Interest rates surged last week after ADP released September payroll data showing a significant uptick in hiring and Fed Chair Jerome Powell said in an interview that the Fed’s benchmark rate is still “a long way from neutral.” Then on Friday, the U.S. unemployment report fell to 3.7%, the lowest level since 1969. The yield on the 10-year Treasury hit its highest level in seven years and remains elevated as this week progresses.
The interest rate surge has been connected to some unusual ripple effects, starting with the fierce selloff in growth stocks. The Nasdaq extended its decline into a second week, and growth-oriented sectors like consumer discretionary and tech have been slammed. At the same time, investors are rotating into more conservative and value-oriented investments. The Dow actually gained 40 points Monday, even as the Nasdaq declined another 53 points.
Utilities, which had pulled back before last week’s yield spike, have bounced back quickly as investors rotate toward safety. However, REITs, which are interest-rate sensitive but not bastions of safety, haven’t been as lucky.
Many financials are also doing well, although it’s a mixed bag. Banks start reporting third-quarter results next week and could issue some higher guidance based on rising yields.
Energy stocks are probably the biggest winners of the rotation; many have built strong launching pads over the past year and boast rapid growth and low valuations.
It’s too early to say if we’re seeing a sustained rotation out of growth-oriented assets and into value-oriented assets, but either way our portfolio is well positioned, with a range of diverse holdings all over the risk spectrum (at least the parts that pay dividends).
However, though our diversified holdings are doing well so far, the deterioration in the overall market is enough reason to consider some defensive moves. If the market stays shaky, we could lighten up on some of our weakest positions over the coming days, probably starting with McGrath RentCorp (MGRC), which has been trending down since July. For now, though, I have no rating changes.
HIGH YIELD TIER
BUY – AllianceBernstein (AB 30 – yield 8.5%) – AB is trading sideways just above its 50-day line, which is currently around 30. A breakout past 31 would be very bullish, while a drop through the 50-day would be cause for concern. For now I’ll keep AB on Buy for high-yield investors, but as noted above, be cautious. AllianceBernstein is an asset manager known for their actively managed strategies. Assets under management rose to $551 billion in August, up from $546 billion at the end of July.
Next ex-div date: November 1, 2018 est.
HOLD – Community Health Trust (CHCT 30 – yield 5.3%) – Bond yields are soaring, and the 10-year treasury hit its highest level in seven years on Friday. That brought CHCT, a health care REIT, back toward 29, but the stock appears to have found some support there for the second time in two weeks, and is bouncing back this week. The stock is still above its 200-day moving average, but we’ll probably see a few weeks, or even months, of consolidation as markets adjust to the new interest rates. Hold.
Next ex-dividend date: November 15, 2018 est.
HOLD – General Motors (GM 33 – yield 4.7%) – Honda invested $2 billion in Cruise, GM’s self-driving subsidiary, last week, furthering GM’s lead in self-driving technology. Honda and GM will work together to design and produce a self-driving vehicle that can be used in an Uber-like fleet. Honda’s participation will help GM quickly ramp up global production of the vehicle. In other autonomous driving news, the Super Cruise system in GM’s new Cadillac bested Tesla’s Autopilot in test conducted by Consumer Reports, which liked that Super Cruise includes more safeguards to make sure drivers are paying attention (like a camera that tracks drivers’ eye movements and warns them if they look away from the road for too long.) None of this good news has moved the needle on the stock though, which is still trying to find a bottom down near 33. At this point, GM’s lows from last May are starting to look like a viable support level. We have a small position and a decent profit cushion, and GM’s yield is great, so we’ll continue to Hold. Eventually, I expect GM’s autonomous driving investments to attract lots of new investors to the stock.
Next ex-div date: est. December 6, 2018
HOLD – ONEOK (OKE 69 – yield 4.6%) – Natural gas prices remain near their highest levels since January, thanks to warm fall weather that’s kept air conditioners running in much of the U.S. ONEOK is a pure-play on natural gas, with a large network of natural gas and natural gas liquids (NGL) storage and processing facilities and pipelines all over the central U.S. The stock is consolidating its recent short-term surge just above its 50-day line, and looks healthy. I’ll put it back on Buy if it can start trending up again. For now, Hold.
Next ex-div date: November 2, 2018 est.
