2019 finishes with an extra kick for investors. Part of that is the continued strong run of the market, erasing memories of last year's near bear market and extending the decade-long bull. There also are plenty of market headlines and events that have sprung over the end of the year, from Phase 1 trade deals to M&A to political whirlwinds and more.
More trivially, the 2010s are ending and the 2020s begin. It has been quite a decade for equity investors, with the S&P 500 returning more than 250% in that time. Even underperformance could leave a portfolio in good shape, and any alpha that was found would really leave investors well off.
Where does that leave investors and the markets for 2020, at the start of a new decade? That's what we try to answer in our annual Marketplace Roundtable series. We are publishing roundtable discussions featuring more than 80 authors from across the spectrum of investing styles and focuses you find on Seeking Alpha: Macro to value investing, small-cap to energy, gold to quant and alternative strategies, and more.
Today's discussion focuses on dividend investing, a perennial hot topic on Seeking Alpha and a style that has had to adapt to a low-rate environment again in 2019. We're featuring the following panel:
Kirk Spano: It has been a great stock market for a decade with only a few lulls and minor corrections. After the financial crisis, it makes sense that the rebound was long and strong. However, the demographically driven "slow growth forever" global economy is structurally challenged. That won't change for decades.
Now, debt is roughly back to 2007 levels and economic growth is slowing globally. A number of factors from trade wars to the potential changing of the tax code in 2021 are threatening to act as catalysts to another correction. That's on top of the steady drip of Baby Boomer money out of stocks. In my view, 2020 is shaping up to be a lot like 2018.
Double Dividend Stocks: The two opposing themes are Trade War Fallout and Mixed Economic Signals. I don't see a smooth rise in 2020, but rather, speed bumps along the way. We'll also have the 2020 elections to stir the market up, which will impact certain industries periodically. Lastly, will the Fed raise rates again in 2020? That's anyone's guess, given the mixed economic signals.
Fredrik Arnold: There's no bubble except a bearish media amplified expectation of a market collapse. The 2020 melt up will continue but will not likely be sharp enough to burst the bearish bubble.
Dividend Sensei: The S&P as of December 16th is up 29% YTD and about 15% historically overvalued per JPMorgan Asset Management. Next year -5% to 5% returns are likely based on the 5% to 8% EPS growth that's likely for 2020. Historically normal 5% to 9.9% pullbacks are likely (one or two of them) and if the current melt-up continues, then a 2020 correction might happen purely due to valuations. But a bear market is unlikely given 13-month recession risk of about 26%. Market timing is the worst thing investors can do, according to 160 years of market data from the US, UK, and Australia, so don't try it.
Robert Honeywill: Levels of share price growth of recent years are unlikely to continue. A leveling off, with a degree of volatility, rather than a sustained precipitous drop, is likely. This contention is supported by Buffett in his 2016 letter, "Both American corporations and private investors are today awash in funds looking to be sensibly deployed." Over the last several years, the lowered return expectations of investors have driven up share prices, resulting in large one-off capital gains for those who remained invested through this period. This might seem counterintuitive, but large capital gains cannot be expected to be achieved during the next five years unless investor return expectations are driven even lower, which is nevertheless possible.
Richard Berger: Engineered Income Investing focuses on value, not momentum. As an income strategy, it also targets high-quality dividend tickers. Thus, we are not concerned (nor overly exposed) to the aging bull market or market volatility in general. In fact, because we use covered option writing to boost income and yield while reducing market risk, we actually benefit from the market volatility, which tends to increase option premiums we earn.
Kirk Spano: Traders carry a lot more power in a thinly-traded and ETF-driven stock market. We have to be respectful of asset price trends and be ever more mindful to maintain a margin of safety. That means technical and quantitative analysis are more important now than when simply buying value worked. For position traders and long-term investors (like me), I am constantly reminding them to "avoid the middle of the market" if risk is a concern. Instead, buy the extreme edges of the markets, what I call "bottom fishing" prices, as there are enough opportunities caused by traders, that a patient approach to buying works.
Double Dividend Stocks: Take management's investor presentations and earnings call promises with a larger grain of salt.
