The weakness that was troubling the market before last Wednesday’s unanticipated holiday worsened when markets opened again Thursday, and the major indexes are back at their correction lows.
Even another week of dovish comments from the Fed couldn’t stem the selling. Dallas Fed President Robert Kaplan said Thursday that the Fed needs to consider “the possibility that the U.S. economy could look very different in the first quarter, first half of 2019 than it does now,” adding, “there are times when the smartest thing you can do is turn over a few cards and do nothing.” His comments were reinforced by jobs data released Friday, which showed good-not-great growth in payrolls in November, strengthening the case for Fed policy to become less aggressive soon.
Also last week, OPEC members agreed to cut production by 1.2 million barrels per day, providing some stability to oil prices. However, the news wasn’t enough to halt the selloff in energy stocks.
Finally, the bond market is worrying some investors. One part of the treasury yield curve inverted recently (3-year treasuries now yield more than 5-year treasuries) and investors are ramping up bearish bets against high yield assets (mostly for hedging purposes) suggesting increasing pessimism about the economy.
So, although I was optimistic when the market strengthened two weeks ago, for now it’s time to stay defensive. In our portfolio, that means selling half of AllianceBernstein (AB), which has suddenly lost significant support, and the rest of ONEOK (OKE), which is hitting new lows. Broadridge Financial (BR) and BB&T Corp. (BBT) could be next to go if the market continues to struggle.
However, some sectors are still working well, and I’m moving both our REITs—Community Health Trust (CHCT) and STAG Industrial (STAG)—back to Buy today. Details below.
HIGH YIELD TIER
SELL HALF – AllianceBernstein (AB 27 – yield 10.8%) – Financial stocks were slammed by heavy selling late last week, and AB dropped sharply along with its asset management peers. Thursday’s heavy volume selloff dropped the stock below its 200-day line, which had provided support back in October and November. The drop was followed up by a partial rebound Friday, but Monday brought another high-volume selloff. AB is now 11% below where it closed one week ago. That’s significant weakness, and the elevated volume on the two down days adds to the strength of the signal. Although we own AB primarily for income (its yield is up to 10.5% after the latest selloff) the fierceness of this selloff concerns me. I’m going to sell half our shares today. Sell Half.
Next ex-div date: February 1, 2019 est.
BUY – Community Health Trust (CHCT 31 – yield 5.2%) – Interest rates remain under pressure; the 10-year yield recently dropped below 2.9%, hitting its lowest level since August. Last time interest rates were this low, CHCT hit a new all-time high of 32.81. The stock is still a few points below that level, but it could be attainable soon. Recent dovish speeches from Fed members and Friday’s good-not-great jobs report have removed a lot of pressure from interest rates, and REITs have been a primary beneficiary. I’m going to put the stock back on Buy today, for more aggressive high-yield investors. Community Health Trust is a REIT that owns healthcare buildings in non-urban areas. Be sure you’re familiar with how REIT dividends are taxed before investing.
Next ex-dividend date: February 21, 2019 est.
HOLD – General Motors (GM 35 – yield 4.4%) – GM continues to chop around. The stock got smacked by the selloff last week and dropped below its 50-day Monday, but bounced back yesterday after Bloomberg reported that China might lower its tariffs on U.S. auto imports. The country is reportedly taking initial steps to bring tariffs back down from 40% to 15%, where they were before the country retaliated against Trump’s own tariffs in May. It’s hard to glean much from this action, so I’ll just keep GM on Hold for now.
Next ex-div date: March 2019
SELL – ONEOK (OKE 59 – yield 5.4%) – OKE declined further this week, falling to its lowest level since April. Oil prices have stabilized over the past three weeks, but energy stocks haven’t started to rebound yet; in fact, the Energy SPDR (XLE) hit a new 52-week low on Monday. After two partial sales we’re down to a third of our usual position in ONEOK, a natural gas pipeline and processing company, and I said after our latest partial sale on November 28 that if the stock continued to decline we would sell the rest. That’s what’s happened, so I’m going to sell the remaining third of our shares at today’s average price. The dividend remains high and safe, but you can’t fight the market. Sell.
Next ex-div date: February 1, 2019 est.
BUY – STAG Industrial (STAG 27 – yield 5.3%) – STAG’s trading range remains neatly contained between 26 and 27 and the stock looks solid. The monthly dividend payer has been a good store of value and source of income during the last two months, and I’m going to put it back on Buy today. STAG is an industrial REIT that owns properties in 37 states that are mostly used as warehouses and fulfillment centers. Major tenants include the Federal government and big logistics companies like FedEx. Investors looking for high yield and monthly income can Buy here. Be sure you’re familiar with how REIT dividends are taxed before investing.
