It’s an interesting time to be an income investor, to say the least. Interest rates have plummeted post-Brexit, as investors flee to the safety of fixed income just as central bankers are promising more stimulus for shaky markets. The yields on U.S. 10-year and 30-year treasuries are at record lows, while yields on more and more global bonds are going negative.
It all adds up to a very good situation for conservative, income-generating equities. Investors simply can’t get enough of dividend-paying consumer staples stocks like Reynolds American (RAI) and J.M. Smucker (SJM), and utilities like Consolidated Edison (ED) and Xcel Energy (XEL). This is good news for our portfolio, of course, and I’m putting RAI back on Buy today.
Of course, the S&P 500 remains trapped below 2,100, the increasingly legendary resistance level at which rallies have been rebuffed every few months since February 2015. So while the market’s quick rebound from Brexit is a strong bullish sign, the rally faces a strong uphill battle from here. Our market timing guru Mike Cintolo says he’s “optimistic but neutral.”
For dividend investors, that means keeping new buys small, and giving your laggards some—but not too much—leeway. Our weakest names are mostly found in the dividend growth tier: CVS Health (CVS), U.S. Bancorp (USB) and Wynn Resorts (WYNN) are all struggling, as is high yield holding General Motors (GM). We’re holding all four, but feel free to use a stop loss in your own portfolio to limit your risk.
On the other hand, we have some great performers in our portfolio, and I think you can nibble on the following names if you’re underinvested: Mattel (MAT), Pembina Pipeline (PBA), Amgen (AMGN), Equifax (EFX), Reynolds American (RAI), J.M. Smucker (SJM) and our latest buy, UPS (UPS).
Read on for updates on each individual stock.
HIGH YIELD TIER
HOLD – General Motors (GM 28 – yield 5.4%) – GM’s stock continues to struggle after lackluster June sales numbers from the big automakers revived concerns about “peak auto.” Auto sales continue to rise but grew at the slowest pace in 13 months last month. At GM, sales declined 2% in June due to a 22% drop in sales to rental fleets, part of an ongoing plan to boost margins. Retail sales rose 1% year over year. And this morning, GM reported record sales in China last month, up 11% year over year. China is GM’s largest market. With a P/E of 4.2 and a yield of 5.4%, GM is a bargain here, even if the U.S. auto market is cooling off. I’m not going to put the stock back on Buy yet because the market remains choppy, but if you own it, hold tight.
Next ex-div date: September 8, 2016 est.
BUY – Mattel (MAT 32 – yield 4.8%)
– MAT rebounded nicely last week and is back in its pre-Brexit trading range between 30 and 35. The mid-turnaround toymaker is expected to deliver 8.7% EPS growth this year followed by 30.7% growth in 2017—if it’s not acquired by a rival first. MAT is a Buy for risk-tolerant investors.
Next ex-div date: August 15, 2016 est.
BUY – Pembina Pipeline (PBA 31 – yield 4.8%)
– Oil prices pulled back this week, and analysts are increasingly predicting that prices will stay about flat through the end of 2016, thanks to a combination of rising stockpiles and moderate demand growth. PBA is holding up nicely though, benefiting from both the pipeline company’s minimal exposure to oil prices and the scramble for income investments. Monthly dividend payer PBA is a decent Buy here for yield-hungry investors.
Next ex-div date: July 21, 2016 est.
DIVIDEND GROWTH TIER
BUY – Amgen (AMGN 154 – yield 2.6%) – AMGN has rebounded nicely from its post-Brexit pullback and is back above lows from mid-May. The stock remains decidedly range-bound, but we like the company’s reliable cash flow, improving operating margins and reasonable valuation. 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.
HOLD – Costco (COST 155 – yield 1.2%) – COST remains above its 200-day moving average, benefiting from investors’ interest in defensive, reasonably valued income investments. The stock will likely face some resistance around 160, its year-to-date high last tested in late March, but the downside risk looks as low as it has all year. COST is a Hold.
Next ex-div date: August 10, 2016, est.
HOLD – CVS Health (CVS 95 – yield 1.8%) – Sellers and buyers of CVS look evenly matched for now. I still don’t see any red flags in the company’s financials or fundamentals, despite rumblings of increasing competitive pressure from other pharmacy benefit managers. Analysts expect EPS growth of 13% this year and next. CVS is a Hold.
Next ex-div date: July 20, 2016 est.