Fredrik Arnold: International investing is safer than domestic speculation.
Dividend Sensei: Buffett was right and the market will always surprise you. In 2019 our biggest winners have been quality companies that had positive fundamentals yet fell into completely irrational bear markets. We bought steadily and are now up 30% to 40% as a result of those positions.
Robert Honeywill: The importance of attempting to gain a better understanding of all of the factors that drive the formation of PE ratios for individual stocks and at sector level.
Richard Berger: 2019 began with most pundits bemoaning a year with a negative outlook, backed by a market correction to start the year. Investors who were moved to the sidelines or otherwise prepared for that outlook paid a steep lost opportunity price. Because EII strategy is designed to thrive in both bull and bear markets and the transitions between them, we stayed the course and have had another excellent year. 2019 again emphasized the need to manage risk as part of a total market strategy instead of allowing markets to manage you.
Kirk Spano: Another historic crash for oil and gas stocks after a rebound in 2017 and 2018. I covered the reasons why in an article titled "Here's Why Oil Stocks Are Priced For Armageddon." In short, there's a battle raging among investors with different views of how fast the oil age will end. That crash also was a signal the alternative energy, EV and smart grid era is coming.
For oil stocks, even in a "run off" situation: No growth and slow decline. There appear to be some value opportunities. But will enough investors buy the stocks to matter? I think so. The companies themselves are buying back shares and paying dividends. That return of capital to shareholders could be very valuable. It's already attracting private equity and vulture investors. We will need to be mindful to sell the rips if there are rallies in oil stocks. Buying some oil stocks now is my exception to the underlying growth rule for dividend stocks.
Double Dividend Stocks: North State Telecommunications (OTCPK:NORSB), a core holding in our Hidden Dividend Stocks Plus Marketplace service, is getting bought out for a 34% premium. In addition to the buyout premium, HDS+ subscribers received two years of fat dividends, yielding over 8%, for a total return of 51% since inception.
Fredrik Arnold: The continued dominance of dividend investment vehicles as a means of preserving and growing wealth.
Dividend Sensei: Maximum SAFE dividend has always been our goal and in 2019 we saw numerous yield traps slash or suspend dividends (like value trap CBL). The stock's reaction to suspending its dividends (including preferred stock dividends) shows that cuts are almost never actually priced in. Avoiding yield traps and sticking to above-average or better quality companies is the best way to not just sleep well at night, but also achieve better long-term returns, both on an absolute basis and a risk-adjusted one.
Robert Honeywill: My biggest story was my June 12 article RH (RH): Expect A Strong Q1 Beat - Trigger For A Massive Short Squeeze, currently up 138%.
My biggest dividend story was my January 9 article - Kellogg (K) DGI Opportunity. The share price currently is up 14.98%, and dividend yield on cost is 3.9% (based on price at publication), outstanding for a dividend king.
Canadian Dividend Growth Investor: We had multiple big stories in 2019 - ideas bought during the year that delivered double-digit returns within the year. The best ones were CVS Health (CVS) shares bought in the low $50s in April that are up 39%. Of course, we generally buy stocks, intending for long-term investment, and we have had ideas that have generated substantial gains over multiple years.
Richard Berger: Defensive market sentiment toward quality dividends (consumer staples, utilities, selected tech) and away from REITs provided strong favorable tailwinds to our EII portfolios which focus on income tickers based on value entry and exit points. The reappearance of Fed QE market intercession to manage liquidity was a surprise that provided added benefits.
Kirk Spano: I think a lot of people confuse what is high quality and what isn't. The Holy Grail for dividend investors should be to find companies that have at least some underlying organic growth. These companies are best able to withstand and recover from recessions.
Companies that have falling revenues, high debt or are engaging in financial engineering to keep dividends up are the trouble of the next correction. That's where the pain will be worst in the next correction, as many of those stocks are bid up to irrational valuations. So, their current dividends won't really help if the share prices are cut in half and eventually followed by dividend cuts, or they cut dividends and their share prices are cut in half.
The way to look at dividend stocks is as two groups. Those in decline with high financial risk vs. those with underlying growth and improving fundamentals. The second group is where to buy, even if their yields today are a little lower.
