The webinar was recorded March 18, 2021.
You can find the slides here.
Chris Preston [00:00:05] Hello and welcome to today’s Cabot Wealth webinar, The Dividend Solution, How dividend stocks have replaced the bond market. I’m your host, Chris Preston, Chief Analyst of the Cabot Wealth Daily Advisory and Vice President of content here at Cabot Wealth Network. With me today is Tom Hutchinson, Chief Analyst of our Cabot Dividend Investor and Cabot Income Advisor newsletters. Today,Tom is here to outline in great detail why dividends are a much better income investment than bonds in a low interest rate environment and have been for quite some time. He’ll also tell you about what types of dividend stocks he likes most for both growth and income. This is an interactive webinar, which means we’ll be fielding your questions after Tom’s presentation concludes. So if you have a question, feel free to ask it any time and we will try to get to as many of them as time allows once Tom wraps up. Just keep in mind that we cannot offer advice in regards to your own personal investing situation or portfolio.
Chris Preston [00:01:00] First, let me introduce Tom. Tom Hutchison is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran and extensive with extensive experience in multiple areas investing in finance. His range of experience includes specialized work in mortgage banking, commodity trading and in a financial advisory capacity for several of the nation’s largest investment banks. For more than a decade Tom created and actively managed investment portfolios for private investors, corporate clients, pension plans and 401ks. He has a long track record of successfully building wealth and providing a high income while maintaining and growing principal. As a financial writer, Tom’s byline has appeared in The Motley Fool, StreetAuthority, Newsmax and more. He has written newsletters and articles for several of the nation’s largest online publications, conducted seminars and appeared on several national financial TV programs. For the past 10 years, Tom has authored a highly successful dividend and income portfolio with a stellar track record of success, including the past two plus years here at Cabot. Bottom line, Tom knows what he’s talking about when it comes to income investing, so I’ll let him do just that. Tom, take it away.
Tom Hutchinson [00:02:11] Thank you, Chris. And good afternoon, everybody. And I’m thrilled to have you joining my webinar, whether you’re joining live or you’ll listen to the recording later. It’s a pleasure to have you on board. And I’m going to talk about some things that I think are very important that you need to know going forward. As Chris mentioned, I manage the newsletter Cabot Dividend Investor, where the objective is total return with an income and basically a good return with an income where you don’t risk losing your shirt as well as Cabot Income Advisor as a way to deliver you a high income and a low interest rate world.
Tom Hutchinson [00:03:03] Now the topic of today’s webinar, The Dividend Solution—How Dividends have replaced the bond market. This is – I’m going to talk about the big picture things, sort of the basic tenets of the way we invest are changing. Now for now, forget what’s going on in the market currently. Forget about covid, the new administration, the rise of cyclical stocks, the technology correction. We’re going to look at the bigger picture. Because things are changing. Now, if you have invested throughout your career, maybe you had a 401k or did it on your own and in a 401k, you basically had an allocation – this much in bonds, this much in the market. As you get older, you put more bonds, less in the market because you can take less risks. When you’re younger, you have more in the market, less in bonds. And that has worked very, very well through the years. But that essential element of investing is changing. And it’s going to change the way you invest going forward and the way America invests going forward.
Tom Hutchinson [00:04:34] Now, it’s a basic situation. When interest rates rise, bond prices decline, when interest rates fall, bond prices rise, for example, let’s say you get a thousand dollar bond, it pays a fixed rate. Let’s say it’s five percent. Thousand dollar bond pays you fifty dollars a year until it’s called or you sell it or it matures. When interest rates rise, let’s say you have a five dollar bond and interest rates rise to and I’m sorry, let’s say interest rates fall, you have a five percent bond, interest rates fall to three percent. Well, what happens is the value of your bond increases because the new bonds are getting the higher interest rate. So your bond is discounted or its sells at a premium so that it reflects that newer, higher interest rate. And falling interest rates when you own bonds are good for two primary reasons. One, because you got the higher rate before they fell and locked it in. And two, the market value of your investments increases, as does your total return. Now, of course, the opposite is true as interest rates rise. The value of the bond falls and you locked in a rate at a lower rate and the new ones are higher and you’re stuck with that lower rate and a lower market value. So basically for bond investing, you want a scenario where interest rates are falling.
