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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor 918

The market continues to make progress, despite the dramatic headlines gracing the front page every day (and popping up online throughout the day). Today I’m adding a well-known restaurant stock to the Dividend Growth tier of our portfolio, to take advantage of rising consumer spending and the strong American economy. I also have updates on all our stocks, most of which are rated Buy, and at the end of the issue I take a look at the importance of diversification.

Cabot Dividend Investor 918

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A Change in Leadership

Despite occasional hiccups, the stock market’s main trend is up. However, the advance has changed character a bit. We’re seeing investors rotate out of the growth stocks that had, until recently, led the market higher, and into more undervalued or stodgier names. The Dow has outperformed the S&P 500 and the Nasdaq over the past month, and the latter tech-heavy index hasn’t actually made any net progress during the past four weeks. Our portfolio is well diversified, with plenty of exposure to industrials, blue chips and the like, so the rotation hasn’t harmed our results.

And today I’m adding a little more diversity, increasing our consumer exposure by adding a well-known chain to the Dividend Growth tier.

On the fixed income side, everyone will be watching the Fed today. A quarter-point rate hike is a near certainty, but market participants will be looking for any change in the Fed Governors’ longer-term rate expectations. The recent rise in long-term Treasury yields suggests a hawkish turn is possible. It’s also caused a selloff in interest rate-sensitive investments over the past week, including REITs and utilities. The selloff hit High Yield tier holding Community Health Trust (CHCT) hard enough that I’m moving it to Hold today.

[highlight_box]What To Do Now: Most of our holdings are rated Buy today, so if you’re underinvested, feel free to do a little shopping. In the High Yield tier, AllianceBernstein (AB) looks close to breaking out, and ONEOK (OKE) may earn back its Buy rating soon. For investors looking for dividends and growth, American Express (AXP), Broadridge Financial Solutions (BR), CME Group (CME) and CSX Corp. (CSX) are all good options. And just about everything in the Safe Income tier is buyable, although UnitedHealth Group (UNH) and McCormick & Co (MKC) are offering particularly good buy points. [/highlight_box]

Featured Buy

Dunkin’ Brands Group (DNKN)

With unemployment the lowest it’s been in decades and consumer spending rising, it’s time to add some more exposure to the American consumer to our portfolio. And as everyone (at least in our Boston office) knows, America Runs on Dunkin’.

The Company
Dunkin’ Brands is the parent company of Dunkin’ Donuts and Baskin-Robbins. The company has over 20,000 stores in 60 countries, all of which are run by franchisees. Originally concentrated in the Northeast U.S., Dunkin’ is expanding its reach across the country and plans to open 1,000 new stores by 2020, with 90% outside the Northeast. In the latest quarter, the company opened 96 new stores and revenue rose 4.9%.

Dunkin’ is also driving growth by improving existing stores. The company recently rolled out a new “NextGen” store design, which is focused more intensely on beverages and simply called Dunkin’. The company expects to have 50 NextGen locations by the end of the year.

Dunkin’ is also simplifying their menu to focus on core items like breakfast sandwiches and coffee. In addition to cutting costs, the change makes life easier for employees and should improve efficiency just as the tightening labor market starts to increase labor costs. Also, just yesterday the company announced that it will drop “Donuts” from its name.

The investments mean capital spending is ticking up a bit, but analysts still expect earnings to grow 12% this year and 9% next year. Over the next five years, earnings growth is expected to average 13% per year.

The Dividend
Dunkin’ was owned by a group of private equity companies until 2011, when it was listed on the Nasdaq. The company started paying a dividend in 2012, and has increased the dividend by an average of 15% per year every year since then. DNKN yields 1.9% at current prices, which is a solid yield for a company with this much growth potential.

The company’s payout ratio is falling as earnings grow, and is currently 51%, down from an average of 60% in recent years. Dunkin’s dividend history and earnings growth earn the stock a Dividend Safety Rating of 4.7 and a Dividend Growth Rating of 7.5 (both out of a possible 10 total points).

The Stock
Finally, there’s the stock. DNKN has been in an uptrend since May, and has strong support from its 50-day moving average, currently at 73. The stock surged 4% to a new all-time high at the start of September, after Coca-Cola’s $5.2 billion bid for Costa Coffee prompted an analyst to speculate that Dunkin’ could be the beverage giant’s next target. Another potential suitor is JAB Holding, the privately-held German conglomerate that owns Peet’s Coffee, Caribou Coffee, Krispy Kreme and Panera Bread.

Takeover speculation aside, DNKN is in a steady uptrend, but isn’t overextended. Earnings growth expectations are strong, the company’s blueprint for growth is showing solid results, and the dividend is steadily rising. I’ll be adding DNKN to our Dividend Growth tier at the stock’s average price tomorrow.

