Beyond the Headlines It’s a Perfect Dividend Market
There’s an old adage on Wall Street that helps explain the market’s tendency to overact in the short term. It essentially says that when the market is booming things really aren’t that good and when it’s falling things really aren’t that bad. The adage is especially prevalent lately.
The market was crashing late last year and fell 20% from the September highs on fears of a recession that wasn’t coming. But things really weren’t that bad. It was an overreaction. Since then the market has moved over 18% higher in a little over two months. It’s up 12.5% so far in 2019. If the current pace continues, the market will be up 65% to 70% in 2019. But it won’t be because things really aren’t that good.
It’s easy to get swept up in the here and now. Investors do it all the time. But the current market action isn’t telling the true story, just like the market at the end of last year didn’t tell the true story. To get a more accurate read on where we really are we need to pull back and look at the bigger picture.
The S&P 500 has delivered an average annual return of 10% over the past five years. The return has been about 5% over the past year. That gives us a much better picture of where we are. The market has been good but returns are fading. That’s because we are in the later stages of the economic cycle and the economy is probably slowing down. Things are still good but in more modest terms.
When you average out the crazy swings, the market reveals its true self. This slower slog higher is the natural habitat for dividend stocks. Dividend stocks generally have more defensive businesses that aren’t affected as much by slower economic growth. And in times when rates of appreciation become less inspired, dividends crank up the returns.
Forget the nutty headlines. We’re in an environment that is ideal for dividend stocks. And the relative performance of these stocks going forward will likely be the best in many years. Enjoy this newsletter, because you’re in the right place at the right time.
High Yield Tier
HOLD – Community Health Trust (CHCT $33 – yield 4.9%) – The healthcare REIT had a bad week. The company announced an earnings per share loss for the fourth quarter due to a temporary impairment charge. It’s a one-off that will not affect the performance going forward and CHCT will likely to recoup most of the losses. But the market didn’t like it and the stock plunged 10% for the week. I was afraid of something like this when I lowered the rating to a HOLD. The stock has risen too far and too fast for a conservative REIT and any bad news will be treated harshly. That said, it doesn’t affect my positive opinion on the stock. And even after the bad week, CHCT has returned 43% over the past year and 16% year-to-date.
BUY - Enterprise Product Partners (EPD $28 – 6.3%) – There isn’t any news since I highlighted EPD in last week’s monthly issue, This is a phenomenal American energy company that continues to ring the register whether energy stocks are in favor or not. The yield is fantastic and quite safe.
HOLD – General Motors (GM $39 – 3.9%) – As I’ve often said, this is a good car company now. But, does anyone care? There have been five straight years of auto sales over 17 million and GM stock has done nothing in those five years. The stock sells at less than six times earnings (compared to near 20 times for the overall market) with a near 4% dividend yield. But I think GM will have to prove resilience in the next recession to get any respect from investors. For now, it might go a few dollars higher so I’ll hold the remaining third of the position.
HOLD – STAG Industrial (STAG $28 – 5.1%) – STAG is a great REIT. It leases to single tenants in the industrial and light manufacturing space, like warehouses and discount centers. There are than many players in this market and Stag does it very well, consistently outperforming its peers. The stock has been a spectacular performer. I like everything about STAG except the price. For now it’s a hold, but if it can form a base here I’ll likely upgrade it to a buy.
Dividend Growth Tier
BUY – AbbVie (ABBV $79 – yield 5.4%) – This is a “show me” stock right now. It has more than enough fire power in recently launched drugs to offset increasing overseas competition for Humira, its top selling drug. But until the company starts showing absolute proof of that, investors probably won’t be snapping up the stock. That’s okay. It shouldn’t take too long and, in the meantime, you collect a 5.3% yield. This should be a winner over the longer term.
BUY – Altria (MO $53 - 6.1%) – I’d say things are looking up for this battered blue chip stock. It’s up 25% in the last 40 days. Granted, that’s from a grossly oversold level but it’s a convincing move from the lows, especially in lieu of the good news recently. There has been very encouraging news from its latest acquisitions in marijuana company Cronos (CRON) and E-cigarette maker JUUL. Time will tell for sure but early indications look very good that these acquisitions will provide more than enough growth to compensate for lower cigarette volumes. In meantime, the stock goes ex-dividend again in a couple weeks.
