In anticipation of the holidays, we wanted to visit three stocks that have stood out over the fray this year.
Each of these three stocks have remained relatively stable since January, not falling prey to the wicked volatility that many stocks have weathered.
And that’s certainly no fluke. They have the potential for long-term, steady growth that can pad your wallet with extra income for years to come.
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No. 1: The Charles Schwab Corp. (SCHW)
Did you know your broker makes money from you in more ways than commissions? They aren’t always so forthcoming about the revenues they extract from you, but in most cases, these revenue streams are tied to interest rates.
As rates rise, it positively affects net margins, driving profits higher. Payment for order flow, margin interest, and share lending are examples of how brokerages like Robinhood Markets Inc. (HOOD) can stay in business despite charging no commissions.
For example, if you have a margin account, your broker can “borrow” your shares and lend them to short-sellers. They don’t pay you anything for that access, but they charge interest on the margin used by the short-seller to hold their position. The higher rates rise, the larger the margin is for brokers.
While all those income strategies are bad for a broker’s customers, they are good for a broker’s shareholders. In that sector, we like Schwab, which we know looks like a bit of a dog right now, but that is normal for bear markets.
If interest rates remain high and market conditions stabilize (or, dare we hope, improve…?), then SCHW should see a big move higher. Schwab has been acquiring customers through acquisitions, which gives them the scale to amplify their profits once, the market starts to settle and trading balances rise again.
No. 2: Starbucks Corp. (SBUX)
Retail services stocks aren’t immune from inflation problems, but some companies have strategies to deal with it.
For example, Starbucks frequently deals with inflation-deflation cycles in their raw materials (coffee beans). From the bottom of the pandemic bear market to the top at the end of 2021, coffee prices rose 100%, while SBUX shares rallied 89%.
General inflation is more complicated for SBUX to deal with than just rising coffee prices. Still, the point is that the firm is already good at adjusting to maintain price stability. That’s why we expect SBUX to stay off its lows and rally in the short-term while consumer spending remains strong.
No. 3: Waste Management Inc. (WM)
It usually makes sense in a volatile market to focus on defensive, dividend-paying stocks. That is still true now, but because interest rates and inflation are rising, traditional dividend strategies don’t work as well. Future dividends are worth less when interest rates rise because the present value of those income streams is lower.
However, if a company has a defensible near-monopoly on their customer base, positive margin trends, and historically has raised its dividend above inflation rates, then the old rules can still apply in an inflationary market. Waste Management is precisely that kind of company.
WM’s efforts to harvest energy and byproducts from trash collection and landfills are just two examples of how the company is working to increase cash flows to keep its dividend payout ratio high and the yield ahead of inflation. As the pool of dividend stocks shrinks, we expect value investors to flow into the company’s shares in the short term.
This time of year is a whirlwind, and the downtime we can scrounge is often dedicated to reflection.
It’s been a tough year, but we believe these three stocks we’ve showed you today have the ability to make you good, solid money in 2023 – and beyond.
But that’s not where the potential ends.
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