This Market Loves Dividend Stocks
The market isn’t spiraling downwards anymore. It’s actually looking healthy again. We’ve arrived at a post-selloff environment that could be ideal for dividend stocks.
It was ugly for a while. The market corrected and kept on going down. It came within a whisker of a bear market, down 20% from the high on a closing basis. And when the market was already down it got kicked by the worst December in 30 years. But it looks like those days are over – for now.
The market bounced back with the best January in 30 years. The S&P 500 has rallied 16% from the December lows and is now just 7% below the all-time high hit last September. So far in this young year, the Dow Jones is up 8.53%, the S&P 500 is 8.94% higher and the NASDAQ is up over 11%. Why the change of heart?
Part of the reason is that the selloff got way overdone. Investors were pricing in a recession that is still nowhere in sight, but finally sobered up and realized the economy is still strong. The change in attitude has since been confirmed by strong economic numbers including a blowout December jobs report.
But there has been a more tangible change than investors collectively realizing they were mistaken. One of the major market headwinds has gone away—the Fed announced that it will likely stop raising interest rates. Sure, the market still has to worry about the global economic slowdown, the trade war with China and ugly political discourse at home. But the biggest impediment to continued economic growth has been removed.
Not only is there no recession on the near-term horizon but the next recession just got pushed even further away. Without the Fed slowing the economy by raising interest rates, this late stage of the economic cycle could last a long time. Late-stage market cycles typically favor more defensive dividend-paying stocks like Utilities, Healthcare and Consumer Staples.
The market is back but a lot of the investor euphoria is gone. The selloff served as a potent reminder to investors that things can go south in a hurry. As a result, the more recession-resistant dividend payers have a renewed appeal that was lost in the go-go days of the bull market. In addition, rising interest rates are typically a headwind for dividend stocks. But that will no longer be an issue.
Sure, in the initial bounce back the stocks that got hit the hardest tend to rebound the strongest. But the next stages of this market should be ideal for dividend payers. The relative return of dividend stocks in the upcoming quarters and years could be the best in a long time.
High Yield Tier
BUY – Community Health Trust (CHCT 33 – yield 4.9%) – This REIT, operating portfolio of properties providing outpatient health services in non-urban areas throughout the U.S., has been a resilient performer. It has outperformed the S&P 500 and the REIT index over the past five years, two years, one year, six months and three months. Although the stock is at the 52-week high, it’s still worth buying here because it offers stronger growth than most REITs and has been strong in down markets.
HOLD – General Motors (GM 39 – 3.9%) – As I’ve mentioned in recent updates, I like the internals of GM a lot. It’s cranking out great cars, growing profit margins and paying a nice dividend that should be safe. But the external environment is not great for autos, with the slowing global economy and China trade frictions. It’s had a great rebound so far, up about 20% from the December lows. It’s still well off the 52-week highs and it might have more room to run. GM announces earnings tomorrow, but with the positive preannouncement it is unlikely to be a big news event.
BUY – STAG Industrial (STAG 28 – 5.2%) – This industrial REIT has outperformed the same way CHCT has. While REIT performance sputtered in December they were up an impressive 11.42% in January, meaning REITs are officially back in favor. And this owner of industrial properties consistently outperforms other REITs. STAG announces earnings next week and there is no reason to believe they won’t be good.
Dividend Growth Tier
BUY – AbbVie (ABBV 80 – 5.4%) – This biopharmaceutical giant had been taking it on the chin. It’s down about 35% from the 52-week high because investors are nervous about competition for their top-selling drug Humira. But 75% of Humira’s sales come from the U.S., where it won’t face competition until 2023. Meanwhile, AbbVie’s other drugs are showing evidence of being able to more than compensate for slippage in foreign sales. Longer term, the drug maker has one of the very best pipelines in the business and it’s riding the tailwind of the aging population megatrend. It’s selling at just a little over 9x forward earnings with a 5.4% yield. ABBV might not take off in the next several months but it should be a long-term winner, and is selling at a bargain price with a great yield.
BUY – Altria (MO 49 – 6.5%) – In less than two weeks shares of this cigarette maker has rallied about 14%. Earnings were solid and newly acquire E-cigarette maker JUUL showed incredible growth in 2018. Investors got way too down on the stock and started pricing in a calamity that just isn’t happening. Sure, cigarette volumes are down but Altria has taken some smart steps to address it. Sure, the regulators have been aggressive. But that’s nothing new to Altria. The stock has been one of the best-performing income stocks on the market historically because the company has proven its ability to overcome these types of industry obstacles, over and over again. Meanwhile, it still sells at a fantastic price (with a P/E of 13) and boasts a huge dividend that will likely continue to grow.
