Don’t Fight the Fed: Let’s Sell These Dividends on “Rips”

Don’t Fight the Fed: Let’s Sell These Dividends on “Rips”

In bull markets, we buy the dips. In bear markets, we sell the rips.

Starting in spring 2020 and through 2021, we dividend investors stayed in “buy the dip” mode. Granted, 2020 seemed like a strange time to want to invest. But the Federal Reserve had our backs.

Heck, Fed insiders knew it. In late February 2020, Vice Chair Richard Clarida sold $1+ million in stock shares—and bought them a few days later on the eve of a certain “central bank announcement.”

The proclamation? That the Fed was prepared to print as much money as it needed to! In order to float the stock market (ha!) protect the US economy, of course.

This is why stocks soared for the next 21 months. The Fed flooded the financial system with liquidity. Stock prices levitated again.

The Fed Printed $4+ Trillion

Even better, these insiders were long the same market! We figured they’d keep printing money as long as they were long stocks. So, we stayed on their side of the trade.

Then something happened on the way to money heaven. Tales of Fed officials trading stoked public outrage. And, as analyst Jim Bianco points out, Fed officials were forced to stop trading their public accounts at the market’s highs.

These guys got out just in time for the Fed to stop printing money—and start sopping up its own liquidity. Withdrawal of financial stimulus is bad news for asset prices.

These Fed officials are now, financially, on the sidelines. And all of a sudden, they care about inflation!

Their slowing of the agency’s massive money printer has already caused the broader stock market to, ahem, correct. But the real capital cleanup is yet to come. The Fed is supposed to remove $1 or $2 trillion from its balance sheet at the rate of $95 billion a month!

How do we think that’ll go?

Next Up: The Hangover

If you’re a premium subscriber of mine, you know we have been lightening up our positions alongside these Fed officials. The slowing of the money printer was our cue to take profits.

But, to put it bluntly, we could see the S&P 500 lose another 15% from here. So we need to continue to sell the rips and flip any of yesterday’s dividend winners that we haven’t yet sold.

B&G Foods (BGS) is an example of a dividend stock we would sell on the next rip.

(And in bear markets, there is always a sharp rally around the corner. It’s what keeps the “buy and hope” investors in the game, despite the pain.)

I used to hate BGS. Then I liked it for a few months (when the world turned upside down). Now, I don’t like it again.

Pre-2020 I had poked fun at BGS for its canned and frozen food selection. The dividend payer had had a rough five years but that turned around quickly when we were all stuck at home. The pantry and freezer were back in, and B&G’s hot brands of 1990 returned for an encore in 2020:

B&G’s Hot Brands of 1990—and 2020

My Dividend Swing Trader subscribers bought BGS and its 7.9% yield. We held it for a few months and sold for fast 13% gains, which annualized to 29%!

With restaurants beginning to reopen, we didn’t want to force feed our portfolios any more frozen peas. It was a tidy trade, but time to move on.

BGS’s headline yield still looks intriguing at 7.1% today. But “peak freezer” is behind us. My wife and I had to make a reservation to take the kids to brunch last Sunday. This is not the stock to own in this bear market.

Instead, we should consider “post-COVID” dividend stocks. While the broader backdrop is a bear market, there are always winners and losers.

BGS had its day for us in 2020. Now, the S&P 500 and NASDAQ are selling off—and the smart money is already flowing into these post-COVID payers.