In an Uncertain Market, Dividends Win
Don’t ever forget about the dividends. Investor attitudes about the market change with the wind. A couple months ago we were spiraling into a recession and bear market. Now, things look good. But the truth is that no one really knows if we are in a raging bull market poised for an epic 2019 or we are still in a bear market that began last September.
We never know where we are until after the fact. But we do know one thing. Dividends will continue to ring the register no matter what. The market often doesn’t go higher and without dividends you get nothing. There’s a reason that dividends have accounted for 44% of market returns over the last hundred years.
Not only have dividends accounted for a huge percentage of returns over time but dividend-paying stocks have vastly outperformed non dividend-paying stocks—and they have done so with significantly less risk. But somehow many investors don’t seem to know that, or they easily forget it.
It’s easy to get swept up in the emotion of the moment. Not long ago investors seemed to only want to hear about emerging technology stocks that could deliver exciting returns. A year ago when I was talking about dividend stocks I felt like the guy who shows up to a rock concert in a suit. But somehow the best performing sectors of the market over the past year were Utilities and Real Estate Investment Trusts (REITs), two of the highest dividend paying sectors.
If the market turns south, dividend stocks will hold up better and pay an income to offset the slide. If the market surges higher, dividend stocks will go up too and pay an income to boot. In a flat market, dividend investors are the only ones who will make money. Dividend stocks won’t help you get rich quick. But these investments deliver a realistic and high percentage chance of making you rich over time.
While the market remains especially uncertain, take heart that you are in the right place with this advisory. Life has a way of distracting us from the truth. A lot of people go to church on Sundays to remind themselves how things really are. Investing is similar. It’s never a bad time to pull back and look at the big picture. There is a good reason why dividend-paying stocks as a whole outperform all other groups over time.
High Yield Tier
HOLD – Community Health Trust (CHCT $35 – yield 4.7%) – CHCT is a smaller REIT that invests in healthcare properties. It’s in a stable business and has higher growth than most of its subsector piers. So far, the formula has been golden. Since its IPO in May of 2015 its return has been double that of the overall market. In the past year it returned 52% compared to 3.8% for the S&P 500 and 35% for Morningstar’s REIT group. REITs are a defensive sector and when a REIT flies like this one has it usually comes back down to earth. So, while it’s near its 52-week high I don’t recommend adding to the position but it’s still worth holding.
HOLD – General Motors (GM $40 – 3.9%) – All anyone seems to want to talk about these days with American car companies is tariffs and trade frictions with China. In the meantime, GM continues to evolve into a great car company. Operational performance has been terrific and the company is aggressively defending against the next economic downturn while investing seriously in the future with self-driving and electric vehicles. It looks like the stock will continue the solid momentum as long as the market is strong.
Ratings change “BUY” to “HOLD”
HOLD – STAG Industrial (STAG $29 – 5.0%) – This industrial REIT announced earnings last week that beat Wall Street consensus expectations, slightly. STAG is up 16% so far this year as it continues to outperform the market. However, after a strong run the stock is just about at its 52-week high and faces some technical resistance in the near term. As well, the near term catalyst to drive it higher has passed. It’s still a strong stock with a solid business plan and balance sheet, but I’m not confident enough to accumulate more shares here until it breaks through the current resistance, HOLD.
Dividend Growth Tier
BUY – AbbVie (ABBV $81 – 5.3%) – After last month’s earnings announcement that showed more overseas competition for Humira than initially anticipated, the stock plunged—but it has since stabilized. The stock doesn’t have great momentum here but it has a fantastic story and a 5.3% yield that pays you to wait. It’s down 30% from the high because of investor nervousness over competition in its blockbuster drug. However, I’ve outlined several times that it should have more than enough sales growth in other existing drugs as well as new drugs from its powerful pipeline to more than offset lower Humira sales. The stock is absurdly cheap right now and should be a strong winner over time.
