Cabot Dividend Investor Weekly Update
After shooting to new all-time highs last Wednesday, the major indexes are taking a well-deserved breather this week. The pullback looks orderly and normal so far, and investors with money to put to work can use it as a buying opportunity.
After shooting to new all-time highs last Wednesday, the major indexes are taking a well-deserved breather this week. The pullback looks orderly and normal so far, and investors with money to put to work can use it as a buying opportunity. The market is healthy and the overall trend is up.
When doing new buying, remember to keep your personal investing goals and risk tolerance in mind. For longer-term high yield investors, General Motors (GM), Pembina Pipeline (PBA) and Verizon (VZ) are all trading at reasonable entry points today. For investors seeking income plus capital appreciation, Carnival (CCL), Prudential (PRU), US Bancorp (USB) and Home Depot (HD) are all poised for further gains this year. And for safe income investors looking to establish low-volatility long-term positions, PowerShares Preferred Portfolio (PGX) and Xcel Energy (XEL) are both buyable today.
HIGH YIELD TIER
BUY – Game Stop (GME 25 – yield 6.2%) – GME is gradually recovering from last Tuesday’s drop; the stock pulled back sharply after Microsoft announced a subscription service for Xbox games. The $10/month subscription, called Xbox Game Pass, will give Xbox gamers access to a rotating roster of titles, much like Netflix for video games. The service could cut into GameStop’s sales as well as its supply of used video games (typically its highest-margin item). GME dropped 8% the day the service was announced, from 26.50 to 24, but has since bounced back to 25. The stock looks to have decent support here so I’ll keep it cautiously on Buy for more aggressive, risk-tolerant high yield investors. GameStop just increased its dividend by one cent last week, to $0.38 per quarter, and will trade ex-dividend on Friday. The 2.7% dividend increase was well below average, but the dividend’s five-year annual growth rate remains nearly 20%. GameStop will report fourth-quarter results on March 23.
Next ex-div date: March 10, 2017
BUY – General Motors (GM 38 – yield 4.1%) – GM is selling its European business to Peugeot, the company announced on Monday. The stock originally sold off on the news (after rallying on the rumor) but found support after a few hours. The sale is expected to be positive for GM’s earnings; its European operations haven’t been profitable in 18 years. Peugeot will pay $2.33 billion for GM’s 12 European factories as well as the company’s Vauxhall and Opel brands, which are based in Britain and Germany. Brexit’s impact on Vauxhall sales was a major drag on GM’s 2016 results, so it will be nice to have the laggards off the books. In addition to the longer-term benefit to earnings, the deal could provide a shorter-term boost to GM’s stock. High yield investors who don’t own GM yet should try to buy on pullbacks.
Next ex-div date: March 8, 2017
HOLD – Mattel (MAT 25 – yield 6.1%) – MAT declined another 2.8% this week. It’s possible the stock will find support here, at 25, but if it doesn’t, a trip to 2015’s lows at 20 isn’t out of the question. We’ll place a mental stop just below 25 and sell if the stock violates it this week; you should do the same.
Next ex-div date: May 12, 2017 est.
BUY – Pembina Pipeline (PBA 32 – yield 4.5%) – PBA has pulled back just to its 50-day moving average and is buyable here for high yield investors.
Next ex-div date: March 22, 2017
BUY – Verizon (VZ 49 – yield 4.7%) – Verizon was added to our portfolio at the stock’s average price of 49.68 on March 1. Investors looking for a high and reliable income stream at a reasonable price can buy VZ here.
Next ex-div date: April 6, 2017
DIVIDEND GROWTH TIER
BUY – Carnival (CCL 56 – yield 2.5%) – CCL has pulled back slightly and may touch its 50-day moving average, currently just under 55. Dividend growth investors who don’t own Carnival yet can start a position here.
Next ex-div date: May 24, 2017 est.
