I noted last week that the outperformance in growth stocks was contributing to some underperformance in our portfolio. That situation has now been flipped on its head. Growth stocks started lagging in the middle of last week, and for the week, the S&P 500 lost 1.24%, the Dow dropped 1.54% and the Nasdaq fell by 1.04%. Utilities and REITs—year-to-date laggards—were the week’s best-performing sectors.
Monday brought another broad market decline (triggered by a brutal selloff in Facebook) and the worst of the selling again hit growth stocks. On Tuesday, rising oil prices helped the market eke out a small gain, but Facebook again dragged tech shares lower.
In another tailwind for income investors, yields remain subdued despite today’s anticipated rate hike. The yield on the 10-year Treasury has actually declined in recent weeks, falling from its late-February high of 2.95% to under 2.80% last week (it’s now back near 2.89%). At the same time, the treasury yield curve (the difference between short- and long-term treasury yields) has flattened. While a rate hike is pretty much a given, this afternoon’s new Fed dot plot is hotly anticipated. Changes in their expected pace of rate hikes could cause some more market adjustments.
While our portfolio is largely healthy, I do have one change today. I’m replacing Pembina Pipeline (PBA) with STAG Industrial (STAG), which provides a similar income stream but has better capital gains prospects. Read on for all the details.
HIGH YIELD TIER
BUY – AllianceBernstein (AB 27 – yield 8.7%) – AB has been trading below its 50-day moving average since the company reported a decline in AUM (assets under management) a week ago. Volume hasn’t picked up though, and the stock is above its lows from a few weeks ago, so I’ll keep it on Buy for high-yield investors. As a reminder, AB is organized as a partnership, so it’s not appropriate for all accounts and taxes entail some extra paperwork.
Next ex-div date: May 3, 2018 est.
HOLD – General Motors (GM 37 – yield 4.1%) – GM remains below its 50- and 200-day moving averages. The stock hasn’t broken its long-term trendline, but the three higher-volume down days in a row at the start of this month mean the stock probably has some base-building to do before it moves up again. Analysts are concerned about slowing sales, tariffs and more oversight of self-driving car technology. On the plus side, four analysts have upped their 2018 EPS estimates over the past 30 days. Hold for now.
Next ex-div date: June 7, 2018 est.
HOLD – ONEOK (OKE 58 – yield 5.2%) – OKE is trading sideways around its 50-day line. The stock briefly freaked out Thursday after regulators made a tax ruling negatively affecting MLPs, but the ruling doesn’t affect ONEOK, which is structured as a corporation. Hold.
Next ex-div date: May 3, 2018 est.
SELL – Pembina Pipeline (PBA 31 – yield 5.5%) – PBA remains grounded, underperforming the energy sector and the broad market. The stock is below its 50- and 200-day moving averages, and its trend is sideways at best. PBA has been a disappointment for a while, and I’ve finally found an alternative that offers a similar income stream, with a better outlook. I’m going to Sell our remaining half position in Pembina today (for a small profit) and replace it with STAG Industrial (STAG), which also pays monthly dividends and yields slightly more. See below for all the details on the new addition.
Next ex-div date: March 22, 2018
NEW BUY – STAG Industrial (STAG 24 – yield 6.0%) – STAG Industrial is a REIT (real estate investment trust) that owns industrial real estate—mostly warehouses. We haven’t had a REIT in the portfolio for some time, because anticipation of Fed rate hikes has made the sector volatile and unrewarding in recent years. However, I suspect rate hike expectations have plateaued for now. Markets already expect three or four hikes this year, and while more are theoretically possible, that would represent an extremely hawkish—and improbable—turn from the Fed.
I’ve had my eye on STAG for a while. I like the REIT’s focus on warehouses (over 80% of their 356-property portfolio), which are in high demand from e-commerce companies competing to ship faster and faster. The Federal government is also a major tenant. And I like their track record: funds from operations (or FFO, a widely-used measure of REIT cash flow) have increased every year since the REIT came public in 2011. Last year, adjusted FFO increased by 29%.
Most importantly, the REIT pays monthly dividends, offering a suitable replacement for Pembina’s income stream. STAG’s history of dividend payments isn’t long (seven years), and its pace of dividend growth is slow (about 3% over the past five years), but payments have been steady and the stock’s payout ratio is reasonable for a REIT (84% based on FFO). IRIS awards STAG Dividend Safety and Growth Ratings of 4.9 and 5.6, middling but acceptable for the high yield tier. Word of warning to the tax-sensitive: the dividends don’t qualify for the lower dividend tax rate.
Finally, the stock is at an attractive entry point. STAG just completed a 20% correction as interest rates surged, finally finding support in early February. That’s a big drawdown (risk is always higher with high-yield stocks) but presents a good buying opportunity for us. It also defined a nice support level around 22.50 to watch should things go South.
