Where's The Dividend? (Hold The Onions)

Summary

• Seeking Alpha dividend investing veteran David Alton Clark joins the Roundtable.
• Dave shares how he came to dividend investing, his risk mitigation tactics in the current market environment, and his sell triggers.
• He also talks about some ideas he's currently passionate about: Bank of America, AT&T, and more.

In 1984, a commercial for fast food purveyor Wendy’s captured the public psyche with the popular catchphrase: “Where’s the beef?” When deciding which stocks to invest in, income seekers might instead ask: “Where’s the dividend?” Not everyone loves a burger (sorry, Wendy’s), but if there’s one thing dividend investors have an insatiable appetite for, it’s a payout. And the bigger, the better.

Seeking Alpha dividend stalwart David Alton Clark knows where to find juicy high yielders. Dave’s been writing on the site since 2010 - so long he’s practically a household name within our dividend & income community - and he’s quite the dividend aficionado. In March, he took the next logical step and launched a service on the Marketplace, called Discovered Dividends. As the name implies, Dave focuses on uncovering lucrative, high-yield opportunities for his subscribers, while also paying careful attention to managing risk, as he discusses in detail in the interview. There’s plenty of great ideas to sink your teeth into here, too, so if you’re a fan of dividend investing or if you’re interested in learning more about how to make income investing work for you, keep reading. There’s no shortage of meat (and potatoes) here. Bon appetit!

Seeking Alpha: Have you always been a dividend-focused investor? How did you come to this approach? Why do you prefer dividend investing beyond all other strategies?

David Alton Clark: Very good question, Robyn. Before we get started, I just wanted to thank you and Seeking Alpha for this opportunity.

My focus on dividend investing has grown throughout the years. My father was a stock broker and told me early on that dividends account for a significant percentage of the total return in stocks. In fact, for the past 80 years, dividends have accounted for over 40% of the S&P 500’s annualized total return. Since 2002, dividends have accounted for about 30% of the S&P 500’s annualized total return. That is a substantial portion of the total returns.

When I first began investing in stocks in the mid-'90s, my portfolio was primarily oriented towards growth stocks rather than dividend stocks. Over the years, the percentages have shifted towards mostly dividend-paying stocks. Even so, I still have a certain portion of my portfolio dedicated to growth/speculative equity boosting opportunities for diversification purposes.

SA: Beyond being a dividend payer, what other criteria do you consider when choosing what stocks to invest in?

DAC: The way I would put it is, before being a dividend payer, what criteria do I look for? The three main factors I like to see prior to putting money to work in a dividend-paying security are a solid long-term growth story, stable predictable cash flow, and a history of returning capital to shareholders.

Furthermore, the factors that determine whether or not to buy any security, dividend payer or not, are assessing the market macroeconomic and geopolitical state of affairs, sector and industry status, individual stock technical and fundamental indicators, as well as having a company-specific product or service catalyst.

SA: Is the current market environment having any impact on the way you think about your dividend investing strategy?

DAC: Not really any strategy changes. I still look for high-yield, dividend-paying securities trading for favorable valuations regardless of market conditions. The opportunities definitely change when entering the late cycle as we are. The current economic expansion is at 105 months, making it nearly the longest in history. The longest economic expansion was 120 months back in the ‘20s. President Trump’s pro-business agenda could be the factor that keeps the expansion going for at least another year or two. So, I feel there are still plenty of great opportunities out there today.

The wall of worry never goes away. The one question I like to ask people in volatile times is: How many times has the market bounced back from a major sell-off? The short answer is, every time. Those that sold out at the lows in 1987’s Black Monday were kicking themselves a few months later went the markets achieved new highs.

SA: How are you and Discovered Dividends members mitigating your risk exposure? With a dividend orientation, how much does risk matter?

DAC: Risk management matters most in late cycle times such as these. Investing is as much about capital preservation as it is about capital appreciation. We mitigate risk in several ways.

Having a well-diversified portfolio is the primary risk mitigation strategy. I maintain a portfolio of 40 stocks with no more than 3-5% allocation to each holding. In my earlier years, I would tend to load up on one or two of my favorite positions, only to see them erode the profits from my other selections when they fell. Keep a well-diversified portfolio and have a rebalancing plan to keep positions in line.