Tom Hutchinson [00:06:19] Now, let’s take a big picture aerial view of the US bond market and see where we are. This is the benchmark 10-year Treasury yield. And this is what it has been in chart form since about 1960. As you can see, rates peaked in nineteen eighty one to about 16 percent. And what have they done since nineteen eighty one? They’ve trended lower and that’s been good for bond investors. Essentially, it’s been a 40 year bull market for bonds. Not only did you enjoy a higher rate, you enjoyed a good total return as bond prices rose. But look where we are now. Look at the end of the graph, around 2020. How much further can rates fall? Or also, it looks like they’re pretty much due to rise. And that’s where we are. That’s a very tentative outlook for bonds, to say the least. Now, it could be, to be fair, I could have pointed out the same thing five years ago or even 10 years ago. Maybe rates don’t rise from here. Maybe they hover around the same area. But even if they do, what kind of a return are you going to get? What kind of an income are you going to get? Best case scenario, you get anemic returns, worst case scenario rates rise and it’s a disaster. Average scenario, you’re probably going to be lucky to break even. Now, let’s look at the bond returns we have seen in past decades when you had your 401k 30, 40, 50 percent in bonds. Well, during the decade of the 80s, the average total return of the Barclays Aggregate U.S. bond index, and that’s what I used to reflect the bond market. It’s a broad based benchmark of U.S. investment grade bonds. It includes treasuries, agencies, corporate bonds, mortgage backed securities. It’s a good view of the whole bond market. Now, you could look at government bonds, municipal bonds and things may be a little different, but the gist is going to be the same. So in the 1980s, you did great in bonds. The 90s you got about almost eight percent just from your bond market investments. In the 2000s, about seven and a half percent, pretty good. But that return fell to about half last decade. And year-to-date, it’s in the negatives. That is where it’s trending.
Tom Hutchinson [00:09:28] So let’s look at the even bigger picture. Forget the last 40 years, forget 1981, let’s go back as long as anyone who’s possibly listening could have been invested. Nineteen twenty eight through twenty nineteen through that period stocks, the S&P five hundred has averaged ten point two nine percent a year in return. The Bonds bond market, five point three, three percent. So you’re still getting a decent return. Now, in that period, if you had that mix, let’s say 30 percent in equities, 70 percent in bonds, you got a total return, seven point two one percent, forty/sixty seven point seventy seven, a 50/50 split, eight point two nine and a 60/40 more equity than bonds split eight point seventy seven percent. So what you had here was, yeah, you didn’t get the ten point two nine percent the stock market averaged, but you got a pretty good return. You got most of the return. However, with much less volatility and an income to boot and for people approaching retirement, for people a little older, that is exactly what the doctor ordered. Last volatility and an income return. Now, here are some of the rates, the current rates on existing bond investments right now. As you can see, the 10 year Treasury bond, one point six, the iShares High Box Investment Grade Corporate Bond ETF two something, AAA Rated 20-Year Municipal Bond one point six. And the Barclay’s Bond Index, a little over two percent. One of those rates is going to get you, that’s barely going to cover inflation and taxes. So not only are you not getting the total the total return you’ve become accustomed to in years past, you’re not getting the income. And the income is lesser at a bad time. Because fewer people have pensions than they used to, and many people are going to find themselves retired for 20 or 30 years.
Tom Hutchinson [00:12:07] As you get older, you’re more dependent on investments with less volatility and an income, and that’s unfortunate right now because the population is aging. It’s older now than it’s ever been before, and it’s getting still older at warp speed. One third of Americans are now over 50. Fastest growing segment of the population, 65 and older, and 10,000 baby boomers on average are turning 65 every single day and will continue to do so for another eight years. That’s a big difference. I mean, it’s really getting older, I’m mean, I’m getting older myself. I’m getting irresistible urges to go clog up the line at the bank. We’re all getting older and the country is getting old. Now getting older, near retirement, let’s see how it’s going with this these vast swaths of the population hitting retirement age. Well, the average length of a retirement’s 18 years. Percentage of workers covered by pensions, relatively small. And the average Social Security benefit is seventeen thousand something. Now, here’s the average retirement income for most of the population. The median retirement account is fifty eight thousand. You take five percent of that. That’s three thousand a year. The median pension, if you get one, little over ninety three hundred and Social Security, seventeen thousand. For a total income of less than thirty thousand a year. That’s not really going to cut it. Because it’s crucial in your later years that you have enough income and you don’t have to dip into your principal. Especially if you’re going to be retired 20 or 30 years, because if you keep dipping into your principal and it runs out, then what? But you need income most at a time when it’s toughest to get. And the basic tenets of investing that we have counted on for that are no longer there.
