After a quiet August, the major indexes pushed out to new highs to start this week. A major catalyst was the lukewarm August jobs report released Friday. Approximately 151,000 jobs were created last month, a decent number but short of economists’ expectation of 175,000. The mediocre data reduced the odds of a September rate hike from 35% to 20%, a plus for stock markets.
Oil prices and energy stocks have also strengthened, so I’m putting Pembina Pipeline (PBA) back on Buy today. However, I’m moving Costco (COST) back to Hold after the warehouse retailer’s latest sales results caused the stock to pull back once more.
HIGH YIELD TIER
HOLD – General Motors (GM 32 – yield 4.7%) – GM has held up well after reporting an August sales decline on Thursday; the news was pretty well baked into the stock after a spokesman warned investors a few days earlier. GM sold 5.2% fewer cars than last August, compared to a 4.2% decline for the industry overall. But management blamed the lower volumes on tight inventories, not lower demand. GM’s market share still increased this month, and average transaction prices rose year-over-year as the company offers fewer and smaller discounts. GM is trading ex-dividend today. Hold.
Next ex-div date: September 7, 2016
BUY – Mattel (MAT 33 – yield 4.6%) – Mattel has announced plans to begin selling American Girl doll products at Toys R Us stores, the first time the brand will be sold through a second party retailer. The brand’s “WellieWishers” dolls for younger girls are already on shelves, while American Girl’s contemporary line, called “Truly Me” dolls, will soon be offered in branded shop-in-shops at 97 Toys R Us stores. However, the stock pulled back yesterday with the rest of the consumer discretionary sector, likely spooked by the mediocre jobs report. Mid-turnaround Mattel has high potential and a high dividend, and remains a Buy for risk-tolerant investors.
Next ex-div date: November 21, 2016 est.
BUY – Pattern Energy (PEGI 25 – yield 6.5%) – Pattern Energy was added to our portfolio at last Thursday’s average price of 23.76. Pattern is a yieldco, a company structure that resembles a REIT but owns renewable energy assets. PEGI’s distributions (which are classified as return of capital) are funded by long-term energy purchase agreements with creditworthy customers including Amazon Web Services and Wal-Mart. However, management’s current challenge is to find a way to create sustainable growth going forward. Yieldcos’ limited track record raises risk here, but PEGI is a solid Buy here for yield-oriented short- and medium-term investors.
Next ex-div date: September 28, 2016
BUY – Pembina Pipeline (PBA 31 – yield 4.7%) – PBA got a nice boost thanks to a surge in the price of oil this week. Saudi Arabia and Russia have reportedly agreed to “work together” to stabilize the price of oil, news that was warmly welcomed by energy traders. Pembina, a Canadian pipeline company, has minimal exposure to oil prices, but can still move in sync with other energy stocks. PBA remains a higher risk investment, but the stock is looking healthier, so I’m putting it back on Buy today for investors whose priority is high current yield. Note that the dividend is declared in Canadian dollars, so exchange rate fluctuations can cause changes in the dividend payout.
Next ex-div date: September 21, 2016 est.
DIVIDEND GROWTH TIER
BUY – AbbVie (ABBV 65 – yield 3.5%) – After a nine-day pullback triggered by the EpiPen controversy, ABBV found support just below its 50-day moving average last week and has closed higher on each of the last two days. Unloved ABBV remains a solid buy for opportunistic investors with medium risk tolerance.
Next ex-div date: October 13, 2016 est.
BUY – Amgen (AMGN 171 – yield 2.3%) – AMGN’s pullback was shallower than ABBV’s, and the stock found support more quickly, signaling a lack of selling pressure and even less worry about pricing pressure from the government. Like AbbVie, AMGN represents a compelling opportunity after a year-plus of underperformance, and is a Buy for dividend growth investors with medium risk tolerance.
Next ex-div date: November 10, 2016 est.
HOLD – Costco (COST 158 – yield 1.1%) – Costco pulled back sharply this week after the warehouse retailer’s August sales disappointed analysts. Sales rose 2% year over year, but comp sales were flat. Excluding the effect of changes in gas prices and foreign exchange, comp sales rose 2%, but still fell short of analysts’ 3.4% growth target. I’ll put COST back on Hold until the stock finds support.
Next ex-div date: November 9, 2016 est.
HOLD – CVS Health (CVS 93 – yield 1.8%) – CVS pulled back sharply last week after Mylan dragged the pharmacy benefit manager into the EpiPen controversy. The stock seems to have found support around 92 for now—the same level where pullbacks ended in June and July—so I’ll keep CVS on Hold for now.
Next ex-div date: October 20, 2016 est.
