Dividends Are The Only Defense In This Turbulent Market

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Includes: AMGN, AVGO, CUBE, EMN, PFG, WEC
by: The Money Madam

The fourth quarter of 2018 has been challenging for the best investors. Just look at the dismal performance of hedge funds. Even the simplest of investments, like an S&P 500 ETF, have performed poorly. The pundits make it sound like Armageddon.

What is an income investor to do? Mostly nothing. Just make sure you are in stocks that pay an ever-increasing dividend. I looked at stocks that announced a dividend raise in 2018. I narrowed my search to include the following:

  • Stocks must have a dividend yield greater than the 10 yr. U.S Treasury
  • Dividend history has to show steady increases in the dividend greater than implied inflation
  • Earnings per share need to be greater than dividend paid out
  • Revenue growth
  • Solid balance sheet

I found six stocks that basically meet these criteria. I am sharing this search with you to illustrate that disciplined investing can create solid and increasing income streams no matter what the overall market is doing.

Looking at the first table below provides insight into these six stocks: Amgen (NASDAQ:AMGN), Pfizer (NYSE:PFE), CubeSmart (NYSE:CUBE), WEC Energy (NYSE:WEC), Broadcom (NASDAQ:AVGO), and Eastman Chemical (NYSE:EMN).

Dividend Yield and Increases:

Why own a stock that pays you the equivalent of a safe security like a U.S. Treasury when you can easily buy the Treasury and know you will get back your money? The reasons are pretty simple.

First, when you buy a bond with a 10-year maturity rate, assuming you pay only par or less, you will receive back your principle when the bond matures. However, the buying power of your principle will be significantly reduced due to inflation.

Next, your income stays the same over the holding period of the bond. During some periods of time the value of a 10-year Treasury can increase when interest rates go down. Right now interest rates are really low and the chance for price appreciation of your bond is very limited.

If you can live on the income created by a portfolio of 10-year Treasuries, go for it. The rest of us who need more have few choices. Stocks that provide a steady stream of income are one of our limited options.

During the next 10 years, I can guarantee your basic expenses will double. I write about this a lot. I have been through nearly three, 20-year cycles and I measure my expenses. In 10 years your expenses will increase by half. To prepare for that, you must find investments and that also increase your income and dividend growth stocks are where I put about one half of my portfolio.

The hurdles I use for my own portfolio and I used to identify these December dividend increasers are: yield greater than 3% and dividend growth greater than 3.8% which is implied inflation extrapolated from the past 20 years.

SYMBOL

12/19/2018

New Div

Old Div

% Div Increase

5 Yr. Div Inc Hx

Current Div Yld

AMGN

$183.08

$1.45

$1.32

9.85%

27.54%

2.88%

EMN

$70.38

$0.62

$0.56

10.71%

15.43%

3.18%

PFE

$41.74

$0.36

$0.34

5.88%

7.69%

3.26%

CUBE

$30.03

$0.32

$0.30

6.67%

29.23%

4.00%

AVGO

$243.20

$2.65

$1.75

51.43%

192.00%

2.88%

WEC

$70.91

$0.59

$0.55

6.79%

10.26%

3.12%

Earnings or Flow of Funds supportive of the Dividend:

During down times, you want a solid "moat." If a stock pays out all its earnings, if earnings decline due to a global or local recession, a change in technology, a mistake with inventory, or running afoul of regulations, they might reduce or even cut your dividend. A dividend cut is a reduction of your income.

When a stock reduces or cuts the dividend, you can be sure the money you invested will also be affected. You can sell and move the investment into a better stock. A better choice is to pick a stock with a good-sized moat.

I like to see earnings per share (EPS) or flow of funds (FOF) in the case of REITs exceed the dividend significantly. Anything under 60% to me is a decent moat. You can see how these six stocks perform on the "moat" metric in the table that follows. You are looking for a low number when looking for payout ratio.

SYMBOL Fwr'd EPS Dividend Div Payout Ratio
AMGN $12.22 $5.80 47%
EMN $10.67 $2.48 23%
PFE $3.96 $1.44 36%
CUBE $1.65 $1.28 78%
* Uses FFO not EPS, Rev in (t)
AVGO $27.80 $10.60 38%
WEC $4.06 $2.36 58%

Revenue Growth:

The funnel that leads to our dividend income begins with revenue. Without revenue a company will never create the cash needed to pay us income. Revenue growth is only one way to create the earnings needed to pay us income. While revenue may not be the only way, you can feel more confident knowing the company is bringing in more and more money.

International companies have to deal with currency issues. Global economies often times move in opposite direction to ours and that can cause revenue fluctuations. While I can be flexible on this metric, I really like to see recent revenues growing.

Solid Balance Sheet:

A solid balance sheet is always important when you invest in stocks. I use debt to equity D/E ratio as my first screen for balance sheet safety.

The balance sheet is a measure of how much debt the company carries. A company can use debt wisely and not so wisely. Lately, debt has been cheap leading to more borrowing by companies. Some companies financed dividends by issuing debt. Others used debt to buy back shares which increases the value of each share you own.

A couple of reasons to care about the balance sheet: you want a company to pay a portion of their earnings to you in dividends and when interest payments decrease the amount available to pay, you suffer.

SYMBOL Fwr'd EPS P/E Ratio Last 4 Qtrs Rev Rev 5 yrs. Ago 5 Yr. Rev Growth D/E ratio
AMGN $12.22 14.98 $23,319 $18,086 5.79% 2.4
EMN $10.67 6.60 $10,137 $9,254 1.91% 1.12
PFE $3.96 10.54 $53,373 $51,917 0.56% 0.68
CUBE $1.65 18.20 $587,544 $307,626 18.20% 0.97
* Uses FFO not EPS, Rev in (t)
AVGO $27.80 8.75 $20,248 $4,269 74.86% 0.66
WEC $4.06 17.46 $7,657 $4,411 14.72% 1.15

Summary:

In each table presented above, I have highlighted in red those metrics of a stock that are marginal. Amgen has a bit too much debt, CubeSmart has both a high payout ratio, but that is by design since it is a REIT, and slow revenue growth. Eastman doesn't increase revenue as much as we would like.

Interestingly, I own none of these stocks at this time. I have owned Amgen and Pfizer in the past. None of these stocks is compelling to me at this time but I will keep them in mind.

The point of this post was to illustrate that dividends are the salve to soothe the wounds of this wobbly market. I looked only at December dividend increases. I apply all these metrics to those stocks I do own. These six stocks will stay on my radar for solid dividend income. Should one or more of these stocks provide good covered call potential, that would increase my appetite. AMGN and AVGO have very good calls.

Dividends, keep paying and increasing those dividends.

M* MoneyMadam