Tom Hutchinson [00:14:40] The best answer—dividends. For a few reasons, typically, they have a high, total return with much less volatility than the overall market. Plus, unlike bond income, dividend income grows. Rates trend up, so will your dividend income. You’re not standing flat footed and get getting clobbered by the rising rate dynamic. And you can also get high yields. You can do a whole lot better than the bond yields that I read off to you before. Now, here’s an example of the last 10 years and what you would have gotten, what a ten thousand dollar investment would be worth today. And what I’ve done is I’ve used household names that you wouldn’t have had the risk [..] own it. Basic investments that aren’t going to go out of business and you can ride through turbulent markets and hang on to. Now, over the past 10 years, from pretty good for the market. Ten thousand dollar investment with dividends reinvested in the S&P 500 would be about thirty seven thousand. So the stocks I used, some did the same, some did worse, some did better, Home Depot would be ninety three thousand, McDonald’s about the same as the market, Pepsi less in the market. Visa a lot more. Intel a little more. But you can see, it’s realistic to get returns that can really build your wealth and get you somewhere in not only dividend stocks, but dividend stocks you don’t have to be afraid to own. As well, you can find places to earn a high income and a high rate of return and yield that you can’t find in the bond market.
Tom Hutchinson [00:16:46] Here are a couple high yield opportunities that exist right now. One, Altria, the cigarette company, Altria, seller of Marlboro Brands, it’s currently yielding seven point one percent. Now the company has growing earnings despite the headlines, a 50 year track record of raising the dividend every single year and more than enough free cash flow to cover it. The stock will most likely trend higher, but in the meantime, it’s paying you seven point one percent in a world where the 10-year treasuries paying one point six.
Tom Hutchinson [00:17:25] Enterprise Product Partners, this is a midstream energy company. What do I mean by that? Well, they don’t pump the oil and gas and they don’t sell it to the end user. They sort of take care of it in between. They pipe and they store oil and gas that’s sloshing around the country and they just sort of collect the fee for those services and aren’t really exposed to volatile commodity prices. Energy is coming back in a big way with the cyclical stocks as the economy moves toward full recovery at the end of the pandemic. This company still offers a very cheap valuation after a rough year. The distribution, the seven point seven percent yield – rock solid, it has coverage of one point six times on distributable cash flow, which is really at the high end of the industry. Even in a tough year, it maintains that and it’s in a sector that has momentum. So it’s a great stock to own outright, just for total return right now, but you’re getting a seven point seven percent yield.
Tom Hutchinson [00:18:47] So there’s two big issues that people face with the deterioration of the bond market. They still need to accomplish total return. You still need to save enough money to accumulate enough money so you have a nest egg from which to draw income in retirement. And you also need a current income wherever you are now, whatever you have, if you retired, you need a higher income than bonds and other traditional investments can deliver. Now, at Cabot Retirement Club, which is the vehicle that encompasses both newsletters: Cabot Dividend Investor, Cabot income advisor. Cabot Dividend Investor, what it does, it seeks to achieve a higher total return with some income and grow your principal without too much risk. Cabot Income Advisor is designed for people who are past the accumulation phase, who need an income now and need a much higher level of income than they can get from traditional investments. This newsletter seeks to deliver a double digit annual income with a level of risk that you can tolerate.
Tom Hutchinson [00:20:14] Now, as I mentioned, Cabot Dividend Investor is designed for safe income and dividend growth and also wealth building. Now, let’s take a look at dividend stocks. This is a snapshot of returns on the S&P 500 by dividend policy from 1972 through twenty eighteen. And as you can see from the table, dividend payers, companies that pay dividend has have averaged an eight point seven eight percent annual return over that time frame, while non-dividend payers averaged two point four percent. That is a massive, massive difference in return, and not only that, but the dividend payers have achieved the much, much higher return with far less volatility and far less risk along the way.