HOLD – American Express (AXP $109 – yield 1.3%) – It seems like as long as things are okay in the market this stock will continue to trend higher every week. The stock might be destined to gravitate right back to the 52-week high of $114. Operationally everything has been solid. The stock has everything going for it right now except the global economy. If the global economy slows further it might start affecting AXP and that is the only reason it isn’t a buy right now.
HOLD – CME Group (CME $176 – yield 1.6%) – The company operates exchanges that trade derivatives and volatile markets are great for business. Fourth-quarter revenues were up 37% and earnings soared 58% from the year-ago quarter. These exchanges are a great niche business and the company will continue to make money even as volatility wanes. Its former success and relatively high price is the only thing that prevents me from rating this stock a buy.
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 2.4%)
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 great but it’s something. 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 $83 – yield 3.4%) – This is a safe and solid utility with a decent yield that should be rock solid. Performance has lagged that of the index over the past year but the stock has had a bit of a breakout of late. It’s up 8% in the past month, compared to just a 2% return for the overall market. The utility announced better than expected earnings last week that has helped the momentum. But I think the biggest catalyst for this slow growth dividend stalwart is the Fed’s decision to stop raising interest rates in the near term. We’ll see how far the current momentum takes the stock but for now it looks good.
HOLD – Ecolab (ECL $171 – yield 1.1%) – Apparently the current uncertain market environment has transformed this sleepy chemical and sanitation company into the energizer bunny. After delivering stellar market beating performance over the past few years it just rolls on. It’s up 16% so far in 2019 and 33% for the past year. It’s right near its 52-week high but there is nothing in its technical trend that suggests it will stop there. The stock just continues to deliver winning results and until that changes just enjoy the ride.
HOLD – Hormel Foods (HRL $43 – yield 1.9%) – Since the earnings beat a couple of weeks ago this stock has held steady. That’s not a bad thing considering this defensive food company is up 16% so far in 2019 and 33% for the past year. It’s a little pricey near the 52-week high but that bothers me less and less because I think we’re in safe stock heaven. The market loves these defensive dividend players right now and there is little to do but enjoy the bounty.
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. After some rough performance last year the market has seemingly decided that it likes this asset class again. Price action has been great and the yield is fantastic. There’s no reason to do anything with this fund except enjoy the safety and diversification and collect the dividends.
HOLD – McCormick & Co (MKC $136 - yield 1.7%) – The action in the stock of this spice company has been different than that of the other stocks in this portfolio. After a blowout 2018 where the stock returned 39% the market Gods got even with it after a slightly below consensus earnings report in January. But since then the stock has done nothing but relentlessly push higher every week. It’s up over 11% in the past six weeks. Momentum is great and the stock is cheaper on a relative basis than most of the others in this portfolio.
BUY – NextEra Energy (NEE $188 – yield 2.4%) – It seems like every week I brag about what a great utility this is. I’m starting to get annoyed with myself. This is a best in class stock in the utility arena. It provides both steady income and a lot more growth than the average utility. It’s a dividend investor’s dream. Over the past three years it’s delivered an average annual return of 20% and grown the payout by an average of 13%. It shows every sign of blowing right past the 52-week high. The stock isn’t that pricey either as it’s selling at a price/earnings valuation below that of its five year average.
BUY – UnitedHealth Group (UNH $241 – yield 1.5%) – This stock has had a bad month. It’s down 13%. The reason is a White House proposal to lower drug prices which could adversely affect the fees UNH collects. The company forecasts a strong 13% earnings per share growth rate for 2019 that likely would not be greatly impacted even if the current proposal became law. But this is United’s Achilles heel. It’s vulnerable to adverse government legislation. I believe the recent action in the stock is both an overreaction to the threat posed by the current legislation and an overestimation of this government’s ability to come together and do anything. I believe there is little risk of adverse legislation until 2021 at the earliest and the recent selloff represents an opportunity to get into a great stock.
HOLD – Xcel Energy (XEL $55 – yield 2.6%) – We are right up to the 52-week high here. Several of the other portfolio positions have experienced resistance at this level. We’ll see how XEL reacts in the next week or so. But the momentum has been great and there’s no reason to get off the train now. This is a good strong utility with stability and strong growth.