Double Dividend Stocks: It comes down to capital allocation for management. In the crash of 2008, many Dow 30 and S&P 500 dividend stocks cut their dividends, when they saw how high their yield had risen. I was fortunate enough to have bought some of the stocks that didn't cut their dividends, at fantastic yields, which I'm still holding.
Fredrik Arnold: It would take a nuclear holocaust to dislodge the security of dividend investing.
Dividend Sensei: According to Ned Davis Research, from 1972 to 2018 dividend growth stocks outperformed the broader market by 2.3% CAGR and with 12% less volatility to boot. A company with sufficiently stable cash flows to generate a long dividend growth streak is a great choice for most investors, and income investors tend to be less likely to run for the hills during times of increased market fear. While no dividend stock is a true bond alternative, quality dividend growth stocks (like the famous aristocrats) tend to have much lower volatility over time. Volatility, dividend growth, quality, and value are four proven alpha factors that have beaten the market over the decades. Dividend Kings similarly tries to "stack the deck" in our members' favor by focusing on those four alpha strategies, all part of our overall motto of "quality first, valuation second and prudent risk management always."
Robert Honeywill: I do buy that. And bad markets are great for long-term DGI investors who DRIP because they get more shares for their dividends when share prices are down. Hold through the bad times and come out a bigger winner when the good times return.
Canadian Dividend Growth Investor: Yes, we buy this. Certain stocks fall much less in a market crash. Johnson & Johnson (JNJ) falls in this category. We've added to the stock whenever we found it decently attractive and it has been doing is job - having little volatility and providing a safe and growing dividend.
Richard Berger: Companies that have a history of unbroken and undiminished dividends for 25, 50 and 100 years are not accidents. Some will falter in any given year, but those records prove the commitment to support the dividend in all but the last extreme. Those extremes are usually very easy to anticipate by monitoring the "canary in the coal mine" metrics of cash flow trends, which are the engines of dividend health. Focus on value and monitor for dividend safety and you should weather market cycles with little trouble.
Kirk Spano: I'm a total return investor because growth is an important component to being able to maintain dividend payments in the long term. Companies with high yields are often at risk for a number of reasons from high debt to slow or no growth. Those risks can result in rising payout ratios that can't be maintained long term. Those companies are walking on thin ice, which is fine until of course, a crack turns into an ice bath.
Companies with at least some growth are more able to pay down debt and buy back shares. Buying back shares makes their yields more attractive. In fact, share buybacks in the past decade have proven to be extremely important in maintaining not only share price but dividend yield. Give me underlying organic growth and conservative financials for total return.
Double Dividend Stocks: As an income investor, I'm much more interested in companies whose cumulative yield forms the majority of their total return. Most income investors, myself included, want to receive dependable monthly and quarterly income from their investments, vs. having to try and trade in and out of stocks in order to earn a living.
Fredrik Arnold: Yield is a strong signal for any dividend dogcatcher. It is both attractive and cautionary and the strength of future yield is totally dependent on the ability of the company to sustain its cash flow yield in excess of dividend yield. In other words, without returns, the yield disappears eventually.
Dividend Sensei: We have four portfolios targeting different companies for different goals and needs over time. High-yield tends to have slower growth while faster-growing companies have lower yields. Since 1956 the Gordon Dividend Growth Model (which John Bogle swore by) has shown that total returns are a function of starting yield + long-term growth + valuation changes. Dividend Kings owns above-average or better quality companies with a wide range of yields and growth rates. Our goal is to create portfolios with above average yields (relative to their benchmark ETFs), equal or better long-term growth rates, and equal or better valuation. Such a portfolio, using prudent risk management that fits your needs, is the best way to maximize both long-term safe income over time and also achieve the kind of total returns that can meet your financial goals.
Robert Honeywill: Total return for an investor in shares can only be realized through receipt of dividends and/or gain on sale. At the end of the day, total return from an investment is what matters. Yield from dividends is important because "a bird in the hand is worth two in the bush" and for many investors receipt of dividends meets their cash needs without resorting to selling the underlying shares.