Next ex-div date: January 30, 2018 est.
DIVIDEND GROWTH TIER
HOLD – American Express (AXP 105 – yield 1.3%) – Even though it’s pulled back this week, AXP is performing much better than a lot of other financial stocks, and the strength is a good sign. I was hoping to be able to put AXP back on Buy this week, but I’ll hold off until the market is more broadly supportive. Analysts expect AmEx to report 26% EPS growth this year and 10% growth next year. Hold.
Next ex-div date: January 3, 2019
HOLD – BB&T Corp (BBT 47 – yield 3.2%) – After the sharp selloff in regional bank stocks last Tuesday, BBT continued to struggle through the weekend, and is back near its lows from October. If BBT find support here and rebounds soon, great. If it doesn’t, we’ll sell the rest of our shares. BB&T is a large regional bank operating in the mid-Atlantic, Southeast, Midwest and Texas. Morgan Stanley recently published an analyst report arguing that bank stocks will struggle next year due to deterioration in the credit market and a plateau in interest rates. It’s a big macro prediction that may or may not come true, but the belief itself is enough to drive bank stocks down and keep them down. For now, we’ll Hold.
Next ex-div date: February 13, 2019 est.
HOLD – Broadridge Financial Solutions (BR 99 – yield 2.0%) – BR continues to flit around 99-100, trying to find the momentum to recover from its big selloff last month. But the stock is still one of our weaker holdings, and is trending down. We’re already down to a third of our regular position size in BR, so for now I’ll continue to Hold. If the stock continues to decline, we’ll sell the rest of our shares. Broadridge provides investor communication solutions and other technology to financial companies and has been dragged down by the selling in tech stocks.
Next ex-div date: December 13, 2018
BUY – CME Group (CME 190 – yield 1.5%) – CME runs financial exchanges where traders buy and sell derivatives on everything from equity indexes to interest rates, and revenues rise when market volatility picks up, so the stock has been doing very well since the current correction started in October. After hitting a new 52-week high in mid-November, CME spent the past three weeks consolidating. But the stock just met up with its 50-day moving average this week, so it could be about time for another leg higher. Plus, CME just declared a special end-of-year dividend of $1.75 per share, payable January 16 to investors who own the stock before December 27. (CME’s regular quarterly dividends total $2.80 per year.) Buy on pullbacks.
Next ex-div date: December 28, 2018
HOLD – CSX Corp. (CSX 68 – yield 1.3%) – CSX, which was in an uptrend when I added it to the portfolio at the end of August, is now in a sideways trend. Our timing was unfortunate, but we can be patient. The stock appears to have solid support from its 200-day line, currently at 66. The company is a major freight railroad, whose network stretches from Florida to Montreal and from the Atlantic to the Mississippi. CSX switched to a low-cost point-to-point system last year to increase efficiency, and boasts the lowest costs in the industry. The company has also paid a dividend since 1981, and has increased the dividend for eight years in a row. Hold.
Next ex-div date: February 28, 2019 est.
HOLD – Dunkin’ Brands (DNKN 70 – yield 2.0%) – DNKN still looks decent; the stock is showing very little selling pressure, given the market environment. Instead, DNKN is trading sideways right around its 50-day line, and is still well above its 200-day. Once the market environment improves, this consolidation could provide a good launch pad for the stock’s next advance. Analysts are expecting the coffee-and-donut chain to report full-year sales growth of 55% and EPS growth of 17%, and management is improving profitability by simplifying menus and focusing on growth areas. DNKN is a Hold.
Next ex-div date: February 22, 2019 est.
SAFE INCOME TIER
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.9%)
BUY – Invesco BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
BUY – Invesco BulletShares 2022 High Yield Bond ETF (BSJM 24 – yield 5.5%)
After a prolonged drop last month, the high yield funds in our bond ladder have stabilized. However, some analysts believe weakness in junk bonds is permanent, citing increased recession risk and an end to the “reach for yield” created by low interest rates over the past decade. Low oil prices aren’t helping things either: about 15% of junk bond issuers come from the energy sector. Even if junk bonds remain out of favor, the BulletShares funds should be a fairly good store of value, since Invesco disburses the net asset value, or NAV, of the ETF back to investors at expiration. Still, if you’re looking for shorter-term security, or are very risk-averse, stick to the investment-grade rated BulletShares.