BUY – Equifax (EFX 129 – yield 1.0%) – As expected, powerhouse EFX’s post-Brexit pullback was brief and the stock hit new highs again on Friday. Due to the stock’s strong performance, EFX’s current yield is low, but dividends can increase quickly. Over the past five years, Equifax’s annual dividend increases have averaged over 15% per year, supported by consistent growth in cash flow. Analysts expect the credit tracking company to report EPS growth of 15.8% this year and 11.5% next year, but earnings have beaten estimates in each of the last four quarters (and acquisitions are always on the table). EFX is a Buy for total return investors.
Next ex-div date: August 19, 2016 est.
BUY – Reynolds American (RAI 54 – yield 3.1%)
– The post-Brexit panic was good news for Reynolds, as investors fled to conservative, countercyclical investments. But the post-panic rally was even better news! After blasting out of its multi-month trading range to the upside on high volume early last week, RAI pushed to new highs to end the week, and remains at all-time highs today. It seems RAI can do no wrong, and I’m putting the tobacco stock back on Buy today. RAI is a Buy for dividend growth and total return investors. You could try and wait for a pullback but after a four-month base-building phase, I think it’s okay to nibble right here.
Next ex-div date: September 6, 2016 est.
HOLD – U.S. Bancorp (USB 39 – yield 2.6%) – The Fed approved U.S. Bank’s 9.8% dividend increase last week, which will boost USB’s annual payout to $1.12 from $1.02. The stock remains in a slump, but we’re holding as long as USB remains within its multi-month trading range and our loss remains within our tolerance.
Next ex-div date: September 28, 2016 est.
HOLD – Wynn Resorts (WYNN 89 – yield 2.2%)
– WYNN didn’t participate in the post-Brexit rally last week, trading sideways around 90 instead. The lack of buyers is disappointing, but the stock is no lower than where it traded for most of May, so it’s well within its trading range. June gambling numbers from Macau were better than expected; gross gaming revenue fell 8.5%, the smallest drop in months and not as bad as the 9.5% decline analysts expected. WYNN remains a Hold for risk-tolerant investors only—the stock can be volatile and Macau’s turnaround is still far from guaranteed.
Next ex-div date: August 11, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 82 – yield 3.3%) – I can’t complain about ConEd, but I do miss the days when utilities weren’t our best performers. Consistent single-digit revenue and dividend growth just aren’t much to get excited about. But predictability and safety are enticing to investors today, and ED is at all-time highs again. Long-term investors should hold on tight.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%)
The yield on Guggenheim’s 2016 funds has begun to drop as we start the second half of the year. Treasuries now make up about half of the 2016 High Yield Fund’s holdings, and that percentage will increase through the end of the year. If you’re starting your bond ladder, begin with the 2017 fund as your nearest-dated holding.
Next ex-div dates: all August 1, 2016, est.
HOLD – Home Depot (HD 129 – yield 2.1%) – The U.S. housing market is strong and two analysts have increased their 2016 earnings estimates for Home Depot in recent weeks, but the stock continues to drift. HD is trading just above its 200-day moving average but lacks momentum to make up its May-June losses. Record low interest rates are boosting mortgage applications and refinancings in the U.S., but we’re not seeing the effect trickle down to HD yet. We’ll keep waiting. Hold.
Next ex-div date: September 6, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.7%) – No news.
Next ex-div date: July 15, 2016 est.
BUY – J.M. Smucker (SJM 152 – yield 1.8%) – Like Reynolds American, conservative SJM remained attractive during both the Brexit panic and the post-panic rally. The grocery company has raised its dividend for 14 consecutive years, and is a free-cash-flow machine, giving it serious conservative and income-generating credentials. J.M. Smucker is Buy for investors who want safe income and total return. Aim for pullbacks.
Next ex-div date: August 10, 2016 est.
BUY – UPS (UPS 108 – yield 2.9%) – UPS was added to our portfolio at Friday’s average price of 107.95. UPS is reaping the benefits of our obsession with online shopping and fast delivery, while simultaneously improving operating margins. The company has paid dividends since 2000 and increases its dividend by an average of 8% per year. After over a year with no real progress price-wise, UPS is trading at a reasonable valuation and is a Buy for all investors.
HOLD – Xcel Energy (XEL 45 – yield 3.0%)
– XEL remains on Hold until utilities fall out of favor again—which could happen tomorrow or next year. Xcel delivers better growth than most utilities, and is investing aggressively in renewable energy, especially wind. But Xcel is still a utility, and there’s no need to chase the stock at these levels. If you own it, hold.
Next ex-div date: September 13, 2016 est.
Closing prices as of July 5, 2016.
