
Source: Market Screener
What you’re looking at (Yield N) represents their estimated dividend for FY22 — with the first eight companies all paying a yield of more than 10%. That’s a damn good payout by any investor’s standards.
More importantly, however, I want you to look closely at the last column. Because it is in that column that you can see these 10 stocks’ market caps, and as you can see, only one company is a blue chip.
Now, there is a slight caveat here as these market caps are represented in USD not AUD. Which is why the US$45.8 billion blue chip is in reality Fortescue Metals Group Ltd [ASX:FMG] — a well-known miner that carries an AU$62.9 billion market cap.
Nine out of 10 of the other companies on this list are either a mid- or small-cap stock — carrying market caps that range from AU$251 million to AU$4.82 billion.
As for their names, sorry to disappoint, but I’m not going to give them away that easily.
If you’re crafty enough, though, you can certainly find them for yourself.
My point in all of this is to highlight this often overlooked opportunity. It’s proof that there is a plethora of relatively tiny stocks with great dividend payouts.
So, if inflation and interest rates do continue to dominate the narrative in 2022, this is one place investors should be looking.
Editor, Money Morning
PS: Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.