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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor 1217

The year is poised to end on a high note, as the major indexes continue to hit new highs, with the Dow hitting a record number of new all-time highs this calendar year.

Cabot Dividend Investor 1217

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2017 Ending On A High Note

The bull market remains healthy as we approach the end of the year; all three major indexes closed at record highs Monday. Markets cooled off a bit yesterday though, led by declines in real estate and utilities stocks.

Both sectors are negatively correlated to interest rates, which have climbed slightly since the Fed raised rates Wednesday. However, their largest jump came this week, as the tax bill sped through Congress.

But based on the strength of the moves in utilities and real estate, markets are anticipating even higher rates ahead. Economic data remains strong; housing starts beat expectations Tuesday and retail sales blew past estimates Friday, while jobless claims dropped. And the Fed agrees: they upped their economic forecasts Wednesday, though they’re still anticipating three rate hikes in 2018.

[highlight_box]What To Do Now: Most of the stocks in our portfolio are rated Buy as we wrap up 2017. If you’re looking to put some money to work, I like our pipeline stocks for high yield, General Motors (GM) for yield and growth, American Express (AXP), BB&T Corp (BBT), Broadridge (BR), Wynn (WYNN) and CME Group (CME) for growth, and 3M (MMM) and UnitedHealth (UNH) for long-term income. [/highlight_box]

Featured Buy

American Express (AXP)

Today I’m adding a well-known company with a 40-year dividend history to the Dividend Growth Tier. The stock has entered a strong new uptrend after a two-year period of underperformance, and earnings and sales growth expectations are excellent.

The Company
Founded as an express mail company in 1850, American Express introduced the world’s second charge card in 1958, eight years after Diners Club invented the industry. The first Amex card’s annual fee was $6—$1 higher than the fee set by Diners Club. Amex has maintained its premium branding over the intervening 60 years, offering cards with more perks than your average co-branded credit card.

However, MasterCard and Visa have increasingly begun to encroach on Amex’s territory with high-end offerings like the Chase Sapphire Preferred Card. The competition started to impact Amex’s market share in 2014, and sales growth began to decelerate, causing revenues to miss estimates in several quarters.

American Express responded by trying to make the Amex brand more inclusive, reaching out to smaller merchants, enabling Apple Pay, and broadening its customer base by launching the Amex EveryDay card.

Then, in early 2015, AmEx lost its exclusive relationship with Costco, which accounted for 8% of billed business. Revenues fell further, declining year-over-year in 2015 and again in 2016, when Costco stopped accepting Amex cards.

Amex cut costs to get EPS growing again in 2016, but longer-term, the company had to find a way to maintain its market share. To that end, Amex doubled down on its Platinum offerings, introducing new features and benefits at the end of 2016. Over the next 12 months, Platinum member and volume numbers both hit record highs. At the same time, Amex continues to invest in new technology, sign up more merchants to its payment network, expand internationally, and offer attractive CashBack and lower-end cards.

In the last three quarters, Amex has beat analyst expectations for revenue and earnings growth. In the latest quarter, revenue rose 9%, the fastest rate since 2011. Revenues are expected to grow another 9% this quarter and about 7% in the first quarter of 2018.

Modest 2017 revenue growth of about 4% is expected to accelerate to 6% next year. And earnings growth is accelerating as well: analysts expect 4% EPS growth this year to improve to 11% growth next year.

The Dividend
While the big story here is about growth and recovery, Amex does pay consistent quarterly dividends for a current annual yield of 1.4%. The company has paid dividends since 1977 and has kept the payout steady through numerous financial panics and times of economic turmoil, earning the stock a perfect Dividend Safety Rating of 10 out of 10. Adding to our margin of safety, the company’s payout ratio is just 25%, and has been below 30% since 2010.

The company’s history of dividend growth is shorter; the dividend was frozen from 2008 to 2012. But over the past five years, American Express has increased the payout each year, by an average of 12% per year. Combined with analysts’ long-term growth estimates, Amex’s recent dividend increases help AXP earn a Dividend Growth Rating of 6.9 out of 10.

The Stock
After the financial crisis, AXP bottomed around 12 in 2009, before beginning a five-year uptrend that took the stock past its 2007 peak and on to new all-time highs. That uptrend peaked in mid-2014, just north of 90, as revenue growth slowed.

Then the Costco bomb came in early 2015. The stock spent the next year in a downtrend, bottoming around 50 in early 2016. After a few months of bottoming action, AXP’s current uptrend started in October of that year, finally bringing the stock back to 100 this month, a 50% gain in just about 14 months.

The stock now trades at a current P/E of 19 and a forward P/E of 15, both reasonable levels for a high-quality company with a 40-year dividend history.

