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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor Weekly Update

I’m first coming to you in the midst of an awful market. We are unofficially in a bear market (down 20% from the high).


The Market Rolls into Bear Territory

I’m Tom Hutchinson and I have taken over the writing and portfolio management of Cabot Dividend Investor. I have decades of experience on Wall Street both on the exchanges and as a Financial Advisor. I’ve invested very successfully but I can’t say that I’m much of a fan of Wall Street. I love the individual investor but I don’t much care for the people who work on Wall Street generally and how it’s run—because mainly they don’t care about the individual investor.

What I do love is working through this system with its unfairness and misinformation to deliver to you advice and counsel that will enable you to beat the system and successfully grow your wealth. Although I will be delivering advice from a distance and in writing, I know the individual investor as well as I know myself. I spent the better part of two decades working with people face-to-face with full accountability. You will always be a real person to me and not just some fictional surfer of the internet.

It will be my absolute pleasure to be your reliable partner in this crazy world that also offers so much opportunity. I will try to offer the best possible advice in plain English and enable you to invest with confidence and success.

I’m first coming to you in the midst of an awful market. We are unofficially in a bear market (down 20% from the high). It’s unofficial at this point because the S&P 500 has only retreated 20% from the high on an intraday basis and not quite by virtue of the closing lows. But the market here has one foot on an official bear market and the other foot on a Vaseline saturated banana peel.

That’s not good. Historically, once a market ventures into bear territory it continues to go down twice as much. We are most certainly not out of the woods yet. More damage is very likely before this selloff is finished.

That said, I believe the current selloff is overdone and the market will recover and rally in the first half of next year. The fundamental backdrop is simply too strong to justify a typical bear market. Consumer confidence and employment are the strongest in several decades. Economic growth and company earnings have been spectacular. While it is likely we’ve seen the peak of this economic recovery, we are still nowhere near a recession, which typically shortly follows a bear market.

While this is my view right now, it can change. An economy runs on confidence. This selloff and the lack of confidence it reflects can be a self-fulfilling prophecy that propels the economy toward recession faster that the current fundamentals indicate.

Then there’s the Fed. I believe that the unprecedented Fed intervention in the economy and markets during this recovery is a problem. The Fed has simply gotten in over its head and involved itself in a game of twelve level chess it doesn’t know how to play. No one really knows have things will play out as the central bank reverses course.

While I am not certain, I am still operating under the assumption that the market is near a short-term bottom and will likely recover into the New Year. My analysis of the current portfolio positions reflects that view. I will talk about the portfolio positions in a fairly general way given the fact that it is my first take and the current tumultuous market is overshadowing everything else.

High Yield Tier

BUY – Community Health Trust (CHCT 28 – yield 5.8%) – Community Health is a REIT with a portfolio of properties primarily engaged in outpatient care in non urban areas of 28 states throughout the country. This stock has two big things going for it. It’s a REIT and it’s in healthcare. REITs are a defensive sector in this bloodbath of a market. The interest rate risk associated with this sector is waning as the Fed moves closer to an interest rate neutral policy and the ten-year treasury yield moves down. Health care should continue to be a market darling as the sector provides growth as the population ages at warp speed and is also naturally defensive. This stock has held up well is the down market and should continue to be solid when the market recovers.

HOLD – General Motors (GM 32 – 4.7%) – GM is a much better company than people realize. Today’s GM is financially solid with $19 billion in cash, a mere 25% dividend payout ratio and a successful array of vehicles. It’s a far cry from the pre financial crisis GM that was sloppily run, a financial mess and offered inferior vehicles that were getting their butts kicked by Japanese cars. This reinvented, superior car company also has strong growth prospects in self-driving cars going forward. It is also a great value with a microscopic PE ratio and a fat payout. That said, the stock will not likely realize its true value until the next cycle. Before that happens we will go through a recession, and you don’t want to own a car company during a recession because the sector is as cyclical as Las Vegas. But the price will likely rise as the market recovers and we can find a better exit point in the first half of 2019.

