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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor 618

The market rolled over this week, but it’s too early to say if it’s the start of another correction or just some turbulence. Either way, we’re well prepared, with exposure to a broad range of sectors, including some benefiting from the uncertainty.

Cabot Dividend Investor 618

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Proceed With Caution

The stock market stumbled this week, and investors have turned more conservative, creating a number of ripples in the market. We’ve been discussing the divergences between growth stocks, conservative stocks and various sectors here for some time, and last week earnings blowups were added to the mix, while the Dow continued its impressive losing streak. After drifting lower for most of last week, it wasn’t a huge surprise when the major indexes were slammed Monday.

Our portfolio is in better shape than most, since we have exposure to a broad range of assets, including some benefitting from a “flight to safety” effect. Our utilities and REITs are all doing quite well. However, financials, industrials and semiconductors are all struggling, causing pain elsewhere.

[highlight_box]What To Do Now: Overall, it’s reasonable to turn a little more conservative now, given the warning signs the market is flashing.

I’m selling half of our Intel (INTC) position today, after the company’s CEO unexpectedly resigned, causing a 7% pullback in the stock over the past week. Intel had already begun to weaken—I had just put it back on Hold the day before the resignation—so a longer correction is possible. Elsewhere, I’m replacing our 2018 BulletShares fund with a 2022 fund, since its yield will decline for the rest of the year. [/highlight_box]

Featured Buy

Occidental Petroleum (OXY)

This month I’m adding some energy industry exposure to the Dividend Growth tier. Occidental Petroleum (OXY) is a large oil and gas company with a 3.7% yield, a 15-year history of dividend growth, and rapidly rising earnings.

The Company
Occidental is one of the largest “independent” oil and gas companies, but with a market cap of $64 billion, it’s only about a fifth the size of ExxonMobil (XOM). About a quarter of Occidental’s income comes from a chemical subsidiary, OxyChem, which makes PVC, chlorine and other products. Another 10% or so of Occidental’s income comes from marketing and transporting hydrocarbons and other commodities. But Occidental’s largest business, generating about 60% of income, is oil and gas production.

The company is based in Houston, Texas, and about half of its oil and gas comes out of the Permian Basin, in West Texas and New Mexico. Wells in Oman, Qatar and the UAE account for another 45%, and the remainder comes from Colombia. The company also owns about 325,000 acres in the Permian that aren’t currently producing but would become economical to operate at higher oil prices.

Very low oil prices devastated Occidental’s earnings in recent years. After peaking at $8.16 per share in 2011, EPS declined in each of the next five years, finally falling into negative territory in 2016. Earnings started to recover last year, thanks to a 24% jump in revenues. However, EPS for 2017 were still low—only $1.70 per share—so earnings are expected to more than double this year (the current consensus estimate is $4.61 per share, or about 171% higher than last year.) In 2019 earnings are expected to grow at a more moderate single-digit pace, although commodity price sensitivity means estimates are liable to change.

The Dividend
OXY has paid dividends consistently since 1982, and has increased the dividend every year since 2003. Since then, OXY has increased the dividend by an average of 13% per year each year, but the growth rate slowed to about 4% per year as earnings crumbled over the last five years. With earnings now recovering, dividend growth should pick back up soon. Management also plans to resume its buyback program in the second half of 2018.

The earnings rebound has also brought OXY’s payout ratio back down to 68.6%, and it will continue to fall as earnings improve over the second half of the year. Combined with earnings growth expectations, OXY’s dividend history earns the stock strong Dividend Safety and Dividend Growth Ratings of 8.8 and 8.2, respectively.

The Stock
OXY has climbed 36% over the past 12 months, but the journey hasn’t been smooth. Last year, steadily rising oil prices gradually lifted the stock from below 60 to about 78, but the stock topped out in late January and this year’s February correction saw OXY give back a good chunk of those gains.