More important, AXP is at all-time highs and in a steady uptrend backed by high and rising growth expectations. That makes now a good time for growth-oriented dividend investors to Buy AXP. We’ll be adding the stock to our Dividend Growth Tier at tomorrow’s average price.

Important Note: Previously, we’ve added new recommendations to our portfolio at their average prices on the first trading day of the month. Beginning with today’s recommendation, we’ll be using the stock’s average price on the next day. This should still give subscribers plenty of time to replicate our results without introducing unnecessary uncertainty into our Buy prices.


American Express (AXP)
Price: 100
52-week range: 73.50-100.53
Market cap: $86.59 billion
P/E: 19
Current yield: 1.4%
Annual dividend: $1.40
Most recent dividend: $0.35
Dividend Safety rating: 10.0
Dividend Growth rating: 6.9
Dividends since: 1977
Consecutive years of increases: 5
Qualified dividends? Yes
Payment Schedule:
Next ex-dividend date:
January 4, 2018

Portfolio at a Glance


Portfolio Updates

High Yield Tier


The investments in our High Yield tier have been chosen for their high current payouts. These ?investments will often be riskier or have less capital appreciation potential than those in our other ?two tiers, but they’re appropriate for investors who want to generate maximum income from their? portfolios right now.


BUY – General Motors (GM 42 – yield 3.7%) – GM fell just below 41 late last week, hitting its lowest point since gapping up October 2. But the stock bounced Friday and surged higher along with the broad market Monday, bringing GM back to the middle of its two-and-a-half-month-long consolidation range. This looks like a decent Buy point; the stock is likely to remain between 41 and 47 for the time being. GM is increasingly seen as a play on the future of mobility, as the company invests heavily in self-driving and electric cars.


BUY – ONEOK (OKE 52 – yield 5.8%) – I put OKE back on Buy last week, after the stock found support at 50 for a second time in six months. OKE is range-bound and can be sensitive to industry news, but the stock’s nearly 6% dividend makes it an attractive option for risk-tolerant high yield investors. The company is a large U.S. natural gas and natural gas liquids pipeline operator that has increased its dividend by an average of 18% per year since 2012.


BUY – Pembina Pipeline (PBA 35 – yield 5.0%) – PBA remains in good shape. The stock is trading in a tight range around 35, and the long-term trend still points slightly up. High yield investors looking to add monthly income to their portfolio can buy a little here. Pembina is a Canadian company (that pays monthly dividends in Canadian dollars) with an extensive network of oil and gas processing and transportation infrastructure. The company has been growing steadily through acquisitions and capital investment and analysts expect EPS to grow by double-digits this year and next.


HOLD – Welltower (HCN 65 – yield 5.3%) – Welltower is a health care REIT. The company’s portfolio of senior housing and outpatient centers is well-positioned to benefit from the aging of the U.S. population and the effort to bring down health care costs. However, 2018 estimates have declined recently, a red flag. We’ll keep the stock on Hold and continue to watch the 65 level for support. As always, use an appropriate stop loss in your own portfolio.

Dividend Growth Tier


To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.


BUY – BB&T Corp (BBT 50 – yield 2.6%) – BBT is consolidating its gains from the financial industry surge of late November. The stock is near all-time highs and in an uptrend, and dividend growth investors can buy here. BB&T Corp is a regional bank with branches in 15 states and Washington, D.C. Growth comes mostly from corporate loans, recreational vehicle loans, commercial mortgages and wealth management.


BUY – Broadridge Financial Solutions (BR 91 – yield 1.5%) – After a four-month advance, BR is consolidating around 90. Dividend growth investors can buy a little here, or try to wait for the stock’s 50-day moving average, currently around 87, to catch up. Broadridge provides technology and services, like portfolio management tools and proxy vote processing, to financial firms. The company has increased its dividend in each of the past nine years, with the last five increases averaging 16% each.


HOLD – Carnival (CCL 68 – yield 2.7%) – Carnival reported fourth quarter and full-year earnings that beat all estimates yesterday, and the stock closed 2% higher. Fourth quarter adjusted EPS fell 6% because of the impact of the devastating hurricanes that hit the Caribbean in the quarter (as well as a smaller impact from higher fuel prices). But revenue still rose 8%, to $4.26 billion, and both revenue and EPS beat analyst estimates. For the full year 2017, both earnings and revenues showed solid growth—adjusted EPS were 11% than in 2016, and sales rose 7%. Management didn’t issue full-year guidance for 2018, but noted that bookings and prices for next year are stronger than they were at this time last year, following a 4.5% increase in ticket prices in 2017. CCL is now back near the top of its trading range and I’d consider putting the stock back on Buy if it can break out past 69. For now, Hold.


