Cabot Dividend Investor Weekly Update

After a one-to-two-week pullback (the S&P 500 and Dow peaked back on June 12, while the Nasdaq high came a week later, on June 20) the broad market has found support for now, moving mostly sideways since our last update. Markets have been closed since 1 p.m. (Eastern time) Tuesday due to the Independence Day holiday.

There’s been more action in the bond market, where treasury yields are gradually declining. The 10-year Treasury yield is back to first quarter levels, and has erased the big leap toward 3% triggered by the suggestion of a fourth rate hike in April. Rate hike expectations haven’t actually changed much over the past month (the odds of the Fed hiking rates in both September and December, as measured by the futures market, have actually increased). Rather, the moderation is yields is largely due to heightened uncertainty in other markets, which is driving investors toward safe haven investments. That’s good news for our utilities, REITs, and preferred ETF, which are all higher this week.

Finally, earlier this week our options expert Jacob Mintz wrote about what we might have to look forward to in the second half of 2018, and I think his comments are worth sharing. Here’s what he had to say:
Now that the second quarter has come to a close, it will be very interesting to see where money rotates in the second half of the year. The Nasdaq and Russell 2000 were the big winners in the first half, with gains of 8.8% and 7.1%. The S&P 500 eked out a gain of 1.7% and the Dow fell by 1.8%.

Of great interest to me will be which sectors see buying interest to start the third quarter. For example, it is possible that technology, which has led, may fall out of favor, and sectors such as Financials and Transports, which have lagged, could be the new leaders.

While it’s also possible that we’ll see more of the same in the second half, Jacob’s suggestion that investors may rotate into less-loved names is worth considering. In our portfolio, we’re already well exposed to financial stocks, as well as conservative holdings like utilities, but I nearly eliminated our exposure to industrials and transports when they fell apart in the first quarter. A big rotation could also mean it’s time to sell some leading stocks we added in the first quarter, like Intel (INTC). For now, I have no rating changes, but read on for updates on all our holdings.

HIGH YIELD TIER

BUY – AllianceBernstein (AB 29 – yield 9.0%) – After hitting new 52-week highs in mid-June, AB pulled back normally and found support around 28 last week. AllianceBernstein is a New York-based asset manager that pays variable but high quarterly distributions based on cash flow (note that they don’t qualify for the lower dividend tax rate, and that you’ll get a K-1 at tax time.) Risk-tolerant investors can use this pullback to Buy for high yield and long-term capital appreciation.

Next ex-div date: August 2, 2018 est.

BUY – Community Health Trust (CHCT 30 – yield 5.4%) – A brief pop in treasury yields Monday contributed to drops in CHCT and other health care REITs, but the stock recovered most of the losses Tuesday. Yields on longer-dated Treasuries remain modest, and CHCT’s strong uptrend remains intact. Risk-tolerant investors looking to add yield to their portfolio can Buy some CHCT on pullbacks. The company owns medical offices and other healthcare real estate in non-urban areas. Distributions are non-qualified.

Next ex-dividend date: August 16, 2018 est.

HOLD – General Motors (GM 39 – yield 3.9%) – Tariff talk continues to push GM around, with the company warning Friday that higher tariffs would lead to job cuts in the U.S. as well as higher prices for consumers. The stock dropped through its 50-day line after the warning. In total, GM has declined 3.5% since last week’s update, bringing the stock’s total drop over the past three weeks to 11.8%. The stock has now closed the gap created by SoftBank’s investment five weeks ago, and could put in a bottom here and begin a new uptrend. This week, the automaker reported that deliveries rose 4.6% in the second quarter, led by strong sales of GMCs and Chevrolets. And this morning it was reported that the U.S. and the E.U. are discussing eliminating all tariffs on cars between the two areas, a definitive positive for GM. All this news-related volatility is no fun, but GM remains a solid, slow-growing business that pays a reliable dividend of nearly 4%, so we’ll continue to Hold.

Next ex-div date: September 6, 2018 est.

BUY – ONEOK (OKE 69 – yield 4.6%) – OKE is consolidating just under its recent 52-week high. The company announced plans to expand several of its natural gas pipelines last Wednesday, and the news was greeted warmly by the stock. Note that although ONEOK owns pipelines, it’s not a master limited partnership (or MLP). The company is organized as a corporation and dividends qualify for the lower dividend tax rate. High yield investors can Buy here.

