Get Paid to Wait: High-Yield Income Stocks for Volatile Markets

Key Concepts

• Midterm Election Volatility: Historical market drawdowns occurring in the 12 months preceding midterm elections.
• High-Yield Value Strategy: An investment approach focusing on income-generating stocks to provide a "cushion" during market volatility.
• Quant Strong Buy: A proprietary rating system used by Seeking Alpha to identify stocks with superior fundamentals, valuation, and growth potential.
• REIT Metrics: Specialized financial ratios for Real Estate Investment Trusts, including AFFO (Adjusted Funds From Operations), FFO (Funds From Operations), and payout ratios.
• Quant Growth and Income Portfolio: A forthcoming investment product combining quantitative stock selection with a dividend-paying requirement.

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1. Market Environment and Strategy

Steven Cress, VP of Quantitative Strategy at Seeking Alpha, highlights that while history does not always repeat itself, data shows significant market drawdowns in the 12 months leading up to midterm elections. Current macroeconomic pressures—including geopolitical conflict, sticky inflation, and a "higher for longer" interest rate environment—exacerbate this uncertainty.

Strategic Recommendations:

• Income-Oriented Positioning: Investors should incorporate dividend-paying stocks to provide a buffer against potential pullbacks.
• Fundamental Accumulation: If a market correction occurs, investors should increase positions in stocks with strong fundamentals, as these are historically positioned to participate in the post-election market recovery.
• Historical Context: Data indicates that markets consistently trend upward on average in the 3, 6, and 12-month periods following midterm elections.

2. Case Study: EPR Properties (EPR)

Cress identifies EPR Properties as a "Quant Strong Buy" due to its resilience and income-producing capabilities.

• Performance & Yield: The stock has seen an 18% year-to-date increase and offers a forward dividend yield of 6.35%.
• Valuation Framework: EPR receives an "A-" grade for valuation (inexpensive relative to the sector) and an "A-" for growth.
• Comparative Metrics:
  • AFFO Growth: 6.2% (EPR) vs. 2.6% (Sector).
  • Forward FFO Growth: ~5% (EPR) vs. 3% (Sector).
• Dividend Safety: The stock holds a "C+" grade for dividend safety, supported by a "B-" grade for dividend growth. Specific metrics supporting this include:
  • Interest Coverage: 2.86% (B+ grade) vs. 1.96% (Sector).
  • AFFO Payout Ratio: 68% vs. 73% (Sector).
  • FFO to Total Revenue: 53% (A- grade) vs. 40% (Sector).

3. Quantitative Methodology and New Product Launch

Seeking Alpha utilizes a quantitative algorithm to identify high-conviction stocks. Cress notes the success of existing products:

• Alpha Picks: ~400% return over four years.
• Pro Quant Portfolio: ~50% return over one year.

Quant Growth and Income Portfolio: This upcoming product applies the same proven quantitative algorithm used in Alpha Picks and Pro Quant but adds a mandatory dividend-paying filter. The objective is to provide a yield comparable to the Vanguard High Yield ETF while achieving superior capital appreciation through quantitative stock selection.

4. Synthesis and Conclusion

The core takeaway is that during periods of high inflation and geopolitical instability, investors should prioritize a balanced approach. By combining income-oriented stocks (like EPR Properties) with fundamentally strong equities, investors can mitigate downside risk while remaining positioned for the historical market gains that follow midterm elections. The transition toward a "Growth and Income" quantitative model reflects a strategic shift to capture both yield and capital growth in a volatile economic climate.

Disclaimer: Past performance is no guarantee of future results. The content provided is for informational purposes only and does not constitute personalized investment advice.