BUY – CME Group (CME 150 – yield 1.8%) – CME is consolidating its gains from late November, which pushed the stock past its pre-financial crisis peak for the first time. Excitement over bitcoin futures, plus CME’s special end-of-year dividend of $3.50 per share, likely contributed to the momentum. CME is still a strong Buy; if you’d like a lower-risk entry point you could try to wait for the 50-day moving average, currently at 142.50, to catch up to the stock. CME operates major financial exchanges where investors trade derivatives on stocks, interest rates, commodities and more. The company pays special dividends every December, and analysts expect EPS to grow by 5% this year and 14% next year.


HOLD – Cummins (CMI 174 – yield 2.5%) – CMI is back above its 50-day moving average and moving back toward its long-term trendline, which points up. The company makes heavy duty engines used in trucks, construction equipment and other industrial and transport applications. The company is in the late stages of a recovery from the 2014-2015 industry downturn, and analysts expect EPS to expand 24% this year, followed by 14% growth next year. The stock is rated Hold because of its two big selloffs in July and October, but is looking healthier today.


BUY – Wynn Resorts (WYNN 166 – yield 1.2%) – WYNN continues to hit new 52-week highs on a weekly basis. Cabot Stock of the Week editor Tim Lutts, who also owns the stock, warned yesterday that the declining volume in WYNN over the past six weeks suggests buyers may be running out of gas in the short term. So we could see some sideways action here, but a consolidation would be normal after the stock’s 88% advance in the past 12 months. If you own it, Hold; if you’re looking to start a position, consider waiting for a pullback, or for the stock’s 50-day moving average to catch up.

Safe Income Tier


The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.


BUY – 3M (MMM 238 – yield 2.0%) – MMM continues to consolidate near all-time highs hit in late November. Long-term, the stock is in a steady uptrend and Safe Income investors who don’t own MMM yet can still start positions here. 3M is a diversified industrial conglomerate that makes a products used in transportation, energy, health care and numerous other industries. Current and next year estimates have both been moving up and analysts currently expect 3M to deliver 12% EPS growth this year and 8% growth in 2018.


HOLD – Consolidated Edison (ED 86 – yield 3.2%) – ED and the rest of the utilities sector have been falling since the Fed raised rates last Wednesday, even though the hike was widely anticipated. Most likely, the Fed’s positive tone on the economy (and the strong economic data that followed Friday) have interest rate-sensitive securities anticipating a faster ramp-up to higher interest rates than before the meeting. Even the big corporate tax cuts passed by Congress Tuesday weren’t enough to pull utilities out of their tailspin. ED is still a long-term Hold for Safe Income, but if it looks like utilities are starting a prolonged downturn—perhaps if ED breaks through 80—we could take some more profits at some point.


HOLD – Ecolab (ECL 135 – yield 1.1%) – After a short-lived breakout in early December, ECL has pulled back to the top of its trading range. The stock could establish a new range here, between about 134 and 138, which would represent some progress. Safe Income investors can continue to Hold. Ecolab is a cleaning products and services company, with mostly recurring revenues and a 31-year history of dividend growth.


BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.0%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 25 – yield 4.8%)
BUY – Guggenheim BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.3%)
These four funds make up our bond ladder, which is a conservative strategy for generating income. The funds pay distributions monthly, and mature at the end of the year in their name, at which point Guggenheim disburses the net asset value of the ETF back to investors. That makes the bond ladder a good store of value and source of reliable income for the most conservative portion of your portfolio. If you’d like to construct your own bond ladder, you can use a mix of investment-grade and high yield funds, as we have, or pick one or the other. The high yield funds own junk-rated debt and yield more, of course, but are also more likely to see some of their holdings default (and to be volatile when credit conditions get dicey). If you roll the proceeds into a longer-dated fund every time a fund matures you’ll create a reliable income stream that can rise with interest rates over time.


BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – PGX is another good option for the most conservative portion of your portfolio. PGX is an ETF that holds preferred shares. It doesn’t have capital appreciation potential, but trades in a low-volatility range between 14 and 16 and pays monthly dividends of about seven cents per share. It’s currently trading just a hair above 15, so I’ll keep it on Buy for investors who want to add a source of reliable monthly income to their portfolios.


BUY – UnitedHealth Group (UNH 222 – yield 1.4%) – UNH continues to consolidate just above 220. The company’s purchase of DaVita medical group has been roundly welcomed by analysts, who expect the network of over 300 clinics and surgical centers to make UnitedHealth an even more competitive player in the health care system. The company’s largest business remains health insurance, but its expansion into delivering care, as well as health-related technology and services, give UnitedHealth distinct advantages in pricing, margins and customer acquisition. UNH is in a long-term uptrend and is a Buy for Safe Income.