The stock eventually found a bottom in March, and went on to recover the losses by the end of April. Then in early May OXY reported first quarter earnings that blew analysts away; revenues and EPS both beat estimates by solid margins, and management announced the restart of their buyback program. OXY gapped up to break out past multi-year resistance at 78 for the first time.

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—the consensus EPS estimate has increased by 42% over the past 60 days—which should fuel additional gains in the second half of the year.

I’ll be adding OXY to the Dividend Growth Tier at tomorrow’s average price.

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Occidental Petroleum (OXY)
Price: 83
52-week range: 57.84-87.67
Market cap: $63.31 billion
P/E: 33
Current yield: 3.7%
Annual dividend: $3.08
Most recent dividend: $0.77
Dividend Safety rating: 8.8
Dividend Growth rating: 8.2
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Dividends since: 2015
Consecutive years of increases: 2
Qualified dividends? No
Payment Schedule:
Quarterly
Next ex-dividend date:
September 7, 2018 est.

Portfolio at a Glance

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Portfolio Updates

High Yield Tier

CDIpyramidHigh

The investments in our High Yield tier have been chosen for their high current payouts. These ?investments will often be riskier or have less capital appreciation potential than those in our other ?two tiers, but they’re appropriate for investors who want to generate maximum income from their? portfolios right now.

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BUY – AllianceBernstein (AB 29 – yield 9.0%) – After hitting new 52-week highs in mid-June, AB is pulling back normally. The stock is still about 3% above its 50-day moving average, which provided support last month. 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.

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BUY – Community Health Trust (CHCT 30 – yield 5.4%) – Health care REIT CHCT surged 5% over the past week and closed at a new 52-week high yesterday. The REIT is benefitting from a “flight to safety” effect as investors rotate from stocks to fixed income. Yields on longer-dated Treasuries have declined for two weeks straight, despite still-strong economic data. The yield on the 10-year Treasury is now 2.853%, down from 2.979% two weeks ago (because small moves are important, treasury yields are reported to the thousandth digit). The main reason being cited for the flight to safety is the threat of a trade war, which could slow economic growth and increase demand for safe haven investments like U.S. government bonds. Longer-term, I think REITs have already priced in the rest of this year’s rate hikes, and that 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, primarily in non-urban areas where it’s still cheap (the price of medical office space in large metropolitan areas has skyrocketed as health care REITs have proliferated). Distributions are non-qualified.

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HOLD – General Motors (GM 41 – yield 3.7%) – President Trump is back on the trade warpath, this time threatening (on Twitter of course) to impose a 20% tariff on cars imported from the European Union. The EU promised it would again react proportionately. (Last week the EU responded to Trump’s tariffs on steel and aluminum by raising duties on more than $3 billion of U.S. imports, including corn, cranberries, bourbon and motorcycles.) Separately, the Trump administration is still considering enacting a 25% tariff on all imported cars and auto parts, including those from NAFTA countries. That would significantly raise costs for GM, which imports at least 30% of its cars and their parts from Mexico and Canada. The trade war panic has dragged GM back down to its 200-day moving average, nearly filling in the gap up that followed SoftBank’s big investment in GM’s self-driving car division a few weeks ago. The stock fell below its 200-day Monday, but closed just above it yesterday. The 50-day line is down at 40. Longer-term, the stock is still within its 9-month trading range, so more sideways action—with plenty of news-related volatility—is the most likely thing to expect from the next few months. For now, Hold for yield.

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BUY – ONEOK (OKE 70 – yield 4.6%) – OKE hit another new 52-week high Friday after oil prices spiked to almost $70 per barrel. The stock looks healthy and OKE’s early May breakout followed 15 months of sideways action, so the uptrend is young and well supported. However, the primary draw here is yield. 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.