Tom Hutchinson [00:21:19] There’s two reasons why dividend stocks outperform—the company and the money. Companies tend to be more profitable because you can’t really fake dividend payments. You know, you come up with the money or you can’t. And companies that consistently pay and grow dividends have a business that produces predictable and steady cash flow and generally have profitable niches. It sort of separates the wheat from the chaff in terms of financial health of companies. So the companies themselves tend to be a great place to be, but then there’s also the money, the dividends themselves. If you look at this chart, dividends have accounted for forty one percent of total market return from 1930 through 1920. As you can see in the decades, the worse the decade is for the market, the more contribution from dividends, the higher the contribution from dividends. And it does vary. But the money is a big element of it, of all those returns. And we’ll see what happens when you reinvest dividends. As you can see on this graph or chart, dividend growers have had a phenomenal return and the growth of one hundred dollars from 1973 through 2020. If you look at that, dividend growers over eleven thousand compared to non-dividend payers, which only eight hundred and forty four dollars. So over time that money accumulates. It’s a good company. The money reinvested in the company makes a big difference as time goes on. And that’s a huge thing when you’re growing your wealth. And also, you know, you’re looking for an income in retirement. Some of these good yielding stocks, you tend to look at what the yield right now. But as these stocks appreciate and the dividends grow, your yield on the initial investment grows a lot as well. And this chart reflects that. These dividend paying stocks have a highly growing source of income, so you may invest now that income would be a much higher percentage by the time you come around to retiring or by the time you come around to needing to take an income from your money. So it’s a great way to grow your wealth and get a total return.
Tom Hutchinson [00:24:06] Then there’s Cabot Income Advisor. The goal, as I mentioned, is to give you a double digit annual income. And we do this in a couple of different ways. We get some of the higher yielding dividend stocks. Which includes regular dividend stocks, as well as master limited partnerships, real estate investment trusts and business development companies. Now, these are companies with special tax breaks from the government. They get tax breaks because they want to incentivize them to build out infrastructure and energy, to invest in the real estate infrastructure and also business development companies loan money to growing businesses where banks drop the ball. It’s desirable for the economy, so they get tax breaks. They’re not charged in income tax at the corporate level so they can pay you much higher dividends. And then I also use covered call writing. Basically a call is the right to buy stock at a higher price in the future, people who buy calls are betting that a stock price will rise. Now, over 80 percent of them expire worthless. You’re on the other side of the trade if you sell a call against your position, you collect the premium and boost your income. It’s like being the house instead of the gambler. You sacrifice potential appreciation for income. It’s safer than just owning the stock outright, and you can dramatically enhance your cash flow from the stock.
Tom Hutchinson [00:25:53] So. Basically. We see what’s happened to the bond market. It’s had a 40 year bull market. Interest rates are already kind of close to zero. They can’t really keep falling, the total returns that have been there throughout the decades are not going to be there anymore. And it’s highly unlikely that the income will either yet. Your needs for total return and income have not changed. And in fact, when you look at the aggregate, the total U.S. population, the need has grown more than ever. So if some of the scenarios I mentioned may not be true for you, maybe you’ve saved a lot more for retirement, maybe you’re in much better shape, and that’s great. But what’s true of the aggregate is going to affect demand and the fact that people will have to get an income somewhere. And dividend stocks are just about the only game in town. Will bouy the demand and likely bouy the performance of dividend paying stocks going forward. And what I plan to do, what I intend to do with my two newsletters, is help you in that endeavor, in the new dynamic.
Tom Hutchinson [00:27:15] So now, for now, I will open it up for questions.