I’ll be adding STAG to the High Yield tier at today’s average price. Investors with high risk tolerance looking for high monthly income can do the same.
Next ex-div date: March 28, 2018
DIVIDEND GROWTH TIER
HOLD – American Express (AXP 95 – yield 1.5%) – AXP has traded sideways since our last update. The stock remains below its 50-day moving average but well above its 200-day and its low from February. Hold for now.
Next ex-div date: April 5, 2018
BUY – BB&T Corp (BBT 55 – yield 2.4%) – BBT traded sideways this week, floating just above its 50-day line. The stock’s uptrend is intact, and EPS are expected to rise by over 40% this year thanks to tax reform, regulatory changes, rising interest rates and moderate revenue growth. Dividend growth investors can Buy here.
Next ex-div date: May 9, 2018 est.
BUY – Broadridge Financial Solutions (BR 109 – yield 1.3%) – BR remains near all-time highs, strong but somewhat extended. The stock’s 50-day moving average is at 99 and the 200-day is way down at 86. Wait for a pullback before buying.
Next ex-div date: June 14, 2018 est.
BUY – Carnival (CCL 68 – yield 2.7%) – CCL’s consolidation continues. The stock is now trading between its 50- and 200-day moving averages, right in the middle of its trading range. I still think the stock’s next significant move will be up: CCL spent the last five months consolidating, and had finally broken out to a new high just before the market correction started. Plus, analysts expect EPS to increase 13% this year and 15% next year. We’ll hang on to our remaining half position, and if you don’t own CCL and are looking for dividend growth, you can start accumulating shares here.
Next ex-div date: May 23, 2018 est.
BUY – CME Group (CME 164 – yield 1.7%) – CME has paused to let its 50-day catch up, presenting a decent buying opportunity for dividend growth investors. Reportedly, the company is considering acquiring NEX group, which would add currencies, Treasuries and more to the already broad range of securities traded on CME exchanges. Buy on pullbacks.
Next ex-div date: June 7, 2018 est.
HOLD – Cummins (CMI 161 – yield 2.7%) – CMI is trading sideways, not showing much buying or selling power. The engine maker could be hit by tariffs on steel and aluminum, which caused the pullback earlier this month. We’ll Hold for now, but CMI is one of the weaker stocks in our portfolio.
Next ex-div date: May 18, 2018 est.
SAFE INCOME TIER
BUY – 3M (MMM 232 – yield 2.3%) – MMM remains below its late-January high, as well as its 50-day moving average. The 200-day continues to provide solid support though, and there’s no real reason for concern, just a lack of momentum. And for the long-term, 3M remains a great holding: the company offers unparalleled free cash flow generation and a very reliable 2.3% yield—it has paid dividends consistently for 100 years, with increases every year since 1959.
Next ex-div date: May 16, 2018 est.
HOLD – Consolidated Edison (ED 77 – yield 3.7%) – Utilities had a moment in the sun this week as investors rotated out of free-falling tech stocks and into more conservative names. The Fed will probably raise rates this afternoon, but the hike has been priced into utilities for weeks, so I don’t expect to see much of a reaction from ED and its peers. Hold for slowly rising income.
Next ex-div date: May 14, 2018 est.
HOLD – Ecolab (ECL 137 – yield 1.2%) – ECL is back in the higher range where it traded in December and January, and above its 50- and 200-day moving averages. Eight analysts have increased their 2019 EPS estimates in the past 30 days. The stock is looking a lot stronger and could earn back its buy rating soon.
Next ex-div date: June 15, 2018 est.
HOLD – 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 24 – yield 4.9%)
BUY – Guggenheim BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
Next ex-div dates: est. June 1, 2018 est.
BUY – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – PGX is an ETF that holds preferred shares and pays dividends monthly, making it a good conservative holding for investors looking for regular income. The fund has low volatility but no capital appreciation potential; it generally trades between 14 and 16. The recent interest rate spike brought PGX down to under 14.75, where it’s buyable.
Next ex-div date: April 13, 2018 est.
BUY – UnitedHealth Group (UNH 227 – yield 1.3%) – UNH continues to trade in a tight range between 220 and 230. UNH is still below its late-January highs, but its long-term uptrend is intact. Safe Income investors can buy some here. The company has an eight-year history of dividend growth, funded by a massive health insurance business and a growing medical services business.
Next ex-div date: June 14, 2018 est.
HOLD – Xcel Energy (XEL 44 – yield 3.3%) – XEL has bounced a little over the past week thanks to a pop in utilities. Investors whose primary goal is income can continue to Hold. The utility recently increased its dividend by 5.6%, the 14th consecutive annual increase in a row. XEL is a Minnesota-based utility, the largest producer of wind energy in the U.S., and has a highly reliable income stream.
Next ex-div date: June 12, 2018 est.
Closing prices as of March 20, 2018