BUY – STAG Industrial (STAG 27 – yield 5.3%) – Last week’s interest rate pop dragged STAG down to its 200-day moving average, around 26, but the stock bounced neatly off the trendline this week. I noted last week that after a good run in the first half of the year, it wouldn’t surprise me to see the stock go through another multi-month consolidation phase here, between about 27 and 29. Last week’s bond-yield panic brought STAG temporarily below the bottom of that range, but the stock’s quick rebound makes the case look even stronger. Interest rate anxiety is likely to keep STAG from making any progress for a while, but it has good support, so risk-tolerant high-yield investors can Buy when it’s close to the bottom of its trading range.
Next ex-div date: October 30, 2018 est.
DIVIDEND GROWTH TIER
BUY – American Express (AXP 107 – yield 1.3%) – AXP continues to pull back from its recent 52-week high, just brushing its 50-day line last week. The stock’s uptrend is intact, so this looks like a good buying opportunity. Many financials have been resistant to the selling in growth stocks over the past week, and AXP should still have plenty of gas in the tank long-term. The stock just broke out of a four-month trading range, and analysts are expecting the credit card company to deliver 20% revenue growth and 24% EPS growth this year. AmEx will report third-quarter earnings next Thursday, October 18.
Next ex-div date: January 4, 2019 est.
HOLD – BB&T Corp (BBT 49 – yield 3.0%) – Banks’ margins expand when interest rates rise, and BBT has been behaving well since our last update. The stock recently hit a new six-month low, so it’s still on probation, but the recent change in the market’s character could be the catalyst BBT needs to get its act together. However, I’m not holding my breath: BBT is still below is 50- and 200-day lines, and has no obvious support level in the near-term. BB&T will report third-quarter earnings next Thursday, October 18. For now, Hold.
Next ex-div date: November 7, 2018 est.
BUY – Broadridge Financial Solutions (BR 126 – yield 1.5%) – BR has pulled back through its 50-day moving average, but the decline still looks orderly. (The stock previously dipped below the 50-day in February and July and recovered quickly both times.) I’ll keep BR on Buy for now, but don’t go overboard until the broad market stabilizes. Broadridge is the largest investor communications firm in the U.S., and delivers steady single-digit sales growth every year.
Next ex-div date: est. December 17, 2018
BUY – CME Group (CME 181 – yield 1.5%) – CME hit a new 52-week high on Friday, no doubt thanks to high volume on its financial exchanges, where interest rate derivatives are traded. CME is in a solid uptrend and has been above 170, which was previously an overhead resistance level, since the start of September. Dividend Growth investors can Buy on normal pullbacks. Now is a great time to get into the stock: CME pays a large special dividend at the end of each year, which can more than double its normal yield.
Next ex-div date: est. December 7, 2018
BUY – CSX Corp. (CSX 75 – yield 1.2%) – CSX pulled back just to its 50-day line last month, and is now chugging along just above the moving average. The company is the third-largest U.S. railroad and recently underwent a major transformation, switching to a point-to-point system that boosted margins, cash flow and profits. CSX has paid dividends every year since 1981, and has increased the dividend for eight years in a row. Over the past five years, the dividend increases have averaged 8%. CSX only yields 1.2% at current prices, but the company’s payout ratio of 25% leaves plenty of room for growth. The stock is not undervalued, but it’s in a strong uptrend that is likely to continue as long as transport stocks and the broad market remain strong. Buy.
Next ex-div date: November 29, 2018
BUY – Dunkin’ Brands (DNKN 73 – yield 1.9%) – In an odd but predictable display of investor psychology, DNKN popped 3% yesterday after Bill Ackman revealed that his fund has taken a large stake in Starbucks (SBUX). Ackman thinks Starbucks is undervalued at current prices, according to his statement. The pop has brought DNKN back above its 50-day moving average. However, the overall climate today remains challenging for DNKN; consumer discretionary stocks have been hit particularly hard by the selling of the last week. As I said last week, if this rotation turns into a longer correction in growth stocks, we’ll reassess our choice of DNKN. However, for now the chart looks more like a pullback or shakeout, so I’ll keep DNKN at Buy.
Next ex-div date: November 23, 2018 est.
BUY – Occidental Petroleum (OXY 82 – yield 3.7%) – Most energy stocks are holding up well to the market’s gyrations. Oil prices peaked earlier this month as stockpiles grew, but they haven’t fallen much, propped up by hurricane-related fears and falling shipments from Iran. Perhaps more important, energy stocks represent some of the best values in the market today, so investors fleeing growth-oriented names are rotating into the sector. OXY is back above both its 50- and 200-day moving averages, although it still faces overhead resistance around 86. Dividend growth investors can nibble here. Occidental is a Houston-based oil and gas company with a large chemicals business. Analysts expect revenues to rise 29% this year, fueling triple-digit earnings growth.