HOLD – STAG Industrial (STAG 24 – 6.0%) – STAG is an excellent REIT with a superior track record. The stock has provided an average annual return of over 16% for the past three years, double that of the overall market and almost triple that of its Morningstar peer group. But the timing isn’t great now. It owns industrial properties which makes it one of the more cyclical REITs that will likely not weather an economic downturn as well as some of its peers in the sector. It should rebound when the market recovers but I am lowering the rating from BUY to HOLD for now as this downturn still has legs.

Dividend Growth Tier

BUY – Altria (MO 48 yield 6.7%) – Altria was highlighted as a “Featured Buy” in the recent December issue. The cigarette maker’s stock has a phenomenal historical track record but is having a rare bad year, down over 28% year-to-date, because of increased regulatory scrutiny. The company has always overcome the regulatory environment and now sits at a five year low with a monster 6.4% yield. It is a strong down market performer that should also recover with the overall market. The company is also getting into higher growth areas to offset the slippage in cigarette volume and recently took a 45% stake in Canadian cannabis company Cronos (CRON). The cannabis market has huge growth potential. Then, last week, Altria purchased a 35% stake in electronic cigarette maker Juul Labs Inc for $12.8 billion. The purchase gives Altria both large exposure to a growth market and neutralizes a main source of competition.
HOLD – American Express (AXP 91 – yield 1.5%) – The stock is taking it on the chin along with the rest of the market and the financial sector. It’s down 20% since early December. But business is good. Analysts expect year-over-year earnings growth of 26% this year and 10% next year. This is one of the better financials to own and I’m reluctant to panic sell amidst the market carnage. There is a strong chance it will regain some of the losses in the months ahead.

HOLD – CME Group (CME 178 – yield 1.6%) – CME Group is a financial company, but an unusual one. It thrives on market volatility. The company runs exchanges that trade derivatives of nearly every stripe, and crazy markets like this really prime the pump for revenues. The stock has shown some real weakness over the past week along with everything else. But while steep selloffs like this one drag the stock price down, they also increase earnings. The stock should be quick to recover if and when the market sobers up. For now, I will hold the stock and consider selling if volatility wanes in the months ahead. CME is also paying a huge year-end special dividend of $1.75 per share.

SELL – CSX Corp (CSX 60 – yield 1.5%) – CSX is a railroad stock and part of the transportation index. The transports tend to be a leading indicator and thus the stock may not recover soon as the market continues to expect slowing economic growth. The stock went through the 200-day moving average last about a week ago and has since been falling like a rock. This is one to sell before the market gets worse. Chloe sold half the shares in October and I’m selling the rest today.

SELL – Dunkin’ Brands (DNKN 63 – yield 2.2%) – There’s a time to own the stock of every good company. Unfortunately, this isn’t the time for DNKN. It is not defensive enough to hold up in this nasty market and it doesn’t offer sufficient opportunity or a high enough yield to reward a contrarian move. There are just simply better opportunities out there right now to be defensive or opportunistic. I’m cutting it loose. Sell.

Safe Income Tier

BUY- Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.9%)
SELL – Invesco BulletShares 2020 High Yield Corporate Bond ETF (BSJK 23 – yield 5.0%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
SELL – Invesco Bulletshares 2022 High Yield Bond ETF (BSJM 23 – yield 5.7%)

Junk bonds have been a terrific investment through most of this recovery, especially if you bought them with astronomical yields shortly after the financial crisis. In terms of price they tend to behave more like stocks than bonds. With their high yield they tend to be resilient in time of rising interest rates and are more vulnerable to rising credit default rates, which appear to be on the cusp of getting worse as the economy slows amidst higher interest rates. You don’t want to own junk bonds when the economy is slowing or anywhere near a recession. In an abundance of caution I am selling both BSJM and BSJK. I could be premature but upheaval in the markets has historically not been kind to junk bonds. The yields are great but you could more than pay for them with falling prices in a market I don’t trust. The investment grade rated ETFs should remain a solid store of value during these volatile markets.