Next ex-div date: August 3, 2018 est.

BUY – STAG Industrial (STAG 27 – yield 5.2%) – STAG closed at a new year-to-date high Tuesday, and still looks healthy. STAG is an industrial REIT benefitting from reasonable interest rates and high demand for warehouse space. High-yield investors can buy some here, or on a pullback to the 50-day, currently at 26.
Next ex-div date: July 30, 2018 est.

DIVIDEND GROWTH TIER

BUY – American Express (AXP 98 – yield 1.4%) – American Express passed its Federally-mandated “stress test” last week, getting permission to buy back up to $3.4 billion of common shares and increase its dividend by 11%. That’s about in line with AmEx’s five-year average dividend growth rate of 12%. The new annual dividend rate of $1.56 per share will boost AmEx’s yield to about 1.6% (once AmEx’s board declares the first dividend at the higher rate). AXP is trending up nicely above its 200-day moving average, although in the intermediate-term it’s stuck below overhead resistance at 102.50. I’ll keep AXP on Buy for steady dividends and growth. The company will report earnings July 18, after the close.

Next ex-div date: July 5, 2018

HOLD – BB&T Corp (BBT 50 – yield 3.0%) – B&BT also got permission from Federal regulators to raise its dividend last week. The bank will increase its payout to $0.405 per quarter, an 8% boost. (A 13.6% bump was already announced earlier this year, for a total 2018 dividend increase of 23%.) The new annual dividend rate of $1.62 will boost BBT’s yield to 3.2% at current prices. BB&T also got approval to buy back up to $1.7 billion of stock, some of which will be used in the Regions Insurance Group acquisition. Unfortunately none of this good news has been enough to get BBT back into investors’ good graces, and the stock is now below its 200-day moving average, and trending down. The break through the 200-day is concerning, but I’ll give BBT a little longer to find support, which it did around this level in the first quarter. The company will also report second-quarter results July 19, before the open.

Next ex-div date: August 8, 2018 est.

BUY – Broadridge Financial Solutions (BR 116 – yield 1.3%) – BR continues to behave well. The stock bounced off its 50-day line nicely last week and is now moving up again. Broadridge, an investor communications firm, is a steady grower that has increased its dividend every year for 10 years. BR is a good Buy for dividend growth right here.

Next ex-div date: September 14, 2018 est.

HOLD – CME Group (CME 161 – yield 1.7%) – Average daily volume on CME’s exchanges rose 8% in June, the financial exchange operator reported Tuesday. For the second quarter, volume was up 12%. CME is pulling back toward its 50-day moving average, and closed below it Tuesday. But the stock is still not far off its all-time high hit in early June. CME will report second-quarter earnings before the open July 26. Hold.

Next ex-div date: September 7, 2018 est.

HOLD – Intel (INTC 49 – yield 2.4%) – I sold half our INTC shares at last Wednesday’s average price of 49.41, for a small 3% loss. I’ll hold the rest of our shares to see if INTC can recover from this turmoil or if the stock’s uptrend is definitively broken (in which case I’d sell). Intel’s CEO unexpectedly resigned two weeks ago, and analysts are worried the leadership vacuum will provide an opening for AMD and other competitors to further encroach on the chipmaker’s territory. Intel’s long-term uptrend is not yet definitively broken, but it’s worth noting that sellers were showing up even before the CEO news, and we had seen analyst downgrades, rising worries about competition, and the start of a downturn in the semiconductor index. Intel will report earnings July 26, after the close.

Next ex-div date: August 3, 2018 est.

BUY – Occidental Petroleum (OXY 84 – yield 3.7%) – OXY was added to the Dividend Growth Tier at the stock’s average price of 83.89 last Thursday. Occidental is one of the largest “independent” oil and gas companies, with production operations in Texas, New Mexico, Oman, Qatar, the UAE and Colombia. The company also has a chemical subsidiary that makes PVC and other petrochemicals, and a hydrocarbon marketing and transporting arm. OXY has paid dividends consistently since 1982, and has increased the dividend by an average of 13% per year every year since 2003. In early May OXY reported first quarter revenues and EPS that beat estimates by solid margins and announced the restart of their buyback program, helping the stock to break out past multi-year resistance at 78. The advance brought OXY to its highest level since 2015, where it has spent the last few weeks consolidating. OXY is now trading just above its 50-day moving average, presenting a good buying opportunity for investors who want to participate in the stock’s next advance. Analysts have been raising their revenue and earnings estimates for OXY aggressively since the first quarter earnings report which should fuel additional gains in the second half of the year. Dividend Growth investors can Buy OXY here.

