Retirement Strategy: 3 Dividend Themes Still Ripe For The Picking

Summary

• With record low rates, dividend yields have headed lower.
• Three dividend themes still look like good opportunities.
• Fertilizers, food, and hospitality REITs are still offering good yields and entry points.

Subscribers to "Resolving Retirement" had an advance look at this material.

Yields on bonds are at all-time record lows. The world is struggling with slowing economic growth, and central banks are doing whatever it takes to get traction. Their actions may be necessary to avoid catastrophe, but investors who are currently looking for yield are in a dubious seller's market. As the Wall Street Journal delicately puts it:

This is evidenced by the Vanguard High Dividend Yield ETF (NYSEARCA:VYM), which printed a new all-time high today, and now yields less than 3%. This run-up in high-yielding assets has been terrific for dividend stock holders, but going forward, we are in a world where high yield means 2.XX%.

What should we do?

We still see opportunities. Here are three dividend themes that we think are still ripe for the picking, plus two honorable mentions.

Honorable Mention: Telecom

Verizon (VZ) and AT&T (T) have surged as bond yields have fallen, but they still yield 4% and 4.5% respectively. The companies are saddled with debt and struggling to grow, but they generate a lot of cash and pass it on. Those yields look like they have hit their floors for now, but they could always reset downward again, providing some more capital gains along with the juicy income.

Honorable Mention: Utilities

In September of last year, we called regulated utility Wisconsin Energy (WEC) the "Best Treasury-Like Dividend in the Market". At the time, we were in a period like right now. Yields had gone lower, and the question was, "Where do we turn for yield now?" We got some comments like:

I am long and I liked WEC better @ 45 and added to my position at that time. 4% yield. If it drops back down, then is the time to get it. Value, value , value with utilities.

and

Great utility, agreed, but overvalued at ~ $51. Most analysts peg Fair Value at $45 or so.

Then, in April, after this and other utilities went on an impressive run, we reiterated that we thought WEC was still the best Treasury-like dividend in the market. Again, we got comments like:

love this investment. wish i'd bought a lot more back in the $35 dollar range. waiting for a decent dip then adding more!

and

would like to own WEC (on a pullback)

And since then, Wisconsin Energy and other utilities have only surged. In all, WEC is up about 40% since September of last year, with very little in the way of pullbacks.

Historical measures of a "good yield" are out the window, and relative measures of "what else is there?" are very much in play for the foreseeable future. So, we still like the utilities here for long-term investors. Yielding 3.11%, WEC is our favorite. Others include:

• Duke Energy (NYSE:DUK) has some international exposure, but yields 3.88% and has exposure to the "retirement states" of the Carolinas and Florida.
• Public Service Enterprise Group (NYSE:PEG) has some unregulated business, but is still a great business yielding 3.60%.
• Southern Company (NYSE:SO) has some budgeting problems, but also has an excellent history of negotiating rates and yields 4.21%.
• Consolidated Edison (NYSE:ED) has a monopoly in New York, yields 3.38%, and has raised its dividend for 42 consecutive years.
• Xcel Energy (NYSE:XEL) has gotten into the electricity transmission business - a regulated enterprise that should allow for enviable growth for a utility. Xcel yields 3.10% and has raised its dividend for 13 years in a row.

1st Ripe Dividend Theme: Fertilizers

Food fertilizers are commodities, and as such, they have their cyclical swings. We are currently in a decidedly weak environment for the producers. Prices were strong a few years ago, so everybody increased their output; now there is too much supply, and the producers are dialing back.

The result is a beaten-down market, but one that should rise again. Two quality stocks that can be had near the bottom of the cycle here are CF Industries (NYSE:CF) and Compass Minerals (CMP).

CF Industries is a low-cost producer of nitrogen fertilizer primarily for the US market. Per YCharts, the company sells 81% of its product domestically, and being a low-cost producer and a local company, its future looks bright fertilizing American farms. The stock is currently yielding 4.57% after a bruising in the sector - it could end up being a steal.

Compass Minerals produces the specialty fertilizer sulfate of potash, which is used by growers of high-value crops that are sensitive to standard muriate of potash. The company also has a larger part of the business that produces salt for applications like de-icing roads.

