Dividend Sensei Positions For 2018: Something Is Always On Sale

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Includes: BA, BPY, BREUF, CRIUF, ENB, EPD, EQM, MPLX, NWHUF, O, PEGI, SKT, SPG, T, TRSWF
by: SA Editors

Summary

My goal is to generate maximum safe yield, with fast dividend growth, and buy stocks at their most undervalued.

The market is now more than a year overdue for a correction.

Value stocks are still highly attractive.

Dividend Sensei began writing for Seeking Alpha in 2016 and, in that short time, has amassed a following 16,000+ users deep. The 31-year-old Army veteran's goal is "to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives." He regularly updates readers on his personal portfolios, as well as offers up individual dividend stock analysis.

Dividend Sensei recently took some time to reflect on the past year and look forward to 2018. He shares his thoughts with Seeking Alpha Editor Rebecca Corvino below.

Rebecca Corvino: Let's begin with an overview of your investment style/philosophy. Has anything changed for you in this regard in 2017?

Dividend Sensei: I'm a fundamental-focused, contrarian, value dividend investor. My philosophy is "something is always on sale." That's even when the market is storming to new highs seemingly daily, because some sector or industry is always out of favor.

RC: What are your main goals for your dividend growth portfolio? What rules or principles do you follow when selecting and adjusting holdings?

DS: My goal is to generate maximum safe yield, with fast dividend growth and buy stocks at their most undervalued. The key is dividend safety first and foremost. So, I look at the business model to make sure it's one that can support consistent and recurring cash flow sufficient to cover the current dividend.

Then, I check the balance sheet to make sure the debt levels aren't dangerous and the company has plenty of liquidity to keep growing.

Finally, I want to make sure the industries in which they operate remain healthy, so as to avoid value traps that are doomed to fail and or cut their dividends (an automatic sell for me).

Generally, I look at industry leaders and blue chip names. These are companies that have proven themselves over time and have strong records of maintaining and growing payouts during any economic, interest rate, or political environment.

RC: What is your outlook on dividend growth stocks for 2018?

DS: I remain cautiously optimistic about 2018. That's because even though the market is now more than a year overdue for a correction (historically speaking) and trading at rather frothy valuations, value stocks are still highly attractive. In fact, according to BlackRock, value stocks are trading at a 70% discount to growth stocks. That's the most undervalued they've been (on a relative basis) since 2000. This is potentially a sign that value stocks are set for a strong reversion to the mean, and thus a great 2018.

RC: What do you expect to be the key driver(s) of stock market performance in 2018?

DS: I'm excited to see whether the optimistic corporate earnings growth that analysts are expecting (about 18% next year, taking into account tax cuts) comes to pass. This could, hopefully, allow another strong year (maybe 5% to 15%) while still lowering valuations below their current levels.

That's especially true given that the economy appears to be accelerating (New York Fed is predicting 4% GDP growth for Q4). In addition, the labor market is strong. In fact, Goldman Sachs is projecting unemployment will fall to 3.7% in 2018 and 3.5% in 2019. That would be the lowest level since 1963 and would likely cause wage growth pick up in 2018 (above 3% YOY) and accelerate in 2019 (3.5%).

That in turn could see already-strong consumer spending rise further and give companies a reason to invest in expanding their capacity. The upcoming tax cuts provide for instant capex expensing through 2022, so that could prove a catalyst for strong economic, job, wage, and spending growth to continue for a few more years.

In other words, I'm an optimist on the economy, although I'm carefully watching the yield curve (10 Year treasury yield minus 2 Year yield) in case it inverts (goes negative). Historically, that's been a one- to two-year warning that a recession is coming. However, most signs are highly positive. So, barring the Fed getting too aggressive with rate hikes (which would invert the yield curve), I don't expect to see a recession, or an accompanying bear market, anytime soon.

RC: Does the political climate affect the risks and opportunities for next year?

DS: Not really. My approach is that I'll be buying and holding my dividend stocks for decades, and that means that any company that can't do well or adapt to changing political climates isn't worth owning at all.

Thus, I don't target "Hillary stocks" or "Trump stocks" ahead of elections, nor do I necessarily try to speculate or chase stocks that end up taking off after the results are in. For example, while I like Bank of America (NYSE:BAC) and Boeing (NYSE:BA) shareholders for their fantastic rally in the past year, I didn't buy either because they didn't meet my needs at the time.

Of course, Boeing is at the top of my bear market buy list, and if it hits a 3% yield, I'll be happy to take a position then.

RC: How are you positioned heading into 2018, and where are you looking for new opportunities?

DS: Like Warren Buffett, I'm a long-term optimist about the economy and the market. However, that doesn't mean I'm going hog wild with risk. After all, since I began publicly tracking my own high-yield retirement portfolio on Seeking Alpha in September, I've come to realize that certain industries that I considered solid sources of high yield are not nearly as safe as I thought.

That includes refiner MLPs, LNG tanker MLPs, mortgage REITs, and BDCs. This is why I've been steadily repositioning my portfolio over time to focus primarily on low- to medium-risk stocks. The way I've done this is to look at what industry is most hated at the moment and then buy the best Grade A blue chips in that industry.