HOLD – Xcel Energy (XEL 49 – yield 2.9%) – XEL is performing better than the rest of the utilities sector, but the stock did get dragged down by the selloff of the last two days. Xcel Energy is a Minnesota-based electric utility that has invested heavily in renewable energy, making the company the largest generator of wind power in the U.S. Safe Income investors can continue to Hold for the long term. As with ED, we may look to take some more profits if the industry selloff deepens.

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.


2017 in Review

At the end of each year, I like to look back at our trades over the past 12 months, and see what we can learn from them. This year, I pay particular attention to the lessons we learned in 2016, and how we applied them.

We sold 12 stocks this year (not including our 2017 bond fund), half for a profit and half for a loss. But our average gain was 21%, while our average loss was only 10%.

Our largest profit was in Costco (COST), which we sold in March for a 49% gain. Our biggest loss was in GameStop (GME), which we sold in August for a 22% loss.

One of the conclusions I came to in 2016 was that selling weak stocks was usually the right choice. As I wrote in our last annual review:

While we sold a couple stocks that went on to do great things this year—Royal Bank of Canada (RY) and Agrium (AGU) both eventually got into gear—most of our sales were good calls. In other words,
we don’t wish we still owned the stocks today—we would be poorer, or at least, no richer.

That approach served us well again this year, despite the bull market. It got us out of Mattel (MAT), Schlumberger (SLB) and GameStop (GME) before our losses multiplied—all are down double-digits since we sold. It also helped us decide to cut our losses short in Verizon (VZ) and United Parcel Service (UPS), which haven’t tanked but have both lagged the market.

The one time the rule failed us was with AbbVie (ABBV), which we sold in February for a 7% loss. At the time, it was one of the weakest stocks in our portfolio, and the company had just released disappointing earnings. But we could have given it a longer leash; ABBV suddenly took off a few months later, and is up 58% year-to-date.

Profit Taking
Another one of our biggest takeaways in 2016 had to do with ephemeral profits. From last year’s issue:

Multiple times this year we watched a nice profit disappear without banking any of it. We had a 40% profit in Novo Nordisk (NVO) at the start of the year; we waited for it to dwindle to 26% before selling the first half of our position, and to 21% before selling the second half. … Take Profits When You Have Them.

I worked hard to follow my own advice this year, and we took partial profits five times.

At the very beginning of the year, in late January, we sold a third of our General Motors (GM) shares for a 20% profit, which made it easier to hold the rest of the position through this year’s choppiness. The stock did finally break out of its trading range in September, and we’re sitting on a 35% profit in our remaining position, so we’re glad we still own most of the shares.

We also sold a third of our U.S. Bancorp (USB) shares for a 19% profit in March; we sold the rest of our shares for a 15% profit a month later, so the decision to take profits netted us a few percentage points.

In August, we sold half our Wynn Resorts (WYNN) shares for a 36% profit. We now have a 78% gain on the remainder of the position, so the partial sale wasn’t the most profitable decision. But when a volatile (and cyclical) stock has run this far, some peace of mind can be more valuable than larger paper profits.

The same goes for Xcel Energy (XEL), which we sold a third of in March for a 46% gain. We’re sitting on a 62% profit in our remaining shares, but again, we’ve been happy to have the added margin of safety as the stock continued to climb this year.

Lastly, in September, we banked a 33% profit in half our Carnival Corp. (CCL) position. The stock has moved sideways since, and we’re still waiting to see if it can start a new uptrend or if this is the top for now, so the jury is still out on this one.

We added 12 stocks to our portfolio this year (not including the 2021 bond fund that replaced our 2017 fund), and still own nine.

The three stocks that didn’t pan out were Schlumberger, Verizon and GameStop. That puts us in the position of being able to copy this verbatim from last year’s review:

The three stocks we bought in 2016 and have already sold are all in industries facing major challenges. We thought 2016 might be the year all three found their way back into investors’ good graces, but were wrong (or at least early).

I’ll try and do a better job of remembering that next year.

On the upside, two-thirds of the stocks we bought this year are in the black, with 3M (MMM) the leader with a 27% gain. Our other top performers to date are Broadridge (BR) and Cummins (CMI), proving again what we said last year: the trend is your friend. All three were already trending up when we bought them, and have continued to do so. This piece of advice is an old chestnut, and we’re banking on it again with our two most recent Buys: UnitedHealth Group (UNH) and today’s addition, American Express (AXP).

Your next issue will be published January 31, 2018
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