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BUY – STAG Industrial (STAG 27 – yield 5.2%) – STAG also looks healthy. After bouncing off its 200-day moving average last week, the stock hit its highest level since January 2 yesterday. Like CHCT, STAG is a REIT benefitting from moderation in Treasury yields and a flight to safety. However, STAG is an industrial REIT—and is outperforming its peers nicely. A big chunk of STAG’s properties are warehouses used for distribution by e-commerce companies, which is a booming sector of the real estate market. High-yield investors can buy some here. STAG trades ex-dividend tomorrow (the company’s monthly distributions don’t qualify for the lower dividend tax rate.)

Dividend Growth Tier

CDIpyramidDiv

To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.

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BUY – American Express (AXP 98 – yield 1.4%) – The Supreme Court decided in AmEx’s favor Monday, ruling that the company’s merchant agreements don’t violate antitrust laws. The case against the company argued that AmEx stifled competition by requiring merchants who accept its cards agree not to steer customers to other, lower-cost payment methods (for example by offering them lower prices). The Supreme Court concluded, 5 to 4, that the practice doesn’t violate antitrust laws and that AmEx can continue it. The stock reacted positively, closing higher for a third day in a row. Then on Tuesday morning AmEx and Amazon announced they’ll offer a co-branded small business credit card, although shares closed lower. Seemingly trapped under overhead resistance at 102.50, AXP isn’t the strongest stock in our portfolio, but it has solid support from its 200-day line. I’ll keep AXP on Buy for steady dividends and growth. The company will report earnings July 18, after the close.

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HOLD – BB&T Corp (BBT 51 – yield 2.9%) – BBT retreated further this week, along with most other financial stocks. If all is well the stock should find support here—it bottomed around 51 multiple times in the first quarter, and is just about to meet with its 200-day moving average for the first time since November. If support fails, I’ll sell. If it holds, I expect BBT to continue trading between about 51 and 56 for the time being. Long-term investors can probably nibble when the stock is in the lower half of that range, although I’ll keep the BBT on Hold as long as momentum stays primarily sideways. Long-term, earnings estimates are firm, and looser regulations mean BB&T is freer to make acquisitions, buy back stock and raise its dividend. BBT will report second-quarter results July 19, before the open.

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BUY – Broadridge Financial Solutions (BR 115 – yield 1.3%) – Broadridge’s addition to the S&P 500 this week caused a volume spike, but the stock is behaving normally. Broadridge, an investor communications firm, is a steady grower that has increased its dividend every year for 10 years. Trending up nicely just above its 50-day moving average, BR is a good Buy for dividend growth right here.

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HOLD – CME Group (CME 166 – yield 1.7%) – After hitting a new all-time high in early June, CME is pulling back toward its 50-day moving average, currently at 164. Average daily volume on CME’s exchanges rose 22% last month thanks in part to record trading in foreign exchange and treasury derivatives after the Italian bond rout. This week’s flight to safety and increased Treasury buying could provide another tailwind. After lying low for most of the last three months, the stock is now back above its 50-day line and in the top half of its trading range. It hasn’t started a definitive new uptrend yet, but the evidence has certainly improved. Hold.

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SELL HALF – Intel (INTC 50 – yield 2.4%) – I sent out a Special Bulletin Friday after Intel’s CEO unexpectedly resigned. Intel has no succession plan in place, and is facing a number of challenges that will be hard for an interim CEO to address adequately. The stock has fallen 7% since last Wednesday’s close, and is at its lowest level since early April. I added Intel to the Dividend Growth Tier around 51 at the end of March, so as of yesterday’s close we’re sitting on a small loss. Intel’s long-term uptrend is not yet definitively broken. A bounce above the stock’s 200-day—currently at 47—could keep Intel’s trend intact. However, sellers were showing up even before the CEO news. I wrote last Wednesday, “INTC is lower this week following an analyst downgrade and a report that the company is losing share in the desktop chip market to AMD.” More analyst downgrades have piled on since the resignation. The semiconductor index also turned down recently, and INTC would have a hard time fighting against a longer industry downturn. With all that in mind, I’m going to Sell Half our INTC shares today and Hold the rest to see if the stock finds support soon.

Safe Income Tier

CDIpyramidSafe

The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.