A few months ago, that was retail REITs like Simon Property Group (NYSE:SPG), Tanger Factory Outlet Center (NYSE:SKT), and Realty Income (NYSE:O), all of which have recovered nicely.

Then, more recently, it was pipeline MLPs like Enterprise Products Partners (NYSE:EPD), Enbridge Inc. (NYSE:ENB), MPLX (NYSE:MPLX), and EQT Midstream Partners (NYSE:EQM), which are just now starting to rally strongly.

AT&T (NYSE:T) also went crazy for a few weeks, plunging 20% at one point for absolutely no good reason. So, I grabbed a full position in that and have watched it become my biggest winner.

Today, my focus is on high-quality yieldCos (renewable utilities), including Pattern Energy Group (NASDAQ:PEGI), Crius Energy Trust (OTC:CRIUF), and TransAlta Renewables (OTC:TRSWF).

Also on my radar (and short-term buy list) are top-quality Canadian companies and REITs, including undervalued, monthly paying Brookfield Real Estate Services (OTCPK:BREUF) and NorthWest Healthcare Properties REIT (OTC:NWHUF).

Of course, I'm also on the lookout for great company-specific opportunities, such as when a quality REIT does a secondary (like Iron Mountain (NYSE:IRM) just did and fell 7%, so I bought a full position). Or when a stock like Brookfield Property Partners (NYSE:BPY) makes a giant acquisition and the market punishes it over concerns that they overpaid (I just bought a full position at 52-week lows).

I also plan to be more aggressive in 2018 locking down blue chip dividend stocks that meet my 4% minimum yield threshold. This includes such grade A names as: Telus (NYSE:TU), the AT&T of Canada, The Canadian Imperial Bank of Commerce (NYSE:CM), and Algonquin Power & Utilities (NYSE:AQN).

I've also created a series of watch lists, which I call my dip, correction, and crash buy lists. This is where I track those blue chip industry leaders like Altria (NYSE:MO), Bank of Nova Scotia (NYSE:BNS), Pfizer (NYSE:PFE), and NextEra Energy Partners (NYSEMKT:NEP), which are very close to my 4% target yield, but just require a small dip, dividend hike, or both.

In fact, just this week, I used this dip buy list to grab Dominion Energy (NYSE:D), one of my favorite regulated utilities, after the short-term post tax cut dip in high-yield stocks (due to a spike in interest rates), caused it to fall 6% in three days.

The core themes I'm working off are: defensive businesses (recession-resistant), with strong, stable cash flows, solid balance sheets, and safe and growing payouts.

I'm also a big fan in a highly diversified portfolio. In fact, I will soon own 26 stocks, with none representing more than 5% of my holdings, or dividend income. That's because I've learned the hard way that no matter how great a company may appear at any given moment (or how great the long-term potential is), something can always go wrong.

This is also why I've adopted a dividend risk weighting to my positions, to ensure that higher risk holdings make up no more than 2.5% of my portfolio each. That way, in a worst case scenario, (dividend cut which is an automatic sell for me), I avoid excessively large losses.

The bottom line is that, while I'm highly optimistic for strong economic growth in 2018, I'm also positioning myself for a correction (that could come at any time), as well as a recession that will inevitably strike - though perhaps not for a few years.

RC: What is your highest conviction pick (long or short) heading into 2018 and why?

DS: That's a tough call. In terms of investing style, I definitely like high-yield value stocks for 2018, since they are likely to have a strong mean reversion year and thus outperform overvalued growth stocks.

In terms of sectors? REITs and midstream MLPs are likely to do well, especially those that have done the worst this year, such as retail REITs like Simon Property Group, Realty Income, and Tanger Factory Outlet Center. In midstream (pipelines), I think Enbridge, Spectra Energy Partners (NYSE:SEP) and Enterprise Products Partners are all attractively priced low risk high-yield options.

But if I had to predict which single stock I follow might do the best in 2018, a kind of Babe Ruth "point to the stands and call your shot" kind of thing, then, Hanesbrands (NYSE:HBI) seems like a really good choice.

It offers a 3% yield, is about 36% undervalued, and is likely to generate safe dividends that grow about 7% to 8% over the long term. In other words, 10% to 11% total returns, in a low risk, and low volatility (81% less volatile than the S&P 500 over the past 3 years), package.

RC: Who will you be reading on Seeking Alpha in 2018?

DS: Seeking Alpha is a great place for regular investors to find numerous subject matter experts (gurus) in numerous fields. For example, here's who I follow to help me find great ideas in various dividend investment areas:

•REITs: Brad Thomas

•Canadian high-yield stocks: Trapping Value

•BDCs: BDC Buzz

•ETFs: Dave Dierking

•How To Live Off Dividends In Retirement: Steven Bavaria

•Portfolio Composition Examples: Regarded Solutions

Keep in mind this is hardly an exhaustive list. I follow 22 other Seeking Alpha authors, and I'm sure there are many more worth following (I just don't have the time).

Disclosure: I am/we are long SPG, SKT, O, EPD, ENB, MPLX, EQM, T, PEGI, CRIUF, TRSWF, IRM, AGN, D.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.