BUY – Altria (MO $49 - 6.3%) – This stock has stopped sliding as well. In addition to a solid earnings report there has been some good news in the recent investment in marijuana company Cronos (CRON) and the acquisition of e-cigarette company JUUL. Marijuana stocks are on fire as optimism for growth in the industry is hitting a fever pitch. Cronos earlier announced a fourfold increase in year over year sales and the stock is up 105% so far this year. Meanwhile, Wells Fargo (WFC) issued a report that stated JUUL sales should more than compensate Altria for any slippage in tobacco volume. Early indications of Altria’s new growth strategy are very good.
HOLD – American Express (AXP $107 – yield 1.5%) – Everything is going great right now for the credit card giant. It had a great 2018 and the business seems to be firing on all cylinders. Meanwhile, the stock is cheaper than rivals Visa (V) and MasterCard (MA). The only thing I don’t like is the slowing global economy. AXP really took it on the chin when the global economy tanked a few years ago, but the stock may have a little more room to run.
HOLD – CME Group (CME $174 – yield 1.7%) – The company operates exchanges that trade derivatives, and volatile markets are great for business. Fourth quarter earnings were announced last week and, after the volatile quarter, they were great. Revenues were up 37% and earnings soared 58% from last year’s fourth quarter. After the great news the stock fell about $5 for the week. While stock performance should level off in these calmer markets, I still like the stock in volatile and uncertain markets. After the great run I took half off the table and I will continue to hold the rest for now as a down market insurance policy.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ $21 – yield 2.1%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL $21 – yield 2.7%)
It’s nice to have something in the portfolio that isn’t vulnerable to a market downturn. These funds fit the bill. The yield isn’t too high but as long as there are a lot of risks out there and we seem to be in the late stages of the economic cycle these short-term fixed income funds are worth holding.
HOLD – Consolidated Edison (ED $79 – yield 3.8%) – This is a safe and solid utility with a decent yield that should be rock solid. While its performance has been uninspiring there seems to be little downside at this point and a solid 3.8% yield.
HOLD – Ecolab (ECL $167 – yield 1.1%) – The company reported fourth quarter earnings yesterday that were in line with Wall Street estimates and the market liked it as the stock moved 2.3% higher on the day. The stock is ideal for its down market outperformance but it has also performed well in the bull market of this year. While the stock is very near the 52-week high it still has solid momentum.
HOLD – Hormel Foods (HRL $43 – yield 2.0%) – I sound like a broken record with these Safe Income Tier stocks. The performance has been solid in the down market as well as the recent uptrend. The only thing holding me back from raising my rating to a buy is the price, which is not far from the yearly high. I’m a little extra cautious with this one because Hormel announces earnings on Thursday. There’s no reason to believe earnings won’t be solid so I will continue to hold the stock.
HOLD – Invesco Preferred ETF (PGX $14 – yield 5.8%) – 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 had 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. I’ll be watching closely.
HOLD – McCormick & Co (MKC $130 - yield 1.8%) – The stock continues to crawl back nicely after getting hammered after a lower than expected earnings report in late January. After a blowout 2018, returning 39%, the market treated the slight earnings miss very harshly. MKC has not performed as well as the other defensive positions so far this year but it’s cheaper than they are on a relative basis.
BUY – NextEra Energy (NEE $185 – yield 2.4%) – This is a great stock with good momentum that continues to rise. It’s also near the 52-week high. As investors have gained a new appreciation for safe dividend paying stocks they continue to trend higher. But this stock is special. It offers the safe and predictable earnings of a traditional utility along with the stronger growth of an alternative energy company. The valuation is getting a little stretched but I won’t fight the tape for now.
BUY – UnitedHealth Group (UNH $270 – yield 1.3%) – The health insurer was up about 3% over the last week. This is a great stock in an expanding industry that has strong momentum. The main risk is unfriendly government legislation, which is highly unlikely to happen until 2021 at the earliest. The stock is defensive as well.
HOLD – Xcel Energy (XEL $54 – yield 2.8%) – This is a good strong utility with stability and strong growth. Being a leader in alternative energy it will benefit from the topic being increasingly discussed. I honestly find the stock a little too pricey here; I was actually tempted to sell the remaining 2/3 of the position. But it continues to outperform the index as well as the overall market. As long as the outperformance continues it will remain a HOLD.