Another risk mitigation tactic is layering in to positions over time. With volatility and trading ranges for stocks at all-time highs, it is important to spread your buys out over time. This lowers the risk of buying in to a full position and then seeing it drop 10% the next day. I can’t tell you how many times this happened to me over the years before I finally learned my lesson. Always dollar cost-average into a position. The higher the beta, the more you need to spread out the buys.

Another risk mitigation tactic is to buy stocks trading at significant discounts. The bigger the discount to tangible book value (or whatever valuation metric you are using), the bigger the margin of safety in the stock.

Lastly, simply buying high-yield, dividend-paying stocks in itself is a risk mitigation tactic. No matter how much the markets swing up and down, you still get your 10% dividend regardless.

SA: Last October, you suggested Bank of America (NYSE:BAC) may be the “best bank buy for the next 5 years.” Do you still feel that way, and is your $36 price target still accurate?

DAC: Yes, I do still feel that way and am sticking with my price target. Bank of America is still the best-positioned bank to increase EPS at present. I have been pounding the table on the stock for the last five years. I wrote an article January of 2012 titled, "The Time Is Now To Buy Bank Of America," recommending to buy the stock when the stock was trading for $6.84. So, I did not just jump on the bandwagon as it were.

Regardless, I see another great five-year period ahead for the stock. The primary catalyst for the stock over the next five years will be the prospects for substantial dividend growth. Furthermore, BAC is trading for a substantial discount with a PEG value of 1.11, one of the lowest in the Banking industry.

A massive paradigm shift has occurred in the banking sector. A fundamental change in approach to regulations by Washington, coupled with the Fed's newly minted hawkish stance, has created the perfect environment for Bank of America to flourish. On top of this, legal woes for the bank are now clearly in the past.

SA: You’ve gotten a lot of pushback from the bears on your coverage of AT&T (NYSE:T). Yet, you’re staunchly bullish on the stock. You’ve written prolifically about it on Seeking Alpha, and you’ve been pounding the table on this name for quite a while, despite its challenges with the DOJ. Hit the highlights for us: Why are you so optimistic about AT&T, and what keeps you firmly on the bull side of the conversation?

DAC: AT&T is making all the right moves at present. Moreover, AT&T has a first-mover advantage over its competition on several fronts. It is ahead of the game in regard to fully integrating content ownership with its network infrastructure in an effort to become the premier Technology, Media & Telecom (TMT) company in the world. On top of this, AT&T already has right-of-way access to the all-important "last mile" due to the company's extensive legacy assets.

Furthermore, don't let the ominous headlines regarding the DOJ worry you. The deal will get done, although there may be a few bumps along the way. Everyone's situation and risk tolerance is different, so I can't make a blanket statement on how others should position.

Nonetheless, a not-so-famous quote by one of my investing role models, Peter Lynch, seems quite apropos at this juncture for current dividend and income investors in AT&T. Lynch stated: "The key to making money in stocks is not to get scared out of them."

That is how I feel about AT&T right now. The trial with the DOJ seems ominous, yet is actually good news, in my opinion. Hopefully, we will be able to put the trial behind us in short order. I submit the DOJ and AT&T will come to an amicable agreement.

One thing I've learned through the years is to do the exact opposite of how I feel. Over time, I've learned that often the exact time I threw in the towel marked the bottom in the stock. Being able to pull the trigger and pick up shares at the point of maximum pessimism in a stock is one of the hardest things to do in investing, I surmise. This is why I always advocate layering into a position over time to reduce risk.

The bottom line on AT&T is the fact that the company is practically a utility at this point. Smartphones and the wireless business are not going away and should provide stable predictable cash flows for many years to come. On top of this, the company has solid long-term growth prospects at present as well.

SA: In your latest piece, you chose Energy Transfer Partners (ETP) as a contrarian MLP pick. You said you see upside in the units despite the MLP sector getting hammered by the new FERC regulations. How so? Even though the MLP sector is currently out of favor, are there other MLPs you think have similar upside?

DAC: A highly negative headline came out recently regarding the Master Limited Partnerships (MLP) sector. MLPs tumbled across the board after the Federal Energy Regulatory Commission announced it will no longer allow MLPs to recover an income tax allowance in cost of service rates.