Next ex-div dates: December 24, 2018 est.
BUY – Consolidated Edison (ED 83 – yield 3.4%) – Utilities remain strong, fueled by a flight to safety and anticipation of a return to neutral interest rates. ED is trading at its highest level since the start of the year and can be bought on pullbacks. ED is a good safe haven from market volatility and source of reliable quarterly dividends. The utility is the electricity provider for New York City and the surrounding area.
Next ex-div date: February 11, 2019 est.
BUY – Ecolab (ECL 155 – yield 1.12) – Ecolab’s management just increased the company’s quarterly dividend by 12%, to $0.46 per quarter. The move marks Ecolab’s 32nd consecutive annual dividend increase. After hitting a new all-time high last Monday, ECL has pulled back to trade right above its 50-day line. Volatility has increased a bit, compared to ECL’s normally boring behavior, but the stock looks ready to make some progress once the market environment improves. The company produces cleaning chemicals and other products used in a variety of industries, generating non-cyclical cash flow and fueling reliable annual dividend increases. Buy on pullbacks.
Next ex-div date: December 17, 2018
BUY – Hormel Foods (HRL 45 – yield 1.9%) – HRL has been consolidating since hitting a new 52-week high three weeks ago. The stock is in a steady uptrend supported by its 50-day line, and has lower volatility than the broad market. Management recently raised the dividend by 12%, bringing the stock’s yield to 1.9% and marking Hormel’s 53rd annual dividend increase in a row. The stock could consolidate a bit longer here, between about 44 and 46. Long-term I think it still has gas in the tank though; the stock laid low for most of the past two years and just surpassed its 2016 highs in October. Buy.
Next ex-div date: January 11, 2019
BUY – Invesco Preferred ETF (PGX 14 – yield 6.1%) – PGX has started to recover a bit this week, but I’m still concerned about the unusual weakness in the ETF in recent months. PGX should be a good store of value when the stock market gets choppy, but fears of a credit crunch or even a liquidity crisis in the high-yield market have investors fleeing many fixed-income assets. The selling is not specific to PGX; it has hit all preferred shares and preferred ETFs. The following charts from Bloomberg show money moving out of riskier, less liquid debt markets and into more stable government debt over the past two months (note that the scales are not equal).
It’s impossible to say whether this is the beginning, middle or end of this shift. So, to reduce risk, I’m going to put PGX on Hold today, and we’ll take some profits if the ETF weakens further in the coming days.
Next ex-div date: est. December 14, 2018 est.
BUY – McCormick & Co (MKC 153 – yield 1.5%) – McCormick makes spices as well as numerous brand-name sauces, seasonings and condiments. As we saw in October and November, MKC does well when the broad market is doing poorly, and the stock hit another new all-time high yesterday. MKC is in a sustainable uptrend well supported by its 50-day line. And management just increased their dividend by 10%, McCormick’s 32nd consecutive annual dividend increase. Long-term investors can continue to Buy on pullbacks.
Next ex-div date: December 28, 2018
BUY – NextEra Energy (NEE 183 – yield 2.4%) – We got lucky with our timing on NextEra. After I added the stock to our portfolio two weeks ago, NEE immediately surged 3% to hit a new all-time high, as investors piled into utilities following Fed Chair Powell’s comments. NextEra is the electric utility for much of Florida, plus a major producer of renewable energy. In addition to wind and solar farms, the company also owns battery storage sites, natural gas pipelines and nuclear plants. The company has paid dividends every year since 1983, and has increased the dividend every year since 2005. Buy.
Next ex-div date: February 27, 2019 est.
BUY – UnitedHealth Group (UNH 267 – yield 1.3%) – UNH has pulled back just to its 50-day line over the past week and can be bought here. The stock recently gapped up to new all-time highs after management released their 2019 financial guidance, including expected EPS growth of 13% to 15%. The health insurance giant is a reliable long-term safe income investment with an eight-year history of dividend growth, and has behaved well during the recent correction.
Next ex-div date: March 8, 2019 est.
BUY – Xcel Energy (XEL 54 – yield 2.7%) – With tailwinds from the Fed’s dovish stance and continued turmoil in the stock market, XEL has closed at new 52-week highs on three of the last six trading days. Xcel is a Minnesota-based utility that generates much of its electricity from wind farms. Long-term safe income investors can buy on pullbacks.
Next ex-div date: est. December 13, 2018
Prices as of December 11, 2018