HOLD – American Express (AXP 104 – yield 1.5%) – What a difference a few weeks makes. The stock plunged from over 112 per share at the end of November to under 90 on Christmas Eve. It has come roaring back with the market—not surprising given its standing as a cyclical stock. Nothing of note happened with American Express itself. Rather, as we talked about earlier, investors decided in December that we were heading into a recession this year—then they changed their minds. Now the economy is strong and a recession is a long way off. AXP has just been riding with the market. It looks like it has room to run.
Rating change: “HOLD” to “SELL HALF”
SELL HALF – CME Group (CME 179 – yield 1.5%) – CME Group operates exchanges that trade derivatives. CME thrives on volatility, and with volatility tumbling—the VIX index shows that market volatility (as measured by options activity) has fallen to the lowest level since early October, when the selloff began—CME stock has pulled back, down $10 in the last couple weeks. I will sell half of the position on the basis of waning volatility and hold the other half ahead of the promising fourth-quarter earnings announcement next week.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.5%)
These short-term funds should hold strong no matter what happens out there. The funds not only provide a good safe place to diversify away from stocks, but they can provide a great source of funds to get in on the cheap after the next bear market.
HOLD – Consolidated Edison (ED 78 – yield 3.8%) – This is a safe and solid utility with a decent yield that should hold steady for quite some time. True, the stock has underperformed its peers but utilities have been very strong lately and ED has been trending higher, albeit slowly. It’s still worth holding for now.
HOLD – Ecolab (ECL 159 – yield 1.2%) – Safe stocks are back in vogue again, and ECL is one of them. The cleaning and sanitizing service company had another good week after a terrific January. If ECL wasn’t so close to the 52-week high I would be tempted to rate it a BUY. But based on price and a long run of outperformance I’ll keep it at a hold for now.
HOLD – Hormel Foods (HRL 42 – yield 2.0%) – This is a really good food company with a no-fuss stock. HRL actually has a negative beta, which means it is nowhere near as volatile as the overall market. Yet the stock has significantly outperformed the market over the past one-, five- and 10-year periods. Thus, it’s safer than the market and performs much better—a good combination! Looking ahead, analysts are forecasting 10.5% average earnings per share growth over the next five years, though the stock seems to have run out of steam recently. But it’s still worth holding.
HOLD – Invesco Preferred ETF (PGX 14 – yield 6.1%) – This is a great place to diversify away from stocks and bonds and get a high yield in a portfolio of preferred stocks. Performance of the fund faltered a little bit this past fall, along with the rest of the asset class. But it has been doing very nicely since the market lows. A market downturn could change things, but for now it looks good.
HOLD – McCormick & Co (MKC 125 - yield 1.8%) – After a fantastic 2018 when the overall market had negative returns, the stock got hammered in late January when it announced earnings that missed expectations ever so slightly. Investors probably realized that MKC is not going to be up another 30%-plus this year. But the stock has stabilized and been trending higher after that bad week and is still a solid defense play that is reasonably valued.
BUY – NextEra Energy (NEE 178 – yield 2.5%) – This is a utility that combines the steady cash flow of regulated Florida Power and Light with the growth of alternative energy big shot NextEra Energy Resources. And it has consistently outperformed the market and the Utility index. However, it underperformed its utility peers in what was a phenomenal January for the asset class, up over 11%. I guess it had it coming. But NEE is coming off a strong week, which is enough to keep it at buy. With NEE you get defense and yield with a level of growth you seldom see in a large utility.
BUY – UnitedHealth Group (UNH 266 – yield 1.3%) – Other health insurance providers including Centene (CNC) and WellCare Health Plans (WCG) just announced earnings that topped estimates. UNH did the same in mid-January. Thus, the sector is enjoying tailwinds and Goldman Sachs expects the health insurance group to have a solid 2019. UNH is also looking technically strong, and should continue to perform well.
HOLD – Xcel Energy (XEL 52 – yield 2.9%) – XEL has a solid 6% EPS growth rate, which is good for a utility. The only problem is that it isn’t a great bargain at the current share price. That’s why it’s rated a HOLD. But the stock has plenty of momentum.
