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Summary

  • Investment outlook for August 2014.
  • With the earnings season in full swing, the mixed market provides some good investment opportunities.
  • The risk of global war, sovereign defaults and scaling back of Fed's bond buying will escalate the market volatility.

The quarterly earnings season has been in full swing for a couple of weeks now and it has been interesting to watch a majority of the companies eke out earnings beat. However, the outlook for the rest of the year from most earnings has been mixed. The Fed has indicated that the bond buying program is going to decrease again in August following the trend and has indicated that they are seeing some inflation in the economy.

July turned out to be a net negative month due to the ongoing crisis in Eastern Europe and Middle East and the trend will probably continue into August. This could potentially provide the long-due correction in the market, providing with some investing opportunity considering all the following points.

  • Talks of all-out wars breaking out - some investors have raised alarms by calling it the perfect storm for the start of World War III.
  • The recent default from Argentina will be an interesting bond market move to keep an eye on. While not the first time (Argentina has defaulted twice in the past twelve years), the Argentinian default could send ripples across the rest of the bond industry.
  • The scale-back of the Fed's bond buying program will induce more volatility in the market.

My Holdings

Provided the right conditions, I intend to add to my positions in some of the following holdings.

Chevron Corp. (NYSE:CVX) is a dividend champion having raised its dividends for 27 years consecutively. Under the current market conditions, where decently valued stocks are hard to find, CVX provides relatively good value. CVX has a 5-yr DGR of 9% and a 10-yr DGR of 10.6%.

Johnson & Johnson (NYSE:JNJ) is a behemoth in the healthcare and consumer goods sectors. The double play on the two sectors makes this a great pick. JNJ is a dividend champion that has been raising dividends (JNJ announced a 6.1% dividend raise in April) consecutively for 52 years; has 5-yr DGR of 7.6% and a 10-yr DGR of 10.8%.

Medtronic Inc. (NYSE:MDT) manufactures and sells device-based medical therapies worldwide. Medtronic is a dividend champion that has been raising dividends for 36 years; has a 5-yr DGR of 11.6% and 10-yr DGR of 14.9%. MDT has recently announced plans to takeover Covidien (NYSE:COV) and is planning a tax inversion to Ireland.

Rogers Communications Inc. ((RCI.B.TO), (NYSE:RCI)) is the largest wireless service provider in Canada and is growing its business segments in cable and media aggressively. Rogers has been growing dividends for 10 years and has a 5-yr DGR of 11.13%. Click here to read about my analysis of the telecom providers in Canada.

Monthly Contributions: I add to my positions in the following stock and funds on a monthly basis:

  • Claymore S&P US Dividend Growers ETF (CUD.TO) is an ETF of 83 dividend growers and provides me with exposure to excellent corporations across all sectors. The ETF has a 1.8% yield and pays distributions monthly.
  • iShares Canadian Financial Monthly Income Fund (FIE.A.TO) is an ETF of 24 Canadian financial equities (70%) and bonds (30%). The fund yields 6.5% and pays distributions monthly.
  • Scotia Canadian Balanced Fund (mutual fund) is an index fund tracking the Canadian S&P/TSX Composite Index and the DEX Universe Bond Index. The fund yields 0.52% and pays distributions quarterly.
  • The Bank of Nova Scotia ((BNS.TO), (NYSE:BNS)) is the third largest of the Canadian banks by deposits and market cap. BNS is also the most international of the Canadian banks with exposure in 55 countries outside Canada. BNS saw a pause in its dividend growth during the financial crisis. However, BNS has started raising dividends after the crisis with a 5-yr DGR of 5.15%. I have a DRIP plan in BNS and invest monthly to this holding.

My Watchlist

I am also considering various stocks that are not currently in my portfolio, but the current high valuations do not provide many options.

  • Canadian National Railway ((CNR.TO), (NYSE:CNI)) engages in transportation of goods including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal, and automotive products. The company operates 20,100 route miles of track that spans Canada and mid-America connecting the three coasts of Atlantic, Pacific and Gulf of Mexico. CNR is a dividend contender that has been raising its dividends for 17 consecutive years and has a 5-yr DGR of 13.9% and a 10-yr DGR of 17.4%.
  • Norfolk Southern (NYSE:NSC) engages in rail transportation of raw materials, intermediate and finished goods operating approximately 20,000 route miles across the southern and eastern US. NSC and other railroads stand to benefit from the oil boom in continental US, and before permanent pipelines are put in place, railroads are the only option available to transport the huge supplies. NSC is a dividend contender raising its dividends for 12 consecutive years and has a 5-yr DGR of 10.8% and 10-yr DGR of 21.1%.
  • Procter & Gamble (NYSE:PG) and Unilever plc (NYSE:UL) are giants in the consumer packaged goods field. PG has five segments - beauty, grooming, healthcare, fabric care and home care. UL has four segments - personal care, foods, refreshment and home care. PG has been raising dividends for 57 years; has a 5-yr DGR of 10.2% and a 10-yr DGR of 10.8%. UL has been raising dividends for 25 years; has a 5-yr 7.07%.
  • Aerospace & Defense Sector: With the global turmoils continuing and the rise of new conflicts across Eastern Europe and Middle East, I am considering adding some exposure to the Aerospace & Defense Sector. I recently posted an article regarding the current valuation of the stocks in the sector here.
  • Index Funds - China ETF, Emerging Markets - I am considering adding a new index fund to my portfolio to track the Chinese market/economy. Read about my comparison of available China ETFs here. I am also considering using an emerging market ETF instead of China-specific ETF and need to weigh out the options available.
  • Global High Yield - In a global economy, it would be naive to ignore international equities as an investment target, especially when a plethora of foreign companies pay attractive dividends. I am considering adding international equities exposure via ETFs which yield approximately 6.5%. Click here for my list and analysis.
  • Income ETFs - I am also considering adding covered call ETFs to my portfolio as a more economical alternative to writing covered calls myself. The current environment is well suited to taking advantage of this strategy and should provide some good complementary income in my portfolio. Read about my review and analysis here.

What are your thoughts on the stocks mentioned here? Do you own them or are they on your watchlist?

Source: Outlook For August 2014

Additional disclosure: My full list of holdings are available here.

Disclosure: The author is long CVX, JNJ, MDT, RCI, BNS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.