Passive income investors shouldn’t attempt to predict where share prices in dividend stocks are headed next. By trying to time the market, one stands to miss out on handsome dividend payments and any potential gains. Indeed, it would be nice to be a buyer after a substantial decline. This year’s rally has been pretty hot and may end with a correction. Regardless, passive income investors stand to lose quite a bit in pursuit of getting into a name at “the bottom.”
It’s only prudent to ensure you’ve got a decent margin of safety for yourself. That said, continuously delaying stock purchases because you think a name is headed lower may not be the best course of action. If you’ve invested through the past year, you’ll know how elusive that market bottom can be. The U.S. stock market’s bottom in October 2022 was hard to catch. At the time, it seemed like stocks could only go lower, with so many pundits calling for more pain ahead.
The recession has not arrived yet. And history suggests that stock markets do not bottom before the recession has had a chance to arrive. Indeed, following the herd in the fall of last year would have probably caused you to miss out on what would have been the bottom. And this bottom may not be hit again anytime soon, especially as investor fear and gloom turn into hope.
While stocks have marched steadily higher of late, the rally has been quite narrow, with some heavyweights (most notably in the tech space) doing a vast majority of the lifting for the S&P 500. When you take the big-tech behemoths out of the equation, you’ll find the stock’s rally isn’t all too hot.
Tech aside, value stocks still seem like bargains right now
In fact, it’s quite muted. The TSX Index is up a mere 2.5% year to date, while the Dow Jones Industrial Average (DJIA) is up 3.5% year to date. These two indices are heavier in the so-called value names and can be a better representation of the overall market.
Though the S&P 500 is the benchmark for many, its heavy weighting towards the mega-caps is difficult to ignore. Undoubtedly, the DJIA may actually be a better representation of the broader U.S. market this time around! At least until tech’s influence retreats a bit. Whether or not that will happen, though, is anyone’s guess!
I think there’s a good chance tech could fade into the back half of the year. Specifically, AI-related names that have surged to the moon as eager investors punched their tickets to ensure they won’t be left behind in the early innings of the AI boom.
Without further ado, consider SmartCentres REIT (TSX:SRU.UN), a bargain in the Canadian REIT space that I think is worth watching or even buying at these depths.
SmartCentres is a retail REIT that doesn’t get too much respect these days. Despite resilience through the pandemic lockdowns, retail real estate is just not a “hot” place to be these days. Today, the shares are at a more than two-year low at $24 and change per share. Though high rates and a recession don’t bode well for the REIT, I view the play as extremely undervalued and the payout as sustainable.
The bottom line for passive income investors
Passive income investors need not fear the recession that many have already prepared for. Names like SRU.UN shares boast sky-high yields and fairly modest multiples that long-term investors may find attractive.
Will it take some time for the retail REIT landscape to stabilize as the recession nears? Probably. But if you’ve got a five-year horizon, I’d argue the reward outweighs the potential downside risks from here.