HOLD – Equifax (EFX 135 – yield 1.0%) – We took half our position in EFX off the table at last Wednesday’s average price of 131.72, booking a 40% profit. We’ll hold the rest of the position for long-term gains; analysts expect the credit reporting agency to grow EPS by 19.6% this year and 10.8% next year.
Next ex-div date: November 21, 2016 est.
HOLD – Reynolds American (RAI 51 – yield 3.6%) – Defensive stocks like RAI received a boost from Friday’s mediocre jobs report and its implications for Fed policy. We’ll continue holding our half position. Reynolds trades ex-dividend tomorrow.
Next ex-div date: September 8, 2016
HOLD – U.S. Bancorp (USB 44 – yield 2.3%) – Financials rallied strongly last month as the odds of a September rate hike increased, setting them up for a big tumble as expectations came back to earth. However, USB and most of the other bank stocks have so far managed to hold those gains, even after Friday’s jobs report cut rate hike expectations by almost half. That’s a solid sign of strength from a long-neglected sector. We’ll Hold.
Next ex-div date: September 28, 2016 est.
HOLD – Wynn Resorts (WYNN 93 – yield 2.2%) – WYNN got a nice boost this week on solid gaming numbers from Macau and Las Vegas, though the stock remains well off its early-August highs. Macau’s gambling revenue rose 1.1% in August, the Chinese territory announced on Thursday, the first year-over-year increase since May 2014. In addition, Las Vegas strip casinos on Wednesday reported a second consecutive month of strong revenue gains. However, WYNN remains depressed because the new Wynn Palace won’t have as many gaming tables as originally planned, part of the Macau gaming bureau’s efforts to limit the growth of gambling there. The regulator wants non-gaming revenue to contribute 9% the casino industry’s income, up from 6.6% in 2014, and is limiting the number of tables approved at new resorts as part of that effort. WYNN is a Hold for risk-tolerant investors.
Next ex-div date: November 9, 2016 est.
SAFE INCOME TIER
HOLD – Consolidated Edison (ED 76 – yield 3.5%) – No news.
Next ex-div date: November 7, 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 4.4%)
BUY – Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
These four funds make up our bond ladder, a conservative strategy for owning fixed income that’s particularly good at preserving capital when interest rates are rising. Each ETF will mature at the end of the year in the fund’s name, and Guggenheim will distribute the net asset value (NAV) of the fund to shareholders at that point—just like getting your principal back when a bond matures. When our 2016 fund matures at the end of this year, we’ll reinvest the proceeds in a 2020 fund (specifically, the BulletShares 2020 High Yield Corporate Bond ETF, BSJK) to keep the bond ladder intact. Guggenheim offers two series of BulletShares funds for each year—one that holds investment grade corporate debt and one that holds high yield (or “junk”) debt. The high yield ETFs obviously yield more, but come with a higher risk that some of the securities in the ETF will default, causing the fund to lose value (they also have higher expense ratios of 0.44%, compared to 0.25% for the investment grade funds). We’ve alternated the high yield and investment grade funds in our ladder, to create a nice mix of safety and yield, but if you have a lower or higher risk tolerance, feel free to adjust your own bond ladder accordingly. Note that the last letter in each of Guggenheim’s ETFs corresponds to the maturity year, so if you’re constructing a four-year ladder starting in 2017, your funds should end in H, I, J and K, whether you’re using high yield or investment grade funds.
Next ex-div dates: all October 3, 2016, est.
BUY – Home Depot (HD 134 – yield 2.1%) – Pending home sales grew 1.4% in July, the National Association of Realtors reported on Wednesday, a solid year-over-year improvement. However, HD’s technical action still looks just okay. I’ll keep the retailer on Buy for now but it’s not the strongest option in our portfolio.
Next ex-div date: December 6, 2016 est.
HOLD – PowerShares Preferred Portfolio (PGX 15 – yield 5.6%) – PGX remains overpriced and on Hold. The preferred stock ETF pays monthly dividends, usually of about seven cents per share, but offers no capital appreciation potential. That’s why it’s best to buy below 15, which can be thought of as the ETF’s net asset value. Hold.
Next ex-div date: September 15, 2016 est.
HOLD – J.M. Smucker (SJM 142 – yield 2.1%) – SJM found support around 140 this week, as hoped. The company is facing a challenging market for dry dog food, one of its growth areas, and could take some time to find its footing again. Hold.
Next ex-div date: November 9, 2016 est.
BUY – UPS (UPS 110 – yield 2.8%) – UPS looks solid, consolidating just above its 50-day moving average. Continued improvement in the U.S. economy should translate to higher prices for the shipper’s stock. Safe income and dividend growth investors can buy here.
Next ex-div date: November 23, 2016 est.
HOLD – Xcel Energy (XEL 42 – yield 3.2%) – No news.
Next ex-div date: September 13, 2016
Closing prices as of September 6, 2016.