Canadian Dividend Growth Investor: In general, for all stocks, I aim for +10% total returns. However, there are some exceptions. For example, I mentioned Johnson & Johnson in an earlier response. It's higher quality, so I'm alright with getting, say, 9% total return from it, but we have been doing better than that so far with our buys in the stock.
For growth-oriented stocks, I certainly try to aim for +12% total returns. For stocks that yield +5%, I'd surely aim for the minimum +10% total return target.
The more likely a recession or bear market is going to happen soon, the more inclined we are to add to more yield-oriented names but ones that still offer stable growth. Typically, we want a growth component to our holdings.
Richard Berger: Income investors like myself and my subscribers must focus on both. You cannot have one without the other. Yield without total net return is actually just a yield trap. EII strategies are designed to generate high-yield income with reduced market risk even across short-term negative total return periods, thus giving time for total return recovery without the pressure to replace income. This is just one of many risk management tools incorporated into our strategies.
Kirk Spano: Investors are bidding up dividend-paying stocks to unprecedented valuations. I've even had Millennials tell me to give them dividend-paying stocks. PEG ratios (price/earnings/growth) above 2 are common, which is very un-Peter Lynch like. What's worse, many dividend stocks are being bid up despite no earnings growth, that is, a negative PEG. This chasing will end badly for a lot of people.
Double Dividend Stocks: Companies have been moving to stronger dividend coverage vs. higher growth, in addition to moving to lower debt leverage. A greater percent of cash flow is being used to self-fund expansion projects, vs. funding them with 100% debt.
Fredrik Arnold: The quest for quality at any price. The cost of an average share of the Dow index is now 50% overpriced.
Dividend Sensei: I'm very pleased to see fast-growing tech companies like Skyworks (SWKS), Broadcom (AVGO), Apple (AAPL) and Lam Research (LRCX), and others embrace rising dividends. I'm seeing more management teams on conference calls state their dedication to rising dividends over time and as a result expect the number of tech names in the Dividend Aristocrats list to grow steadily over time. I love tech dividend stocks (at the right valuation of course) and the more quality candidates we have to choose from the better and more profitable our Master List of 400 companies can become in the future.
Robert Honeywill: Chasing yield is probably the biggest single factor driving P/E multiple expansion over the last 5 to 10 years. Companies can greatly influence share price levels through dividend policy. For a company actively repurchasing shares, the level of dividends may influence the repurchase price. What's good for the company does not necessarily align with shareholder interests. I have a process for identifying "shareholder-friendly" and "shareholder unfriendly" companies, and the latter is to be avoided no matter how good company performance.
Richard Berger: Dividend income investing is becoming more and more popular as population ages. It also can provide the most reliable and predictable growth (total net return) for long horizon investors while minimizing downside volatility when proper strategies are used. I have developed EII strategies to avoid the negative parts of DGI, dividend capture, and other focused dividend income strategies. Valuation is all-important in selecting entry and exit points for even the best dividends. After all, any company may be a bargain or overpriced at a given moment.
Kirk Spano: The transition to the "smart everything world" continues to move forward and that trend is accelerating. I want to find "asset light" tech companies, as well as companies across all sectors benefiting from tech, that pass money back to shareholders.
I also see a return of scarcity to certain markets in the 2020s due to underinvestment in the past decade. I want to find resource plays in metals, minerals, water and fertilizer, that have pricing power derived from good assets and strong fundamentals. Here I'll toss in one pick. I think Nutrien (NYSE:NTR), which is the leader in potash and is now vertically integrated after the merger of Potash Corp and Agrium, is poised for a huge decade.
Double Dividend Stocks: More diversification into other sectors with strong macro tailwinds, such as healthcare and tech. However, we may do this via backdoor dividend stocks that support these industries.
Fredrik Arnold: This dividend dog catcher will continue to focus on tracking down outstanding proven dividend winners.
Dividend Sensei: Our mission will never change. "Quality first, valuation second, prudent risk management always." Our service has 24 five-star reviews not just because we're making our members money via actionable recommendations each week and our valuation/total return potential lists, but because we help guide members through periods of normal and healthy market volatility. We help them to understand what political/economic/interest rate news is noise and what matters to their long-term financial goals. As Buffett said "We don't have to be smarter than the rest. We have to be more disciplined than the rest."