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SELL – Invesco BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.0%)
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)
BUY – Invesco BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.4%)
BUY – Invesco BulletShares 2022 High Yield Bond ETF (BSJM 25 – yield 5.3%)
The year is half over, and it’s time to sell our 2018 BulletShares fund (BSJI) and roll the proceeds into a new, longest-dated rung on our bond ladder. We could hold on to BSJI until the end of the year, but it’s unlikely to move much over the next six months (the fund has been trading around 25.12 since the start of the second quarter) and its yield is gradually declining as its holdings mature. The fund is already 59% invested in Treasuries (where Invesco reinvests the proceeds from maturing bonds) and its yield has fallen to 2.9%. I added BSJI to the bond ladder at 25.06 in September 2015 so, with dividends, our total return will be about 11%. To maintain our bond ladder, I’ll start a new half position in the BulletShares 2022 High Yield Bond ETF (BSJM), currently trading at 24.64 and yielding 5.3%. If you are also using a bond ladder to create a reliable, gradually rising income stream, you can do the same. (You can also opt for the safer but lower-yielding investment grade fund, BSCM.) If you’re not familiar with how a bond ladder works, you can read an explanation at cabotwealth.com/tag/bond-ladder/.

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HOLD – Consolidated Edison (ED 77 – yield 3.7%) – The flight to safety pushing down treasury yields has led to further gains for ED and other utility stocks. ED has advanced for nine days in a row, and jumped back above its 50-day line Monday. Rates are still moving up long-term, but as I’ve said before I think this year’s hikes are probably priced in, potentially allowing ED to start recovering soon. Hold.

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HOLD – Ecolab (ECL 138 – yield 1.2%) – ECL fell sharply following a JP Morgan downgrade Thursday. The pullback has brought ECL back to where it was trading in early April, be fore a still-unexplained gap higher. The stock is now just above its 200-day moving average, and still in a gradual long-term uptrend. Safe income investors can Hold. 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 and the company has increased its dividend every year since 1987.

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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.

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BUY – McGrath RentCorp (MGRC 65 – 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.

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BUY – UnitedHealth Group (UNH 250 – yield 1.4%) – UNH continues to pull back toward its 50-day line, in normal action. Healthcare stocks have been relatively resistant to the recent market pullback, correcting less than the broad market over the past week. UNH hit a new 52-week high two weeks ago and is in a healthy uptrend with good support from its 50-day, currently at 243. The stock can be bought here for steady dividends and growth. UnitedHealth will report second-quarter results before the open July 17.

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HOLD – Xcel Energy (XEL 45 – yield 3.2%) – Like ED, XEL is back above its 50-day line thanks to the strong rebound in utilities this week. The stock’s primary trend is still sideways, but a longer market shakeout or continued softness in Treasury yields could bring us some medium-term gains here. Either way, investors whose primary goal is long-term income can continue to Hold. XEL is a Midwest-based utility that provides both conventional and wind power.

Closing Prices on June 26, 2018

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.

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Mid-Year Review

We’re halfway through the year, and so far it’s been an eventful 2018. The last six months have been very different from the previous six: volatility roared back into the stock market in January, the broad market experienced its first significant correction in years in February, and Treasury yields have finally picked themselves up off the floor (with a little help from the Fed).

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Our first buy of the year was an attempt to add some energy exposure to the Safe Income tier. I recommended ExxonMobil (XOM) at the end of January, but my timing was terrible. The market had just started what turned out to be a 20% correction, and I sold the stock a month later for an 11% loss. XOM bottomed about a month later, and is now making an attempt to recover; the stock is up about 5% since we sold it, but still about 11% lower than when we bought it. Timing is everything with energy stocks, especially the largest ones, given how leveraged they are to oil prices. However, we’re giving it another go this month with the addition of Occidental Petroleum (OXY) to the more risk-tolerant Dividend Growth Tier.

