Cabot Dividend Investor Weekly Update
We have one portfolio change today: we’re finally putting Costco (COST) back on Buy, after the stock broke out of its trading range to the upside last week. Elsewhere, I encourage you to do a little buying if you’re underinvested, taking advantage of pullbacks to start new positions in stocks that are acting well.
The Dow and S&P have hit new highs since our last update, significantly strengthening the case for the bull market. At the same time, bond prices and gold prices continue to strengthen, throwing the typical relationship between these safe-haven assets and the stock market out the window.
The Wall Street Journal reported this morning that the correlation between high yield bonds and the S&P 500 has averaged 0.67 over the past 30 days, compared to a historical correlation of 0.06. (A 1.0 means two assets are perfectly correlated, while a -1.0 means they move exactly opposite each other.) Likewise, the correlation between the S&P and a basket of commodities has risen from 0.01, indicating a very slight correlation, to 0.58.
While the reasons behind this unusual situation are varied and complex, one thing we know for sure is that it’s good news for dividend stocks. Fixed-income yields are at record lows and continuing to fall, while stocks and stock dividends are both rising—it’s pretty clear which asset class income investors should prefer today.
And in fact, our options expert, Jacob Mintz, has noted significant call writing in a number of blue chip dividend paying stocks recently, including AT&T (T), Verizon (VZ), Johnson & Johnson (JNJ) and General Electric (GE). There could be multiple reasons for this, but one likely contributor is an effort by large income investors to boost their yields in the face of record low interest rates.
We have one portfolio change today: we’re finally putting Costco (COST) back on Buy, after the stock broke out of its trading range to the upside last week. Our position is showing a total return of 49% today, but if you don’t own it yet, feel free to start a new position now. Elsewhere, I encourage you to do a little buying if you’re underinvested, taking advantage of pullbacks to start new positions in stocks that are acting well.
HIGH YIELD TIER
HOLD – General Motors (GM 31 – yield 5.0%) – GM is 9.5% higher since our last update, advancing on each of the past five days. The automaker announced an expansion of its rental program for Lyft drivers, which provides free or cheap GM cars to drivers who give a certain number of Lyft rides per week. More importantly, June sales numbers released yesterday showed the Chinese auto market is growing at the fastest pace in six months, thanks in part to a temporary tax break. GM’s sales in the country, its largest market, rose 11% year-over-year. GM is still trapped in a trading range and faces significant resistance at 32 and 36, so there’s probably no hurry to add to positions, but the stock is a solid long-term Hold.
Next ex-div date: September 8, 2016 est.
BUY – Mattel (MAT 34 – yield 4.5%) – MAT hasn’t had a down day since the post-Brexit rally begin, advancing on each of the last 10 trading days. The stock remains in its multi-month range between 30 and 35, which will provide a strong base for a rally if MAT can break out to the upside. The toymaker will report second-quarter results on July 20, after the close. Analysts are expecting a loss of five cents. MAT is a Buy for risk-tolerant investors.
Next ex-div date: August 15, 2016 est.
BUY – Pembina Pipeline (PBA 31 – yield 4.8%) – Energy stocks haven’t participated in the rally of the last few days, but PBA looks okay, consolidating just above its 50-day moving average. The monthly dividend payer is a Buy for investors whose priority is high yield.
Next ex-div date: July 21, 2016 est.
DIVIDEND GROWTH TIER
BUY – Amgen (AMGN 162 – yield 2.5%) – Biotechs were major beneficiaries of the rally of the last few days, and Amgen has soared back to the top of its multi-month trading range North of 160. In company-specific news, Amgen’s biosimilar version of AbbVie’s Humira was approved by the FDA yesterday. Humira, an arthritis treatment, still has patent protection through at least March 2017, and Amgen is likely to go to court to determine when their competitor can legally be launched. AMGN is a Buy for medium- and long-term investors looking for dividend growth and total return.
Next ex-div date: August 10, 2016, est.
BUY – Costco (COST 166 – yield 1.1%) – COST blasted through the top of its trading range on high volume last Thursday, after the company reported strong June sales growth. Comp sales were flat year-over-year, but rose 3% excluding the impact of gas prices and exchange rate changes. The growth was an improvement from May’s 2% rate and particularly impressive considering that most Costco customers received their new credit cards last month, a transition that came with some hurdles. Year-to-date, Costco’s net sales are 2% higher than in 2015. I’m going to put COST back on Buy today; the stock might face some resistance at 170 but the powerful breakout through 160 is a great sign. Costco is a low yielder but has an excellent history of dividend growth, increasing its dividend every year for 12 years and often surprising investors with large special dividends. COST is a Buy for dividend growth investors; consider nibbling here and adding to your position if COST pulls back to around 162.
Next ex-div date: August 10, 2016, est.
HOLD – CVS Health (CVS 97 – yield 1.8%)
– CVS will report second-quarter earnings August 2. Analysts are expecting EPS of $1.30 and revenue of $44.3 billion, up 6.6% and 19.2%, respectively. CVS is a high quality company with a strong history of dividend growth, but the stock is lacking momentum. CVS is a Hold.
Next ex-div date: July 19, 2016
BUY – Equifax (EFX 135 – yield 1.0%)
– EFX is at new highs after advancing for 10 consecutive trading days. If you own it, hang on for more gains and dividend growth, if you don’t, I recommend you wait for a small pullback before starting a position. The stock’s 50-day moving average is down at 124. Equifax will release second-quarter results after the close on July 27 and hold a conference call the next morning. Analysts are expecting the credit reporting agency’s EPS to rise 18.3%, to $1.36, on revenue growth of 18.4%, to $802.8 million.
