Last week, I wrote that the American consumer is alive and well.

Despite concerns that we may be headed for a recession, a slew of recent data supports this.

But towards the end of that piece, I hinted at something interesting. You see, the data is pointing to some shifts in our economy that are generational in nature. And investors need to be wise to what’s going on if they want to profit.

Here’s what I said:

I’ve sung the praises of non-discretionary stocks many times over the years for their strength and resilience. And my closed trades list over at High-Yield Investing is full of all-weather performers such as National Grid and H&R Block. Regardless of interest rates or GDP growth, people still have to turn on the lights and file their tax returns.

But we’ve flipped the script lately. If you take a quick look at the active consumer-oriented holdings in our High-Yield Investing portfolio, you will notice they deal far more with wants than needs. Big ticket ones at that… boats, RVs, home theatre systems.

I want to talk about this idea more today. But first, we have to understand an important difference between consumer habits- specifically, wants vs. needs- and why it matters…

Discretionary Vs. Non-Discretionary

It’s a well-known fact that approximately 80% of the S&P 500 makes regular distributions. That means 20% don’t — roughly 100 well-known companies. A disproportionate number of those belong to the consumer discretionary camp. These are companies providing products or services that we want rather than need.

By contrast, Procter & Gamble (NYSE: PG), which sells everyday staples such as paper towels and laundry detergent, has famously increased its dividend distribution for 66 consecutive years.

Colgate-Palmolive (NYSE: CL) has a 59-year streak going. These Dividend Aristocrats are barely fazed by recessions and other economic disruptions.

Let’s face it, if times get tough, that trip to Hawaii will be axed from the family budget long before toothpaste.

It makes sense. But as I noted the other day, something strange is happening. Consumer behavior is shifting, upending our understanding of what’s “discretionary.” And savvy investors are responding.

The result? A broad asset allocation shift in favor of cyclicals.

Understanding The Economic Cycle

As the name implies, this market segment tends to go through business cycles. More often than not, the economy is in expansion mode. Inevitably, it will reach a peak and begin to contract, eventually settling at a bottom. From there, GDP growth recovers anew, and the whole process starts over again.

And again.

_{Source: Corporate Finance Institute}

This cycle is as predictable as the rising and setting of the sun. The tricky part is forecasting the duration of these stages and knowing when the next inflection point is approaching.

Some businesses (like utilities and dollar stores) are fairly immune to these cycles and can generate healthy profits in good times and bad. We call them non-cyclicals. As you might expect, they are defensive in nature and tend to outperform the market when the economy is struggling.

Cyclicals, on the other hand, are more sensitive to economic changes. They tend to ebb and flow along with the tide. This group includes airlines, furniture stores, jewelry retailers, and new car dealerships. They are generally vulnerable to weaker cash flows (and dividends) in economic downturns.

But the opposite is also true. When the pendulum swings back into the next up-cycle, then look out. Peruse some of the market’s biggest 2023 winners so far, and you’ll see names like Carnival, Expedia, and Tesla. Yesterday’s laggards have become today’s leaders, delivering quick gains of 47%, 31%, and 69%, respectively, as of this writing.

But as I said, there’s something bigger in play right now. In fact, you might call it generational in nature. The implications for investors could be huge.

How huge? Well, this secular shift is tied to the very core of consumer spending behavior. And as you probably know, consumer spending accounts for roughly two-thirds of the $25 trillion U.S. economy.

A Generational Shift…

The Wall Street Journal recently dug into the Personal Consumption Expenditure (PCE) Index to analyze this trend. They found that many (particularly younger Millennials) continue to drop more of their paycheck on things like brunch, concerts, tours, spas, festivals, cooking classes, casino nights, and everything else.

They want to be entertained and to interact with friends and family — and yes, to document it all with photos on Instagram. None of this is lost on the market. The Invesco Leisure and Entertainment ETF (NYSE: PEJ) has chalked up a nice 13% gain so far this year.

In fact, polls indicate that roughly three-quarters of consumers (76%) prioritize experiences over material items. That’s about 200 million U.S. adults, give or take.

This is much more than lingering post-Covid cabin fever. Yes, there is still pent-up demand to escape and unwind. But we’re seeing a continuation of a big-picture trend that started more than a decade ago. In analyzing tens of millions of transactions, Mastercard confirms that Americans are increasingly choosing to spend more of their hard-earned cash away from home.

This is why I continue to look for picks with exposure to this shift over at High-Yield Investing.

For example, we own a REIT that focuses on “experiential” properties (think movie theatres and Top Golf locations). And just recently, we doubled down on this premise with a hotel REIT that turns a steady stream of overnight guests into one of the market’s most generous dividend yields.

The point is, if you think it’s impossible to find income-payers with exposure to this trend, think again. Yes, you may have to look a little harder, but the payoff could be huge for long-term investors.

In the meantime, how would you like to get paid from some of my absolute favorite high-yield picks?

If that sounds appealing, then you need to check out my report. You’ll learn about 12 ultra-generous dividend payers that put more money in your pocket. And the best part? They pay dividends monthly. Go here to learn more now.