BUY – Consolidated Edison (ED 75 – yield 3.8%) – Even Con Ed is getting scalped in this market. The NYC area utility is taking it on the chin of late. The stock was down almost 6% on Monday alone. This selloff accelerated to a level where there were no safe havens whatsoever. But don’t let the crazy Christmas Eve market make you forget what ED has done recently. The past three tumultuous months where the S&P 500 crashed about 20% have spared ED; the stock is about even over that period. Utilities, with their high yield and defensive business model, are the best performing sector of this down market. The selling may not be done and ED, despite recent outperformance, is still selling closer to its 52-week low than high and yielding 3.8%. You can buy it confidently here.

HOLD – Ecolab (ECL 140 – yield 1.3%) – This maker of cleaning chemicals and other products had been a safe port in a stormy market. That is, until the market underwent a personality transformation. I am reducing the rating from BUY to HOLD because if you can muster the courage to step into this roaring bear market and expose yourself in broad daylight, you can do it in a way that provides much more opportunistic upside and more defensive overage than with Ecolab. Hold.

HOLD – Hormel Foods (HRL 41 – yield 2%) – Can you think of a more boring stock than food staple company Hormel? I can’t. But boring has been beautiful in this hideous market. HRL has delivered a positive return in the past three tumultuous months and is up 14.5% YTD. But the company’s boring predictability hasn’t been enough to save the stock lately. It’s fared just about as bad as the overall market in the last month and week. If you’re going to overcome fear and invest contrary to recent headlines, you need to get paid a lot better than the measly 2% per year this food stalwart pays. It’s not good enough to buy here, but I wouldn’t run away from it either. Hold.

HOLD – Invesco Preferred ETF (PGX 13 – yield 6.3%) – This one has been a real head scratcher. I love the idea of earning a great yield on something that is a different asset class than stocks and bonds and is still not particularly vulnerable to rising interest rates. But the market isn’t really sharing my enthusiasm. Its down market performance has been resoundingly disappointing; it’s being treated like a junk bond ETF. Since I so love the fat yield and diversification, I’ll continue to hold on for now. But if PGX disappoints me again I’ll desert it like a redheaded stepchild.

BUY – McCormick & Co (MKC 136 - yield 1.7%) – Ditto most of what I said about Hormel. But this stock is the clear superior of the two. Sure, it’s been obliterated over the past week like everything else. But MKC has really delivered in a down market. The stock is up 33% YTD. That’s 44% market outperformance. It’s delivering just like a boring stock should. It’s a thumbs-up Buy here despite the lame yield.

BUY – NextEra Energy (NEE 168 – yield 2.7%) – This is a utility, which is a nice thing in this market. It’s different than most utilities in that it is more forward looking, with its emphasis on alternative energy. But the social conscience comes with the price of a lower yield than most of its peers. This is a stock that has come as advertised and outperformed this down market at every turn. It’s still reasonably priced in a market that is not out of trouble yet. It’s a nice safe have that should continue to outperform for a while yet.

BUY – UnitedHealth Group (UNH 237 – yield 1.5%) – UnitedHealth is a different company and stock. But virtually everything I said about Community Health Trust applies to UNH, except it’s not a REIT. It’s in a great sector that offers both growth and defense. And it’s held up very well in this market with the exception of the past week. This is one I wouldn’t be afraid to buy in this market, Buy.

HOLD – Xcel Energy (XEL 49 – yield 2.9%) – This is a solid REIT that has outperformed in this troubled market. Like NEE, Xcel is also a leader in alternative energy. But I like NEE better, as well as ED. By all means hold it if you already own it but if you want to put new money to work I’d rather steer you toward NEE and ED at this point.

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