Chris Preston [00:27:19] Yeah, thanks, Tom, for that. I’ll give you a minute to catch your breath so I can just tell people a little bit about how for those who are interested, how they can sign up for Cabot Retirement Club. Again, what you get is access to both Cabot Dividend Investor and Cabot Income Advisor newsletters. Tom just explained the difference between the two and what you get today, we have a special offer reserved exclusively for listeners of today’s webinar. That’s one month for just one dollar. What you get in return is monthly issues of both Cabot Dividend Investor and Cabot Income Advisor, weekly updates on all our holdings in both advisories, special bulletins via email and text alerts when market events warrant immediate action, an analyst video call every month from time to get real time stock advice and your questions answered and direct private access to Tom for answers to your investing questions. Today’s special attendee offer to Cabot Retirement Club will be emailed directly to you. So watch your email inbox. You should receive the offer shortly. And again, it’s just one dollar to try it out for one month to see if it’s for you. It’s not a bad deal. OK, let’s move on to your questions. Let’s see, there’s been a few rolling in.
Chris Preston [00:28:49] Let’s see, I’ll start with one from Daniel, what do you think of income funds, income funds like JEPAX, which pay a hefty monthly dividend?
Tom Hutchinson [00:29:08] I’m not I’m not familiar with that exact fund, Chris, Did he say that was an ETFs or a fund?
Chris Preston [00:29:18] An income fund? OK, it pays a monthly dividend.
Tom Hutchinson [00:29:22] Yeah. I mean, income funds are a great way to sort of diversify yourself among many stocks that you can’t really do individually. Although my favorite fund or ETF is Cabot Dividend Investor, there are some good ones out there. I’m not familiar with that particular one. I don’t know how much risk they take. And the monthly pay is great. It helps out your cash flow.
Chris Preston [00:29:52] OK, let’s see, let’s see. Question from John. John asks, Can you outline which stocks should be held in a tax deferred IRA account versus outside non retirement account? I guess just I guess just asking for examples.
Tom Hutchinson [00:30:10] Well, pretty much anything known outside a retirement account you can hold inside a retirement account. However, you have to be a little careful with master limited partnerships because there is a special tax form. And if you generate more than a thousand dollars worth of income in a year, you may owe taxes on your IRA. So you have to be careful about that one. But in terms of regular stocks, you can own whatever you can own outside of your IRA, IRA, you can own in an IRA.
Chris Preston [00:30:48] I viewed it as a question about sectors, what what sectors do you like for the next year and beyond?
Tom Hutchinson [00:31:00] Well. Technology, of course, even though it’s had a heck of a run, we’re in the middle of a technological revolution and technology stocks have been driving the market for years and years now. It would have been a lame bull market last time if it wasn’t for technology stocks, it would have been a much slower recovery, and that’s where all the growth is. So, of course, that sector. In the near term, however, the cyclical sectors with the vaccine announcement, it promises a full recovery later in the year. And as the lockdowns and restrictions and the economy will be unshackled and it’ll be much better for the mainstream economy and sectors like energy, which you see taking off. And that’s a beneficiary. And I think although it’s had a nice run already, still many of those stocks are still below pre pandemic levels and I think they have more to go. Financial sector looks very, very good at this point because they’ll benefit from the full recovery as well. They’ll also benefit from rising interest rates, which has already begun to happen. And it’s a nice offset because technology has been getting hurt by rising interest rates. They benefit. So I think I still like the cyclicals for the remainder of the year. And technology as always.
Chris Preston [00:32:39] Ok, a question Demal, hope I’m pronouncing that right. Asks about what the impact of rising interest rates right now might have on income investments in the market in general.
Tom Hutchinson [00:32:54] Well, it depends which income investments, obviously, it’s going to hurt you. If you have bonds. And the longer term, the longer term the bonds are, the more you’re going to get hurt because higher rates have more effect on a bond that’s longer dated out into maturity. So that’s a problem. It’s a problem for bonds. You can get around that somewhat by short term bonds, maybe adjustable rate bonds. As far as dividend paying stocks, it kind of depends which ones you own. In general, it’s much less dangerous for income stocks because, as I mentioned, they can raise dividend and certain income stocks like financial stocks benefit as interest rate rise, as interest rates rise and energy stocks benefit from inflation and the rising interest rate environment more than the rising interest rates hurt the dividend stocks. So I think dividend stocks going to shield you somewhat from rising rates. You’re more exposed with the slower growing stocks like utilities. But in general, you’re still in pretty good shape with dividends.
