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These Asset Classes Could Reinforce Your Portfolio

Economic outlook

By now, all investors should have a good idea of the bleak outlook for world economies as Covid-19 shutdowns continue. Overvalued markets like the U.S. have been hit especially hard.

The International Labor Organization in April that just for the second trimester of 2020, about 195 million full-time workers will lose their jobs due to the closure of many non-essential business activities, while 1.3 billion workers will be at risk of losing their positions.


In regard to gross domestic product, S&P Global has predicted that the American economy will drop by more than 5% and that the economy of the Eurozone may contract by not less than 7% in the current year.

Once economies begin to recover, I believe that the next move of monetary authorities will consist of a gradual hike in the interest rates. Banks will be encouraged to grant higher financing to corporations and other businesses.

If this happens, it will create the following opportunites for investors, which is why I am bullish on these asset classes.

Gold and its publicly listed producers

Gold will still be the go-to safe haven commodity for the next 18 months to come. The price per ounce, which traded at $1,745.70 on the Comex and $1,715.90 on the London bullion market at close on Friday, April 24 (up 11% so far this year), is projected to trade significantly higher by Wall Street analysts.

However, contrary to what strategists at Bank of America Global Research predicted on Wednesday, I think the troy ounce is unlikely to hit $3,000, because the assumed rise in the interest rates will create some counter pressure. My estimate is a 75% upside from current prices.

Public Joint Stock Company Polyus (OPYGY), Eldorado Gold Corp (NYSE:EGO) and Saracen Mineral Holdings Ltd (SCEXF) appear to be better positioned than many of their competitors to take advantage of the rise in gold prices.

Based in Moscow, Polyus is the world's third-largest gold producer with total reserves accounting for approximately 64.4 million ounces. Its assets base consists of rich gold lodes located in Siberia and the Yakutia region of Russia and a pipeline of high-return brownfield development metallic projects, through which the operator expects to further bolster its operational profile for the next seven years. The stock closed at a price of $84 per share on Friday for a market cap of $20.42 billion, a 52-week range of $37.19 to $85 and an enterprise value-to-Ebitda ratio of 10.16.

The Canadian miner Eldorado Gold Corp has recently achieved an important milestone in the extension of the operation life of the Kisladag mine in Turkey. Now, thanks to a rejuvenated Kisladag and other strong operations that the company also runs in Turkey as well as in Canada and Greece, the target of 450,000 ounces in annual gold output to mine over the next five years is not chasing a Chimaera anymore. The stock closed at a price of $9.74 per share on Friday for a market cap of $1.59 billion, a 52-week range of $3.05 to $11.29 and an enterprise value-to-Ebitda ratio of 6.77.

Australian miner Saracen Mineral Holdings Limited holds mineral interests in the most productive zones of Western Australia. These assets are located within approximately 250 miles from the city of Kalgoorlie, where the Super Open Pit, one of the world's largest gold mines, is located. Thanks to promising exploration results from the Carosue Dam Gold Mine and the Thunderbox Gold Mine, as well as the acquisition of some nickel projects adjacent to Thunderbox, the company has given a significant boost to the number of opportunities for long-term growth. The company may exceed 370,000 ounces in annual gold production for several years ahead. The stock closed at a price of $2.86 per share on Friday for a market cap of $3.09 billion, a 52-week range of $1.63 to $3.18 and an enterprise value-to-Ebitda ratio of 25.28.

30-Year US treasuries

Bank of America Global Research illustrates that the 30-year Yield U.S. treasuries have been the most successful investment vehicle so far this year, gaining an impressive margin of return while all the other assets lagged.

The persistence of tough economic conditions will confirm the 30-year Yield U.S. treasuries and other longer-term bonds as one of the best investment vehicles for at least the next couple of years, in my view, as I expect interst rates to rise once the recession is over.

High-quality dividend stocks

The positive impact on dividend yields from lower market valuations will be partially offset by many companies' decisions to cut or suspend the payment of dividends to protect their balance sheets from the negative effects of the crisis.

Over the last 20 years, the dividend yield of the S&P 500, one of the most tracked indices, was above 3% only once, and that was due partially to artificially higher yields in the 2008 finanical crisis.

Investors looking to buy dividned stocks in this environment will need some kind of guarantee that their holdings will keep on paying dividends and eventually increase them. The stocks of companies that have strong balance sheets, high profitability and consistent cash flow are good places to start looking. In my view, Garmin Ltd (NASDAQ:GRMN), Paychex Inc (NASDAQ:PAYX) and T. Rowe Price Group Inc (NASDAQ:TROW) show these characteristics of resilient companies.

Garmin Ltd has received a GuruFocus rating of 8 out of 10 for both financial strength and profitability. The Swiss scientific and technical instruments manufacturer has already scheduled the payment of a quarterly cash dividend of 61 cents per common share for this year on June 30, Sept. 30 and Dec. 31, as well as for March 31 of next year.

The company sustains the dividend with $1.4 billion in cash on hand as of the most recent quarter reported, which ended on Dec. 27, 2019. Operating activities brought in cash flow of $700 million in full-year 2019.

Garmin has been paying dividends for more than 15 years and increased them at a compound annual growth rate of 11.6% over the last 10 years.

Over the past five years prior to Dec. 27, 2019, the company had grown revenues by almost 6%, EPS without NRI by 20.3% and free cash flow by 16%.

The stock traded at a price of $78.99 per share at close on Friday for a market cap of $15.02 billion and a forward dividend yield of 3.08%.

Paychex Inc has a GuruFocus rating of 7 out of 10 for financial strength and 10 out of 10 for profitability. The Rochester, New York-based staffing and employment services company has already scheduled the payment of a quarterly cash dividend of 62 cents per common share for this year on May 30, Aug. 22 and Nov. 21, as wekk as for next year on Feb. 20.

The company backs the payment of the dividend with nearly $855 million cash available on hand as of the most recent quarter, which ended on Feb. 28, 2020. The trailing twelve months of operating activities brought in cash flow of approximately $1.3 billion.

Paychex has paid dividends for more than 30 years and increased them at a CAGR of nearly 7% over the last decade.

Over the past five years prior to the most recent full fiscal year, which ended on May 30, 2019, the company has grown revenues by almost 8.3%, EPS without NRI by 11.6% and free cash flow by 8.6% on average every year.

The stock traded at a price of $68.09 per share at close on Friday for a market cap of $24.5 billion and a forward dividend yield of 3.65%.

T. Rowe Price Group Inc has received a GuruFocus rating of 8 out of 10 for financial strength and 10 out of 10 for profitability. The Baltimore, Maryland-based asset management company has already scheduled the payment of a quarterly cash dividend of 76 cents per common share for this year on June 28, Sept. 27 and Dec. 30, and of 90 cents per common share for next year on March 30.

The company finances the quarterly distribution with about $1.8 billion cash available on hand as of the most recent quarter and full fiscal year, which ended on Dec. 30, 2019. Operating activities generated cash flow of $1.52 billion in full-year 2019.

T. Rowe Price Group has distributed dividends for about 20 years and increased them at CAGR of 12.2% over the past 10 years.

Over the past five years prior to Dec. 30, 2019, the company has grown revenues by 10%, EPS without NRI by nearly 15% and free cash flow by nearly 6%.

The stock traded at a price of $100.37 per share at close on Friday for a market cap of $23.33 billion and a forward dividend yield of 3.61%.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.