HOLD – Costco (COST 167 – yield 1.1%) – As described in Friday’s special update, Costco’s second-quarter results missed estimates. Revenue grew 6%, to $29.8 billion, just a hair shy of analysts’ consensus estimate, but gas margins fell significantly due to the rise in oil prices over the past year. As a result, EPS declined to $1.17, from $1.24 in the same quarter last year, well below analysts’ $1.36 estimate. The stock fell 5% over two days, and is now trading right at its 50-day moving average. If COST rebounds quickly from here, we’ll hang on, if not, we’ll probably take our profits and move on.
Next ex-div date: May 10, 2017 est.
BUY – Prudential Financial (PRU 111 – yield 2.7%) – Financials, including PRU, popped to new highs last Wednesday as the odds of a March rate hike rose to over 80%. Try to buy on pullbacks.
Next ex-div date: May 19, 2017 est.
BUY – Schlumberger (SLB 80 – yield 2.5%) – SLB continues to chop around just above 80. SLB could take a while to get going again, but is buyable here for the dividend and medium- to long-term gains.
Next ex-div date: June 2, 2017 est.
BUY – U.S. Bancorp (USB 55 – yield 2.0%) – USB is trading just off all-time highs and can be bought here for dividend growth and short-, medium- and long-term gains.
Next ex-div date: March 29, 2017 est.
BUY – Wynn Resorts (WYNN 99 – yield 2.0%) – Macau gaming revenue rose 18% in February, 8% more than expected and well above January’s 3% pace. WYNN is 4% higher this week. Volatility-tolerant medium-term investors who don’t own it yet can buy now.
Next ex-div date: May 9, 2017 est.
SAFE INCOME TIER
HOLD – Automatic Data Processing (ADP 104 – yield 2.2%) – ADP has now more than recovered from its post-earnings selloff and is trading at 52-week highs. I’m keeping the stock on Hold for now though.
Next ex-div date: March 8, 2017
HOLD – Consolidated Edison (ED 77 – yield 3.6%) – No news.
Next ex-div date: May 8, 2017 est.
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.4%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 25 – yield 4.9%)
These four funds make up our bond ladder, a conservative strategy for owning fixed income that’s particularly good at preserving capital when interest rates are rising. Each ETF will mature at the end of the year in the fund’s name, and Guggenheim will distribute the net asset value (NAV) of the fund to shareholders at that point—just like getting your principal back when a bond matures. The investment-grade funds are currently trading at a slight premium to where they will likely mature, while the high yield funds are trading closer to their likely NAVs at maturity. At the end of each year, we’ll sell that maturing fund and reinvest into a new longest-dated ETF to preserve the bond ladder. Note that the last letter in each of Guggenheim’s ETFs corresponds to the maturity year, so if you’re constructing a four-year ladder starting in 2017, your funds should end in H, I, J and K, whether you’re using high yield or investment grade funds.
Next ex-div dates: all April 3, 2017 est.
BUY – Home Depot (HD 146 – yield 2.4%) – HD gained just under 1% this week. Safe income and dividend growth investors can buy on pullbacks.
Next ex-div date: June 6, 2017 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.8%) – PGX is approaching its “par” value at 15, but can still be bought here. PGX is an ETF that owns preferred shares, a type of corporate debt that is typically high yielding and has a relatively low correlation to bond market moves. The ETF usually trades in a fairly low-volatility range between 14 and 16, and pays monthly dividends of about seven cents per share. Investors looking to add reliable monthly income (without capital appreciation) to their portfolio can buy PGX when it is trading below 15.
Next ex-div date: March 15, 2017 est.
HOLD – J.M. Smucker (SJM 139 – yield 2.2%) – SJM pulled back about 2% this week; we’ll look for the stock to find support around 138, where it built a little base early last month. Hold.
Next ex-div date: May 10, 2017 est.
BUY – Xcel Energy (XEL 44 – yield 3.1%) – No news.
Next ex-div date: March 21, 2017 est.
Closing prices as of March 7, 2017