Next ex-div date: September 7, 2018 est.

SAFE INCOME TIER

I sold BSJI, the “rung” in our bond ladder maturing at the end of this year, at last Wednesday’s average price of 25.09. Our total return was about 11%, primarily from dividends. I replaced it with the BulletShares 2022 High Yield Bond ETF (BSJM) at last Wednesday’s average price of 24.54. If you’re using a bond ladder to generate income in the conservative portion of your portfolio, you can do the same, or you can hang on to BSJI until it matures at the end of the year and replace it then. However, the price of the 2018 fund is unlikely to move much over the next six months, and its yield is gradually declining as its holdings mature (and Invesco reinvests the proceeds in Treasuries). Whenever you choose to make the switch, maintain your bond ladder by adding a new longest-dated rung at the end. I’m using BSJM, Invesco’s high-yield bond ETF maturing in 2022, but you could also use BSCM, the investment-grade version (which has a lower yield but is safer and less volatile.) If you’re not familiar with how a bond ladder works, you can read an explanation at cabotwealth.com/tag/bond-ladder/.

Next ex-div dates: est. August 1, 2018 est.

HOLD – Consolidated Edison (ED 78 – yield 3.6%) – ED is on an uninterrupted four-week streak of higher closes, powered by calm interest rate expectations and anxiety in the stock market. The move has brought the stock back above its 50-day line and, more importantly, into its previous six-month trading range. ED is a solid long-term Hold for safe income.

Next ex-div date: August 13, 2018 est.

HOLD – Ecolab (ECL 140 – yield 1.2%) – ECL has developed some unusual volatility since the start of the year, but the Dividend Aristocrat is still a solid holding for long-term income investors. A long-term chart of the stock shows a clear, steady uptrend, notwithstanding the gyrations of the last two quarters. The company makes chemicals and cleaning products widely used in the industrial, healthcare and hospitality industries, among others. Its high percentage of recurring revenues means cash flows are very predictable; the company has increased its dividend every year since 1987. If the market’s primary trend turns more bullish I’ll put ECL back on buy for long-term investors. Ecolab will report second-quarter earnings July 31, before the open.

Next ex-div date: September 14, 2018 est.

BUY – Invesco Preferred ETF (PGX 15 – yield 5.7%) – PGX is an ETF that holds preferred shares and pays monthly distributions. The fund has low volatility but no capital appreciation potential; it generally trades between 14 and 16, depending on the direction of interest rates. Buy under 15 for a good store of value and regular income.

Next ex-div date: July 13, 2018 est.

BUY – McGrath RentCorp (MGRC 64 – yield 2.1%) – MGRC has pulled back neatly to its 50-day line, providing a good buying opportunity for Safe Income investors interested in the stock. MGRC hit a new 52-week high two weeks ago, and is in a strong uptrend. McGrath rents modular offices, classrooms, and more, and has a 25-year history of dividend growth. It’s also blissfully under the radar and unaffected by today’s big news stories. On Tuesday, McGrath was chosen by Tim Lutts for his Cabot Stock of the Week portfolio, which features the cream of crop of all the Cabot advisors’ recommendations.

Next ex-dividend date: July 16, 2018

BUY – UnitedHealth Group (UNH 247 – yield 1.5%) – UNH spent the last three weeks pulling back to its 50-day line, and now looks to have found support there. UNH hit a new 52-week high two weeks ago and is in a healthy uptrend with good support from its 50-day. The stock can be bought here for steady dividends and growth. UnitedHealth will report second-quarter results before the open July 17.

Next ex-div date: September 6, 2018 est.

HOLD – Xcel Energy (XEL 46 – yield 3.1%) – XEL has advanced nearly 9% over the past three weeks, thanks to the surge in utilities and other safe havens mentioned above. The stock is now just under its 200-day moving average, and could close above it as soon as today. It would be the first time XEL had closed above the line since January 2.

Next ex-div date: September 11, 2018 est.

Closing prices as of July 3, 2018