Dunkin’ Brands Group (DNKN)
Price: 74
52-week range: 52.35-77.13
Market cap: $6.18 billion
P/E: 18
Current yield: 1.9%
Annual dividend: $1.39
Most recent dividend: $0.35
Dividend Safety rating: 4.7
Dividend Growth rating: 7.5
cdi918-dnkn 10/9/18
Dividends since: 2012
Consecutive years of increases: 6
Qualified dividends? Yes
Payment Schedule:
Quarterly
Next ex-dividend date:
November 23, 2018 est.

Portfolio at a Glance

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Portfolio Updates

High Yield Tier

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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 30 – yield 8.4%) – AB remains just short of breaking out past 31, although it did hit a new closing high of 30.95 a week and a half ago. AllianceBernstein is an asset manager known for their actively managed strategies. Assets under management rose to $551 billion last month, up from $546 billion at the end of July. Market appreciation and net inflows in all divisions (Institutions, Retail and Private Wealth) both contributed. The stock has solid support at its 50-day line and high-yield investors can Buy a little here.

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HOLD – Community Health Trust (CHCT 30 – yield 5.4%) – Interest rates have been climbing steadily for the past month. The 10-year Treasury yield is back above 3% and close to hitting its highest level since 2011. That’s dragged most REITs lower, and CHCT has been no exception. I was hoping the stock would find support at its 50-day moving average last week, but a big selloff Wednesday dragged the stock right through it. CHCT is now trading around 29.50, below its 50-day but above its 200-day. Since the break through the 50-day means a longer correction or consolidation is now likely, I’m going to put CHCT on Hold today.

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HOLD – General Motors (GM 34 – yield 4.5%) – GM managed to find support a couple weeks ago but is still very choppy and near the bottom of its trading range. I moved the stock to Hold earlier this month and will keep it there for now. While sales are expected to fall this year, 2019 should bring a return to growth, and the longer-term potential of GM’s autonomous driving and ride-sharing investments is big—and should draw new investors into the stock.

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HOLD – ONEOK (OKE 68 – yield 4.6%) – Natural gas prices are at their highest level since January. That’s good news for ONEOK, which operates natural gas and natural gas liquids (NGL) pipelines and natural gas processing facilities. The stock had been declining but reversed course sharply two weeks ago, and is now trading around its 50-day line. Hold.

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BUY – STAG Industrial (STAG 27 – yield 5.2%) – Like Community Health Trust (CHCT), STAG got hit by the selloff in REITs this week, and has fallen below its 50-day line. But the stock is still only 5% off its recent all-time high, and well above its 200-day. If interest rates continue to rise this could turn into a larger correction, or a consolidation like the one we saw at the end of last year. If that’s the case I’ll put STAG on Buy and we could take some profits. But for now this looks like an ordinary pullback, so I’ll keep STAG on Buy for now.

Dividend Growth Tier

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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 110 – yield 1.3%) – AXP is still in a strong uptrend, and just pulled back from a new 52-week high. The stock might be a little overextended short-term—it’s 5% above its 50-day line—but should have plenty of gas in the tank long-term. The stock just broke out of a four-month trading range, and analysts are expecting the credit card company to deliver 20% revenue growth and 24% EPS growth this year.

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BUY – BB&T Corp (BBT 50 – yield 3.0%) – BBT found support at the bottom of its trading range once again last week, strengthening the case for buying the stock when it’s near 50. Short-term traders can hold for a bounce back to 55, the top of the stock’s trading range, while longer-term investors can use this opportunity to start positions. Just be aware that you may have to be patient with the stock for a while.

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BUY – Broadridge Financial Solutions (BR 134 – yield 1.4%) – BR’s pullback toward its 50-day line continues, but still looks normal. The moving average is currently around 129, and starting to catch up to the stock. Broadridge is the largest investor communications firm in the U.S., and delivers steady single-digit sales growth every year. The recent pullback represents an ideal buying opportunity.

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BUY – CME Group (CME 174 – yield 1.6%) – CME’s breakout seems to be the real thing. The stock has been above 170, which was previously an overhead resistance level, since the start of September. CME’s 50-day is not far behind, at 169, and the stock also has support from the 200-day, down at 163. Dividend Growth investors can Buy on normal pullbacks. CME pays a large special dividend at the end of each year, which can more than double its normal yield.

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BUY – CSX Corp. (CSX 73 – yield 1.2%) – CSX has pulled back just to its 50-day line over the past month, which looks like a good buying opportunity. The company is the third-largest U.S. railroad and recently underwent a major transformation, switching to a point-to-point system that boosted margins, cash flow and profits. CSX has paid dividends every year since 1981, and has increased the dividend for eight years in a row. Over the past five years, the dividend increases have averaged 8%. CSX only yields 1.2% at current prices, but the company’s payout ratio of 25% leaves plenty of room for growth. The stock is not undervalued, but it’s in a strong uptrend that is likely to continue as long as transport stocks and the broad market remain strong. Buy.