Next ex-div date: December 7, 2018 est.
SAFE INCOME TIER
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.4%)
BUY – Invesco BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.8%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
BUY – Invesco BulletShares 2022 High Yield Bond ETF (BSJM 25 – yield 5.3%)
The BulletShares funds make up our bond ladder, which is a conservative strategy for generating a steady income stream by buying a series of individual bonds or defined-maturity bond funds that mature in successive years. Because the BulletShares funds are short-term and mature at the end of the year in their name (at which point Invesco disburses the net asset value, or NAV, of the ETF back to investors), they are a good store of value even when interest rates rise. And if you reinvest the proceeds of the maturing fund in a new, longer-dated holding every year, you can secure rising income stream as rates rise. You can construct your own ladder with either the investment-grade or high-yield funds, or a mix, as we’ve done.
Next ex-div dates: January 4, 2018 est.
BUY – Consolidated Edison (ED 78 – yield 3.7%) – Utilities usually drop when interest rates increase, but a rotation into conservative assets seems to be overpowering that effect this time around. ED has advanced on seven of the last nine trading days, and is nearly 5% off its September lows. ED is a great long-term holding for safe income, and can be bought when it’s near the bottom of its trading range. Expect a little more volatility in the short term.
Next ex-div date: November 13, 2018 est.
BUY – Ecolab (ECL 155 – yield 1.1%) – After a rapid advance over the past four weeks, ECL is consolidating between 155 and 160, pausing to let its 50-day line—currently at 152—catch up. Ecolab makes cleaning chemicals and other products that generate reliable recurring revenues and has paid dividends for 32 years. Buy on pullbacks for capital appreciation and safe income.
Next ex-div date: est. December 17, 2018
BUY – Invesco Preferred ETF (PGX 14 – yield 6.0%) – PGX has pulled back sharply as interest rates have spike over the past two weeks. I’ll keep the ETF on Buy though, since it usually has ample support near these levels. PGX is an ETF that holds preferred shares (a type of debt) and pays monthly distributions. The fund has low overall volatility and usually trades between 14 and 16. Note that PGX offers no capital appreciation potential, instead, it’s a good store of value and source of regular income. Buy under 15.
Next ex-div date: est. December 14, 2018 est.
BUY – McCormick & Co (MKC 136 – yield 1.5%) – McCormick is firing on all cylinders: the company reported excellent third-quarter earnings two weeks ago, triggering a flurry of upward estimate revisions, and the stock is benefitting from a rotation into conservative sectors. MKC has closed higher on eight out of nine days since its quarterly report, and is trading at all-time highs. MKC remains in a strong uptrend, if a little overextended short-term. Buy on pullbacks for dividends and capital gains.
Next ex-div date: January 8, 2018 est.
HOLD – McGrath RentCorp (MGRC 52 – yield 2.6%) – MGRC is probably the weakest stock in our portfolio, so if I decide to do some housekeeping in the coming days, it will be on the chopping block. MGRC has been trending down since July, and is below is 50- and 200-day moving averages. The stock has now pulled back to 51, slightly below where it found some support three weeks ago. On the other hand, earnings estimates are firm. The company rents modular buildings, storage units and more, and has a 16-year history of dividend growth. Hold for now.
Next ex-dividend date: October 16, 2018
BUY – UnitedHealth Group (UNH 271 – yield 1.3%) – UNH still looks very healthy, trending up just above its 50-day line. Safe income investors can start positions in UNH here. The company has an eight-year history of dividend growth and has increased its dividend by 26% per year, on average, over the past five years.
Next ex-div date: December 6, 2018 est.
BUY – Xcel Energy (XEL 49 – yield 2.9%) – Like ED, XEL has bounced back from last month’s interest rate selloff like a rubber ball, even though yields remain elevated. It’s a combination of “buy the rumor, sell the news,” and a rotation into safe, conservative investments. XEL is back near its September highs and above its 50- and 200-day lines. Buy for safe income. Xcel is one of the largest providers of renewable energy in the U.S., and delivers reliable single-digit revenue growth.
Next ex-div date: est. December 13, 2018
Prices as of October 9, 2018