Nonetheless, the massive sell-off in ETP shares on the news was a case of investors selling first and asking questions later. The reality is the majority of pipelines in the U.S. are not FERC-regulated. In fact, ETP put out a statement shortly after the FERC announcement, stating the new regulations would not materially impact the MLP. The following is ETP’s response to the new FERC regulations:

“DALLAS - (BUSINESS WIRE) - Mar. 15, 2018 - Energy Transfer Partners, L.P. (ETP) is aware of revisions the Federal Energy Regulatory Commission (“FERC”) is proposing to its 2005 Policy Statement for Recovery of Income Tax Costs, which if adopted after a public comment period, would no longer allow interstate pipelines owned by master limited partnerships to recover an income tax allowance in the cost of service. These revisions are not expected to have a material impact to ETP’s earnings and cash flow. Many of ETP’s rates are set pursuant to negotiated rate arrangements or rate settlements that it believes would not be subject to adjustment, or would be limited in terms of adjustment. In addition, many of its current transportation services are provided at discounted rates that are below maximum tariff rates, many of which it believes would not be impacted by a change in the maximum tariff rate.”

My perception regarding the units at this point is they represent an excellent buying opportunity for long-term high yield income investors looking for capital gains as well as income.

The reward far outweighs the risk at the time. The over 14% yield, coupled with adequate coverage ratio of better than 1, establish a solid margin of safety. ETP is underowned and oversold presently.

Regarding other MLPs, I am sure there were other MLP “babies” being thrown out with the bath water. I have a few on my watch list, but none that I feel comfortable recommending at this time. I need to perform further due diligence.

SA: I always ask dividend investors - because many prefer a “buy and hold” approach - what, if any, are your sell triggers, and why?

DAC: The number one trigger would be if the long-term growth story changes. This is what happened with my investment in General Electric (GE). I bought in at $16 five years or so ago. I sold out of the stock at $23 after Immelt stepped down and prior to the dividend cut. At that point, the long-term growth story was no longer visible. It would have basically been gambling to hold on to the stock under those conditions. It wasn’t about cutting losses, but preserving gains in the investment.

The second trigger would be any material changes to underlying cash flows. Positive cash flow is the key to everything. If cash flows materially decline, the company may not be able to continue to pay the dividend.

Other triggers relate to valuation and portfolio allocation management. If I have positions that have been on quite a run, I will trim them back accordingly for portfolio rebalancing. If the stock’s valuation becomes rich either from going on a significant rally or due to fundamental deterioration, I will trim it back as well.

SA: What’s one investing idea you’re currently excited about, and what’s the story?

DAC: I am excited about the energy sector. I feel we may be on the cusp of a breakout for dividend-paying energy stocks. The price of oil and gas has increased substantially over the last few quarters, while energy-related names have remained stagnant. Exxon Mobil (XOM), for instance, is consolidating near its 52-week lows and trading at a highly favorable valuation as we speak. I see several opportunities in the energy sector at present.

Lightning Round

SA: DRiP or draw income directly, and why?

DAC: This is the type of question where suitability comes in to play. I can’t really make a blanket statement regarding the decision to DRiP or not to DRiP, because I do not know each person’s individual circumstance. What I can say is what I do. I am 54 years old and hopefully going to live for quite a bit longer, so I am reinvesting all dividends at this point. I would suggest keep reinvesting dividends for as long as you can until you need the money for income. The only other time I have turned the DRiP off is when one of my positions has had an outsized run and the valuation has risen above my target. I let the dividends stack up and buy in to the stock when it has cooled off and trading for an acceptable valuation.

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Thanks to David Alton Clark for sharing his dividend wisdom on the Roundtable. To read more of his work, click here. And if you’re looking to add profitable high yield dividend investing ideas to your portfolio while investing alongside a seasoned dividend investor, consider a subscription to Discovered Dividends.

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This interview was conducted by Marketplace Contributor Success Strategist Robyn Kurdek Conti.

Analyst’s Disclosure: I am/we are long T, BAC. 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.

David Alton Clark is long XOM, ETP, T, and BAC.