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HOLD – Occidental Petroleum (OXY 81 – yield 3.8%) – Oil prices have climbed to their highest level since July, and OXY has gotten its mojo back. After bouncing off its 200-day moving average two weeks ago, the stock proceeded to pop back above its 50-day line Monday. OXY has now made up for its early August losses, and I’ll put the stock back on Buy if the advance continues. Occidental is a Houston-based oil and gas company with a large chemicals business.

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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BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.4%)
BUY – Invesco BulletShares 2020 High Yield Corporate Bond ETF (BSJK 24 – yield 4.8%)
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 BulletShares funds make up our bond ladder, which is a conservative strategy for generating a steady income stream by buying a series of individual bonds or defined-maturity bond funds that mature in successive years. Because the BulletShares funds are short-term and mature at the end of the year in their name (at which point Invesco disburses the net asset value, or NAV, of the ETF back to investors), they are a good store of value even when interest rates rise. And if you reinvest the proceeds of the maturing fund in a new, longer-dated holding every year, you can secure rising income stream as rates rise. You can construct your own ladder with either the investment-grade or high-yield funds, or a mix, as we’ve done.

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BUY – Consolidated Edison (ED 76 – yield 3.8%) – The selloff in interest rate-sensitive investments over the past week sent ED crashing through its 50- and 200-day lines. The stock is now at its lowest level since July, and could go lower. We’ll see what happens after today’s Fed announcement. In other news, ConEd just bought 981 megawatts of solar projects from Sempra Energy, increasing its renewable energy production by more than half.

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BUY – Ecolab (ECL 157 – yield 1.0%) – Industrial stocks have done well in recent weeks, helping ECL extend its advance. The stock is looking overextended short-term but is trending up nicely. Ecolab makes cleaning chemicals and other products that generate reliable recurring revenues and has paid dividends for 32 years. Buy on pullbacks for capital appreciation and safe income.

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BUY – Invesco Preferred ETF (PGX 14 – yield 5.8%) – PGX is an ETF that holds preferred shares (a type of debt) and pays monthly distributions. The fund dropped sharply this week along with other fixed-income investments, but still has low overall volatility and usually stays above 14. Note that PGX offers no capital appreciation potential; instead, it’s a good store of value and source of regular income. Buy under 15.

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BUY – McCormick & Co (MKC 129 – yield 1.6%) – MKC remains in a strong uptrend, and is pausing for breath just under the all-time high it hit last week. Buy on pullbacks for dividends and capital gains. The company is expected to report 13% sales growth and 17% EPS growth this year and has a 31-year history of dividend growth.

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HOLD – McGrath RentCorp (MGRC 55 – yield 2.5%) – MGRC found some support last week and is bouncing back toward its 200-day moving average, currently at 56. The company rents modular buildings, storage units and more, and has a 16-year history of dividend growth. Hold.

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BUY – UnitedHealth Group (UNH 264 – yield 1.4%) – UNH looks healthy. After a normal pullback, the stock bounced off its 50-day moving average a couple weeks ago, and is trending up again. Safe income investors can start positions in UNH here. The company has an eight-year history of dividend growth and has increased its dividend by 26% per year, on average, over the past five years.

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BUY – Xcel Energy (XEL 47 – yield 3.1%) – XEL looks okay; the stock pulled back below its 50-day line over the past few weeks but has kept most of its recent gains. I’ll keep it tentatively on Buy unless and until utilities start a more sustained correction. Xcel is one of the largest providers of renewable energy in the U.S., and delivers reliable single-digit revenue growth.


Closing Prices on August 28, 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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Allocation & Diversification

Diversification is important because it keeps any one event from having too large an impact on your portfolio. If half your savings are invested in REITs, and Congress or a regulator makes a rule change that negatively impacts their business (or their tax status, as happened to MLPs just a few months ago), you can lose a big chunk of your money overnight. Diversification can also protect you from longer downturns, like declines in commodity prices that can keep entire industries struggling for months.

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Here’s how the Cabot Dividend Investor portfolio is currently invested, by sector. (Note that this chart is based simply on the number of stocks from each sector, ignoring position sizes.)

Over time, a more diverse portfolio will be less volatile, with declines in some sectors offset by uptrends in others. Of course, we try to be more heavily invested in sectors that are doing well.

You may also want to look beyond categorization by sector, which is inherently broad. For example, although our portfolio includes four stocks from the financial sector, the four are quite different. We own one credit card company, one regional bank, one financial exchange and one asset manager. Although all are somewhat correlated (see below), they’re affected by different factors: BB&T (BBT) benefits from rising interest rates, for example, while market volatility is an important driver of revenue at CME Group (CME).

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Also note that we’re only talking about the equity component of your portfolio here. It’s also a good idea to have some of your portfolio invested in fixed income, especially if you’re retired. In the Safe Income tier, we own four defined-maturity bond funds as part of our bond ladder, as well as the preferred ETF PGX.

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Your next issue will be published October 31, 2018
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