By Parke Shall
We have a portfolio that consists entirely of stocks that pay some type of yield or dividend, which we keep separate from our normal active trading portfolio. It just so happens, as we have discussed in previous articles, that we are currently in the process of rearranging this portfolio and rebalancing it. Many of the positions that we have put on in 2014 and 2015 have been taken off for the time being and with this morning's crash in the futures, we are considering putting some cash to work today, and as the market heads lower.
Here's how the year has started off for the indices:
^DJI data by YCharts
As we have been saying in our previous articles, we believe that the Dow needs to fall to a 15,000 handle. We have been adamant about this in articles dating back as much as six months to a year, even with the Dow touching 18,000 and then 18,000 again when it retested highs after the first initial China crash. We also said over and over that the bubble in China had yet to collapse, and was likely to continue. Today, Chinese stocks need to fall far more than 50% from current levels just to adjust their price to earnings ratios so that they would be in line with the "overvalued" valuation that US equities hold.
Our assessment of the current correction that we are in is that we are not at a point where there is systemic risk. We believe that while China's issues and the low price of oil may be able to spread contagion to US Equity markets, we don't feel as if there is a large looming problem in the US economy and we certainly don't see any type of systemic risk like we saw in 2008, where AIG could have basically brought down the entire global economy.
So we take our assessment and we start to look at how much the market has pulled back already. Futures on Friday morning are pointing to the Dow finally looking to test a 15,000 handle. Granted, we think stocks will move to the low-end of this 15,000 handle, but we think we will see some relief after that with real buying and real volume. We also think that this move is an absolute necessity for the markets to continue in a healthy fashion over the course of the long term.
Friday morning, we also coincidentally started to see oil fall below $30 per barrel. In past articles, we had said that once oil gets into the $20s that we were going to start scaling into a position. Not only will we potentially begin scaling into oil today, and then scaling further as it moves lower, but we may start to take a look at some oil and gas companies that meet the criteria necessary for our long-term dividend portfolio.
In reconstructing our long-term dividend portfolio, we usually want to go out and buy the best of breed in several sectors and find a nice balance between companies that pay a good yield versus companies that do not have their yield at risk and are not value traps.
We are already long Macy's (NYSE:M), but we may look to add shares in our long-term dividend portfolio if the stock continues to pull back and stay under $40. We have a long-term $50 target on the stock based on the value of its real estate and its fine performance in moving to online sales.
For exposure to oil, we already have a small position in British Petrol (NYSE:BP) that we took yesterday, but we may add to this position in our long-term dividend portfolio as well, as the company currently trades three dollars below its book value and has arguably the best balance sheet out of all of the oil and gas companies, even though we are expecting the dividend to be cut slightly as well.
In banking, we were encouraged by the results that J.P. Morgan (NYSE:JPM) posted yesterday and we may look to add J.P. Morgan to our long-term dividend portfolio as we move forward. Citigroup (NYSE:C) is another bank with low multiples trading near book value that we think could also be an attractive long term hold for any dividend portfolio at bargain levels.
F PE Ratio (Forward) data by YCharts
Finally, we are also looking at Ford (NYSE:F) here. Ford now pays a huge 4.78% yield and has just issued a $1 billion supplemental dividend. A lot of people think that the auto industry is at the top of a credit bubble right now and so for our long term dividend portfolio, we will look to establish a position here and add to it as the equity moves lower. We are believers in the company for the long term and we think they can ride out any short-term cycle changes, just as they rode out the financial crisis into 2008.
Many of the financial commentators have been stating that we are unequivocally in a bear market. We believe that this is true, and we believe that the bull market is over. However, we actually believe we are in more of a stock pickers market than we are in a bear market.
As the market begins to settle down and move a little bit lower, we are going to reach a point where sentiment isn't negative by default, nor is it positive by default. We think that sentiment can get to a point where it is net/net neutral, and this is an area where we could see stocks stay in a trading range. The benefit of making sure that you are owning stocks with dividends and reinvesting those dividends is that you are still making a yield while the stock price may stay parked for the short term.
If you ask Warren Buffett about 2016's dip so far, he's going to come on and say,
"...stocks are going to be much higher five, 10, 15 years from now than they are right now."
He is absolutely right, and a lot of investors do not have the foresight to understand that if you're going to hold dividend paying stocks for the long term, you have to have some semblance of patience and you have to let the market run through the cycles that it is going to run through. While we believe we may even be at the end of the short-term debt cycle, we are going to look from this point (and lower) to try and find buying opportunities that we can scale into as the market moves lower and lower, that we can hold for the long term.
One last note regarding a hedge. We generally always have a hedge on in our main portfolio, whether it is shorting an index or simply shorting companies that we do not think are fundamentally sound that can crash in a down market as well. In order to be able to try and ride out some of the short-term cycles, we think always having a hedge on, at a cost relatively small to your portfolio assuming you are net long, is a must have idea.
Disclosure: I am/we are long M, BP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: May add any other tickers at any point, including oil via futures or various ETFs