At the end of February we sold the final third of our Wynn Resorts (WYNN) shares, for a total return of 61%. At the time I wrote:

If you want to hang on to WYNN (with an appropriate stop loss in place, of course) feel free, but we’ll move on to other opportunities. The stock’s relative underperformance in recent weeks suggests that buyers won’t be able to retake control for some time, and a lot of uncertainty now surrounds the company (namely, investigations by gaming boards in Nevada, Massachusetts and Macau, and the impact of Steve Wynn’s resignation.)

The stock has since fallen another 1%, although it was higher for most of March, April and May, so a nimble trader should have been able to squeeze out a few more percentage points of profit.

Also at the end of February, new Fed Chair Jerome Powell raised the specter of a fourth rate hike for the first time, and we added AllianceBernstein (AB) to the High Yield Tier. Our total return so far is 11% (vs. 2% for the S&P 500). The stock may be a bit extended now but is still a good long-term Buy for high yield investors.

In March the broad market re-tested its February correction low. The S&P 500 eventually bounced off its 200-day moving average April 2 and the major indexes have been moving mostly up since.

On March 21, I replaced Pembina Pipeline (PBA) with STAG Industrial (STAG), another monthly dividend payer. We booked a 16% total return in PBA, which is up about 7% since. But as hoped, STAG has delivered better capital gains, handing us a total return of 16% so far.

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I sold another half of our General Motors (GM) shares March 28, for a 12% profit. We now have a 30% profit in the remainder of the position, so I’m glad I held on to some of them. However, I don’t regret reducing our risk, GM has become extremely volatile.

Also at the end of March I added Intel (INTC) to the Dividend Growth tier; our profit climbed as high as 11% earlier this month but has fallen to -2% after Intel’s CEO unexpectedly resigned last week. If WYNN is any guide, the next few months could see an attempted rebound but the stock may suffer longer-term.

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In April we sold 3M (MMM), in three tranches, for a total return of about 10%. I wish we had acted sooner; we had an unrealized profit of over 30% in the stock earlier in the year. It’s been less than two months since we sold the last of our shares and so far MMM has mostly moved sideways, and is still volatile because of trade war worries.

On April 25 I added McGrath RentCorp (MGRC) to the Safe Income Tier; and two months later the stock is up 8% (vs. 2% for the S&P 500) so the position is working out well so far.

On May 2 I sold Cummins (CMI), which we had owned for a year, for about breakeven. While I wish we had taken some profits when we had them (we were up 26% at the end of January), I’m still glad we got out when we did—the stock has fallen an additional 8% since I sold.

Also in early May I sold a third of our shares in CME Group (CME) for a 17% profit after the stock broke through its 50-day line and reacted negatively to earnings. The stock gapped up a few weeks later after the Italian bond rout caused an unexpected spike in trading volume, but has now pulled back a bit and is up only 3% since the partial sale.

On May 31 I added Community Healthcare Trust (CHCT) to the High Yield Tier; so far the REIT is up 7% (vs. 0% for the S&P 500).

Finally, early this month I sold the rest of our shares in Carnival Corp (CCL) for a total return of 34%, the stock is down about 5% since and remains under pressure due to rising oil prices.

Eight other stocks have been in our portfolio all year. I added American Express (AXP) on December 21, 2017. The stock has underperformed slightly since; it’s currently down 0.3% vs. the S&P 500’s 1.5% gain.

ONEOK (OKE), which I added in October 2017, is up 29% since the start of 2018. BB&T Corp (BBT), which we bought in September of last year, is up 4% year-to-date. Broadridge (BR), which we’ve owned for 13 months now, is 26% higher year-to-date, and we have a total return of 50%. The S&P 500 is up 2%.

In the Safe Income Tier, utilities Consolidated Edison (ED) and Xcel Energy (XEL) are down 9% and 6% year-to-date, though we still have profits of over 50% in both. Elsewhere in the Safe Income Tier, Ecolab (ECL) is up 3% and UnitedHealth Group (UNH) is up 14% and we have small profits in both.

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