Chris Preston [00:34:17] OK, let’s see a question from Rick, just clarification, you you talked about both newsletters. Yes. Is the idea with Cabot Income Advisor that you purchase a stock and write a call on it immediately?
Tom Hutchinson [00:34:33] Sometimes he sometimes yes, sometimes no. I do that, which is called a buy write. I have recommended stocks to buy and a call to write on the same day, but not always. Sometimes I buy the stock when it’s good picking to buy the stock and wait a little bit and write the call in a more ideal environment. So it depends on the situation.
Chris Preston [00:35:04] OK, question from Richard, do you see any risks from the Democrats raise in taxes?
Tom Hutchinson [00:35:13] Yeah, I mean, obviously the market’s not going to like that. But there’s a big question about how much of an impactful tax hike they can get through Congress. It doesn’t look like and things can change, and I’m no political expert, but in terms of the way the market sees it at this point, it looks like they’re going to have to do away with the filibuster to get any major tax hikes through. And they’re not that anxious to do that because they have a razor thin majority. They’ll probably lose in 2022. So while that’s a worry, it’s a muted worry at this point.
Chris Preston [00:36:00] OK, do you—are there any tech stocks that you particularly like that pay dividends?
Tom Hutchinson [00:36:11] Sure. I like Broadcom, symbol, AVGO, major technology company that few are familiar with. They’ve been with this whole technological revolution from the inception. They’re actually derived from the old Bell Labs and have their hands in just about every in key aspects of of technology and the switching mechanisms and the stuff that that’s hard to explain. But they’re set up beautifully and they’re going to benefit from 5G as phones demand more power and connectivity, as more and more devices connect to the Internet. A great way to play it. Also, Qualcomm symbol, QCOM. They do licensing for for 3G and 4G technology, but they also have the only good smartphone chip for 5G. That may change in a few years, but right now they’re the only game in town, so as 5G rolls out they’re going to be a big beneficiary from higher, residual revenues as more phones are sold and longer term, they’re also going to benefit from more connected devices, et cetera. I also like Microsoft, although it’s it’s not that cheap, I’d wait for a better price, but the two I mentioned are the main dividend technology stocks I’m buying.
Chris Preston [00:37:56] All right, we’ll do a couple more. Question from Martin, Can can one write a covered call in an IRA?
Tom Hutchinson [00:38:06] Yeah, you have to check. But for the most part, they’re allowed in IRAs, you’ve got to check with the company. But it should not be a problem.
Chris Preston [00:38:19] You OK, question from John, do you ever consider using put sales to get an attractive entry point into your selections?
Tom Hutchinson [00:38:28] Yeah, I’m not really in terms of options strategy, I’m really just using it to enhance the income. Do the one covered call strategy and do it well. It’s the safest. And it tends to generate the most income.
Chris Preston [00:38:55] OK, and we actually at Cabot do have a couple of options advisories as well, Cabot Options Trader and Cabot Profit Booster for anyone who’s interested. Okay, I’ll make this the last question. This is a good one to end on. Where do you see the market ending this year?
Tom Hutchinson [00:39:17] Well, that’s a tough one, because no matter what information you have, however good it is, it’s very difficult to predict the future, especially in the near term. Who would have – who saw Covid coming? So you never know. That said, I’m still bullish on the market over the course of the year. Although some areas of the market are getting a little or a little high. Look, we’re looking ahead to a full recovery. And even normally, cynical economists are predicting the highest GDP growth in decades, if that’s not enough, there’s trillions of stimulus floating around to boot. And still low interest rates. That’s Christmas morning for the market, and I think that situation will prevail and unless there’s something new developments, I think they’ll trend higher.
Chris Preston [00:40:25] All right, that’s a good, good, uplifting note to end on. Well, thanks, Tom, and thanks to all of you for joining us today. We’ll be back next month on Thursday, April 22nd, with the webinar titled Three Micro-Cap Stocks That Could Triple in the Next Year, hosted by our micro-cap investing expert, Rich Howe. So come back next month for that presentation. Again, that’ll be Thursday, April 22nd, also at 2:00 PM ET. That does it for us, for Tom Hutchinson and the entire Cabot Wealth Network team, I’m Chris Preston. And we’ll see you next time.