Next ex-div date: August 19, 2016 est.
BUY – Reynolds American (RAI 52 – yield 3.2%)
– RAI has pulled back a bit in recent days, as investors have become more aggressive. Risk-averse investors piling into conservative, recession-resistant tobacco stocks drove RAI to all time highs this year, but tobacco stocks become less attractive during bull markets. But RAI remains healthy, and its high dividend is likely to put a floor under the stock, especially with income investors desperate for yield today. Reynolds will report second-quarter earnings before the open on July 26. Analysts are expecting the tobacco company to report EPS of $0.61, up 19.6%, and revenue of $3.62 billion, up 35.5%. I’ll keep RAI on Buy, though if you have a large profit, like we do, you may want to take some off the table here.
Next ex-div date: September 6, 2016 est.
HOLD – U.S. Bancorp (USB 41 – yield 2.5%)
– U.S. Bancorp will report second-quarter earnings on Friday before the market opens. Analysts are expecting EPS to be about flat, at $0.08, while revenue is expected to grow 3.9%, to $5.2 billion. USB remains challenged by low interest rates and the uncertainty Brexit has created in the financial sector. The stock’s lack of momentum makes it a good candidate for covered call writing; the September 44 calls can currently be sold for around $0.50. If the stock remains below 44 for the next two months (and you don’t have to sell the stock), you will collect an additional yield of about 1.2% in two months.
Next ex-div date: September 28, 2016 est.
HOLD – Wynn Resorts (WYNN 96 – yield 2.1%)
– After sitting out the first part of the post-Brexit rally, WYNN finally pushed above its 50-day moving average with a big move on Monday. Early July numbers from Macau suggest the recovery there is accelerating, and that gaming revenues could actually rise year-over-year this month. WYNN is volatile and cyclical, but the stock’s dividend can rise rapidly when businesses is booming, thanks to the company’s semi-variable dividend policy. WYNN is a Hold for risk-tolerant dividend growth investors.
Next ex-div date: August 11, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 79 – yield 3.4%) – Utilities remain the top-performing sector in the S&P year to date, with the Utilities ETF (XLU) up over 19%. That’s likely to change at some point, and investors who still have a large position in ED may want to take some profits here. We already took some profits last year, so we’ll just continue to Hold.
Next ex-div date: August 8, 2016 est.
HOLD – Guggenheim BulletShares 2016 High Yield Corporate Bond ETF (BSJG 26 – yield 1.8%)
BUY – Guggenheim BulletShares 2017 Corporate Bond ETF (BSCH 23 – yield 1.3%)
BUY – Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.5%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
Our bond ladder is the most conservative part of our portfolio, generating regular monthly income with minimal exposure to the bond market, thanks to these four ETF’s defined maturities. If you’re starting your own bond ladder, begin with the 2017 fund as your nearest-dated holding and add a 2020 fund if you like. Guggenheim’s offers a high yield and an investment grade fund for each year.
Next ex-div dates: all August 1, 2016, est.
HOLD – Home Depot (HD 134 – yield 2.1%) – HD staged a nice recovery over the past two weeks, returning the stock to the top of its trading range. The home improvement chain will report second-quarter earnings on August 16. Analysts are expecting EPS of $1.97 on revenue of $26.47 billion, up 15.2% and 6.6%, respectively. We’ll keep the stock on Hold with a potential for an upgrade next week; a decisive breakout through resistance around 137 would be very bullish.
Next ex-div date: September 6, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – No news.
Next ex-div date: July 15, 2016 est.
BUY – J.M. Smucker (SJM 152 – yield 1.8%) – SJM is at all-time highs, but I think the stock is still a decent buy on pullbacks for long-term investors. The grocery company is diversifying into faster-growing lines like natural pet food and coffee K-cups, while pantry staples like Jif peanut butter and Smucker’s jams remain reliable cash cows. Smucker’s increases its dividend by an average of 10% per year, and the stock typically demonstrates low volatility. SJM is a Buy on pullbacks for all investors. The 50-day moving average is way down at 137, but I think a pullback to about 146 would be a good buying opportunity. The company won’t report earnings until late August.
Next ex-div date: August 10, 2016 est.
BUY – UPS (UPS 110 – yield 2.8%) – The newest addition to our portfolio, UPS hit a new 52-week high this week. The logistics company will report second-quarter results on July 29 before the open. Analysts expect EPS to rise 5.9% to $1.43, on revenue growth of 3.8%, to $14.63 billion. After over a year with no real progress price-wise, UPS is trading at a reasonable valuation and the latest breakout could lead to a sustained rally. UPS has paid dividends since 2000 and increases its dividend by an average of 8% per year.
Next ex-div date: August 24, 2016 est.
HOLD – Xcel Energy (XEL 44 – yield 3.1%) – Investor anxiety is waning, triggering a rotation out of super-safe utilities and into more aggressive stocks. But with interest rates expected to stay historically low for a prolonged period, utilities could remain popular with income investors. We’ll keep XEL on Hold, but feel free to take some profits if you want to reinvest the cash in higher potential, more undervalued investments. Xcel will report second-quarter results on August 3, before the open. Analysts expect EPS of $0.41 on revenue of $2.52 billion, up 5.1% and 0.4% respectively.
Next ex-div date: September 13, 2016 est.
Closing prices as of July 12, 2016.