In its sulfate of potash business, Compass owns one of only three operating natural sources of sulfate of potash in the world at the Great Salt Lake in Utah. In its salt business, the company owns the world's largest active salt mine, and it is on a deep water port on Lake Huron. So, not only does Compass have the best mine, its cost of transportation is a fraction of its competitors' costs. In addition, the Great Lakes have a lot of cities located on them that get a lot of lake-effect snow and buy a lot of salt.

Lately, the fertilizer business has hit a softer market, and this past winter was one of the warmest on record in the north central part of the country. Compass Minerals is doing some restructuring in response, but the markets should improve, and this looks like a good chance to get aboard a company with estimable competitive advantages. Compass is currently yielding 3.82%.

2nd Ripe Dividend Theme: Food

American food fertilizers look good, and the American food producers look good here as well.

Armanino Foods of Distinction (OTCPK:AMNF) is our favorite play here, and is still our choice for the Best Dividend Growth Stock in the market. The stock is up about 10% since we told our subscribers about it in May, but has also raised its dividend again since we wrote about it. The company is the very picture of steady dividend growth and shareholder oriented management. Its products compete primarily on quality and not on price, and the steady growth has led the company to announce expansion plans. Armanino currently yields 3.57%.

B&G Foods (BGS) has growth in spades, as it is a very acquisitive company. The management team has proven its excellence in operations, incorporating acquisitions with aplomb. B&G does issue equity to raise money, but they are making it work for shareholders. The stock currently yields 3.51%.

Hormel Foods (HRL) is also providing an entry point here. The company never yields much (1.60% right now), as it is always valued dearly by the market. But its dividend growth is prodigious and reliable, and the stock is currently well off its highs for about as good of an entry point as this stock ever gives.

3rd Ripe Dividend Theme: Hospitality REITs

REITs have surged as rates have fallen, with no equity exemplifying this as much as Realty Income (O), which is up 50% in the last year, and now yields only 3.42%. That yield was well over 5% only months ago.

So now that REITs have run so much, what do we do going forward for yield? One REIT subsector that did not participate in the rally is hospitality.

The hospitality sector is always priced at a discount to the rest of the REIT world, because hotels do not have long-term leases with their tenants, but rather, extremely short leases measured in single days.

Nevertheless, the following three hospitality REITs look ridiculously undervalued, especially versus the much larger and far more popular Realty Income. Realty is projecting $2.85-2.90 of Adjusted Funds From Operations in 2016, and trades at $70.07 per share. At the high end of guidance, that's a P/AFFO ratio of 24.2. The P/AFFO ratio is roughly like a P/E ratio, and 24.2 looks reasonable in this low yield world.

It is harder for hotel REITs to project occupancy, so only Chatham guides for full year's AFFO, but each of these three REITs' ratios are a fraction of Realty's:

• Ashford Hospitality Trust (AHT): $5.83 / $1.41 (trailing); P/AFFO ratio: 4.1; yield: 8.23%
• Chatham Lodging Trust (CLDT): 23.29 / $2.41 (2016); P/AFFO ratio: 9.7; yield: 5.67%
• RLJ Lodging Trust (RLJ): $22.92 / $2.50 (trailing); P/AFFO ratio: 9.2; yield: 5.76%

Yes, there are threats from oversupply, economic weakness, Airbnb-type services, and the strong dollar deterring foreign travelers from coming to America. But in a low yield world, those ratios and yields are absurd.

In Ashford's case, an entrenched and greedy CEO is scaring people away, but the CEO likes dividends and owns a ton of shares.

Chatham has Silicon Valley and Washington DC exposure that gives it a lot of upside.

RLJ is almost entirely Marriott, Hilton, and Hyatt - all chains that offer more services than an ordinary hotel, making the REIT more than just an occupancy play, but something of a services play as well.

All three of these REITs look like buys here.

Conclusion

Record low interest rates are sending already low dividend yields even lower. But there are still opportunities in the market. Telecoms and utilities are still providing good income. Fertilizers look like they are near the bottom of their down cycle, and are paying high yields in the interim. Food producers are still providing high and growing yields. And Hospitality REITs may have challenges, but they look absurdly undervalued in this low yield environment.

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Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I am/we are long AMNF, VZ, WEC. 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.