The market deteriorated further this week, so dividend investors should continue to act cautiously. While the major indexes staged a nice comeback yesterday, it isn’t enough to erase the damage done at the end of last week. The S&P 500 dropped 1.5% on Thursday alone, while the Dow fell 1.2% and the Nasdaq declined 1.9%. The latest selloff dragged all the major indexes below their 50-day lines.
There are plenty of reasons to point to (many eyes are focused on Washington) but the only thing that should matter to investors is the health of the market itself—which isn’t great. At this point, the intermediate-term trend has turned down, and things still look even worse below the surface. For example, new lows continue to outnumber new highs every day.
I’m not advising you to sell all your stocks: the trend could still turn around any day. But wise investors will limit or hold off on new buying until that happens. You should also consider pruning your portfolio, by selling laggards and taking some profits where you have them. That will make it easier to ride out a correction if it comes. And if it doesn’t, you’ll have cash to invest in the market’s new leaders, once they reveal themselves.
In our portfolio, Ecolab (ECL) moves to Hold. That leaves us with three Buy-rated stocks: Welltower (HCN), Broadridge (BR) and Carnival (CCL), plus three funds in our bond ladder.
HIGH YIELD TIER
HOLD – GameStop (GME 22 – yield 7.0%) – GME has traded sideways since last Tuesday’s big retail-sector selloff. The retailer will report second-quarter earnings after the market closes tomorrow (August 24). Analysts are expecting EPS to decline by 44%, from $0.27 to $0.15, while revenues are expected to decline only 0.6%, to $1.62 billion. Profit margins are declining because GameStop’s highest-margin business, used video game sales, is one of its fastest-shrinking. In addition, the second quarter of 2016 saw the release of several big games, which wasn’t repeated this year. GameStop’s results are expected to improve in the second half of the year, once the Switch is back in stock and the new iPhone is released (GameStop also owns a bunch of AT&T, Simply Mac and other electronics stores). Worth noting is that GME actually beat EPS expectations in the last two quarters, but the stock gapped down anyway due to concerns about declines in its core business. For now, downside potential looks limited by the stock’s bargain-basement valuation and strong support at 20. If that changes—either due to an adverse earnings reaction or further weakness in the retail sector—we’ll change our minds.
Next ex-div date: September 6, 2017 est.
HOLD – General Motors (GM 35 – yield 4.3%) – GM continues to trade in a choppy range between 35 and 36. The company is the healthiest U.S. automaker: GM began reducing margin-destroying fleet sales before competitors, and has spent the last two years beefing up its crossover lineup while cutting small car production. It’s all working… but it might not be enough. U.S. auto sales are declining, and average prices just declined for a sixth straight month, indicating that automakers are discounting to lure customers. That’s good news for car buyers, but bad news for the industry. I’ll keep GM on Hold for high yield investors, but if we see a real correction start, it could be on the chopping block.
Next ex-div date: September 7, 2017
HOLD – Pembina Pipeline (PBA 32 – yield 4.6%) – Riding PBA back down to the bottom of its trading range during these past couple of weeks hasn’t been fun, but I’m going to keep the stock on Hold for high yield investors, because it’s still above support. (The stock’s lows from earlier this year were all around 30.75.) Unfortunately, PBA is now likely to take another extended stay in its 30-34 trading range, but the 4.6% yield will keep you company while you wait.
Next ex-div date: August 23, 2017
BUY – Welltower (HCN 71 – yield 4.9%) – HCN seems to have found solid support right above its 200-day moving average, after correcting about 8%. Unfortunately, health care REITs have begun lagging the rest of the real estate sector, which is otherwise strong these days. The underperformance is probably related to political uncertainty, since these companies’ tenants depend on reimbursements from health insurers and Medicaid/Medicare for most of their revenue. Washington-linked trades can change quickly, especially these days. (HCN and its peers were outperforming the rest of the REIT sector until the end of July.) I think risk-tolerant high yield investors can buy a little here.
Next ex-div date: November 3, 2017 est.
DIVIDEND GROWTH TIER
BUY – Broadridge Financial Solutions (BR 77 – yield 1.7%) – BR has entirely erased its gap down from two weeks ago, and is back in consolidation mode above its 50-day line. Dividend growth investors can buy a little.
Next ex-div date: September 14, 2017
BUY – Carnival (CCL 68 – yield 2.1%) – CCL continues to see very little selling pressure during the market’s tantrums, despite being at all-time highs. Carnival will report third-quarter earnings at the end of September (the company’s fiscal year ends in November). The company has beaten analysts’ earnings estimates in each of the last four quarters, and is expected to deliver 5% revenue growth and 8% EPS growth this year. Cruise demand is growing steadily in both the U.S. and abroad, boosting Carnival’s booking volumes and ticket prices year-over-year. Dividend growth investors who don’t own CCL yet can start new positions on pullbacks. CCL trades ex-dividend today.
Next ex-div date: August 23, 2017
HOLD – Cummins (CMI 153 – yield 2.8%) – CMI dropped another 1.5% last week, before bouncing off its 200-day moving average yesterday. While CMI isn’t our strongest stock, this could easily be a normal correction (the stock is now 8% off its late-July high), followed by a resumption of CMI’s long-term uptrend. I’ll keep it on Hold.
Next ex-div date: November 17, 2017 est.
HOLD – Prudential Financial (PRU 102 – yield 2.9%) – Last week I wrote, “At this point PRU is one of the weaker stocks in our portfolio, but it’s starting to rebound this week, and is still within its multi-month trading range.” That’s no longer true: PRU’s rebound lasted all of a day and a half, and on its next leg down, PRU broke through the bottom of its long-established trading range to hit its lowest level since December. That weakens the case for PRU quite a bit. There are still two arguments for holding on: there’s no stock-specific negative news, and volume has only been slightly elevated. But the stock’s action is making a good case for selling. We’ll see what PRU does in the coming days, and won’t hesitate to exit if we’re not impressed.
Next ex-div date: November 17, 2017 est.
HOLD – Wynn Resorts (WYNN 136 – yield 1.5%) – WYNN has held on to its Deutsche Bank-upgrade gains, trading sideways since our last update. The stock is still stuck in a consolidation range between 125 and 140 though, so Hold is the appropriate rating for now.
Next ex-div date: November 7, 2017 est.
SAFE INCOME TIER
HOLD – 3M (MMM 205 – yield 2.3%) – MMM’s attempt to rally back to its pre-earnings highs has run into resistance at the stock’s 50-day moving average, which is now acting like a ceiling. That’s not a great sign, but it’s not enough to push us out of the stock yet. Earnings growth expectations remain strong, and most of the issues in the second-quarter report were transient. We’ll hold until the stock sends us a stronger signal one way or the other.
Next ex-div date: August 23, 2017
HOLD – Consolidated Edison (ED 84 – yield 3.3%) – Utilities continue to chug along, tacking on additional gains after markets sold off late last week. ED is a good Hold for long-term income investors.
Next ex-div date: November 13, 2017 est.
HOLD – Ecolab (ECL 131 – yield 1.1%) – ECL remains aimless, with a slight downward bias. Given the deterioration in the broad market, I’m going to put ECL on Hold today.
Next ex-div date: September 15, 2017
HOLD – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.1%)
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%)
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, because of the funds’ maturity features. 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. Towards the end of each year, we’ll sell that maturing fund and reinvest the proceeds into a new longest-dated ETF to preserve the bond ladder. If you’re looking to start a new bond ladder today, start with the 2018 fund as your nearest-dated position and add a 2021 fund if you’d like to build a four-year ladder. You can use either investment grade funds (which begin BSC) or high yield funds (which begin BSJ) or a mix, like we have. All the funds pay distributions monthly.
Next ex-div dates: all September 1, 2017 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – PGX is a Hold for investors who want reliable monthly income. The preferred share ETF doesn’t have capital appreciation potential, but it trades in a low-volatility range between 14 and 16, and pays monthly dividends of about seven cents per share.
Next ex-div date: September 15, 2017 est.
HOLD – Xcel Energy (XEL 49 – yield 2.9%) – XEL continues to hit new all-time highs as investors reducing risk rotate into utilities. I prefer to buy long-term, conservative holdings like Xcel when they are less popular, so Hold remains the appropriate rating for now.
Next ex-div date: September 13, 2017 est.
Closing prices as of August 22, 2017.