Robert Honeywill: Gaining a better understanding of the factors driving P/E multiple expansion and contraction across all sectors. While P/E multiple contraction affects unrealized gains (losses) on shareholdings it also increases dividend yields available on high-quality shares, so it's not without opportunities for DGI investors.
Canadian Dividend Growth Investor: As usual, we're focused on quality, valuation, dividend safety, and growth. Additionally, we have several megatrends that we have our eyes set on, although valuation prevents us from buying some areas today.
Richard Berger: Staying focused and on course with EII income strategies will continue in 2020. The further the bull ages, the more inclined I'm to manage for downside protection while maintaining superior (double-digit) income yields. I also find many special opportunities and arbitrage trades available in these aged bull markets to provide strong yield with lower risk.
Kirk Spano: Investors must sell "old economy" stocks in disrupted industries. High debt, low growth and technologically behind companies will suffer as the "smart everything world" continues to emerge. When the next correction hits, a lot of companies will never recover again. Sell them ahead of the next correction to avoid permanent loss of capital. On that next correction, buy the disruptors and companies that use technology well to get ahead of the competition.
Double Dividend Stocks: Industrial Logistics Properties Trust (NASDAQ:ILPT) is a high-yield backdoor to Amazon and e-commerce. ILPT yields over 6% and Amazon (AMZN) is its biggest tenant.
Fredrik Arnold: Medical property real estate investment trusts pay healthy dividends and have a long life expectancy. Just the thing to produce a steady stream of passive income for the savvy investor.
Dividend Sensei: One of our highest conviction buys is Bristol-Myers (NYSE:BMY), due to 46% to 136% growth in fundamentals per share (ranging from EPS, operating cash flow, EBITDA and EBIT). That's courtesy of the hyper-accretive $74 billion Celgene (CELG) acquisition. Despite a 50% rally since late July, it's still extremely undervalued ($109 fair value in 2020) and we're buying more every week until it goes above $76 and is no longer a "very strong buy."
Robert Honeywill: The emergence of hydrogen fuel cells as serious competitors to batteries for electric motor-driven transport. Australia has vast sunny spaces and is planning a transition from supplying coal to the world to supplying hydrogen, with Australian developed technology to back it up. What good are BEVs to Japan unless the electricity to recharge batteries comes from clean fuel sources. Japan is positioning to move to a hydrogen economy, with its own developed technology and is cooperating with Australian interests through joint ventures. This is a developing story, and there will be much to investigate and analyze in 2020 to identify the potential winners and losers. Watch out for Twiggy Forrest and his Fortescue Metals Group (OTCQX:FSUMF) for green energy and other environmental initiatives.
Canadian Dividend Growth Investor: The China-U.S. trade tensions dragged down the valuations for Chinese stocks in 2019. The phase 1 deal has led to a nice pop in some Chinese stocks like Alibaba (NYSE:BABA) and Tencent (OTCPK:TCEHY). Additionally, a greater GDP growth than North America and a growing middle class population will be growth drivers for China.
Tencent is a leader in social networks, online gaming, fintech, and much more. The stock has been one of the top ideas in our DGI Across North America Service for quite some time now. And we've added to it over time. However, there's still lots of growth runway for Tencent in 2020 and beyond despite the stock appreciating roughly 20% in the last few months from a low. So, it remains one of our favorite buy-and-hold dividend growth ideas.
Richard Berger: Value-focused investment strategy will remain key and become even more important as the bull continues to age. Even in late stage bulls, even in bear markets, individual tickers will still arise with excellent bargain value prices available. Knowing how to find these and maximize gains while minimizing risk is what EII strategy is designed for. The easing of trade war tensions also will boost several China-centric opportunities such as Caterpillar (CAT), Deere (DE) and selected tech.
Thanks to our panel for their thoughts on dividend investing in 2020! You can find more of their work here:
We continue our year-end roundtable series tomorrow with a panel on alternative income investing - BDCs, REITs, CEFs, and the like. Watch out for that!
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Kirk Spano is long NTR.
Dividend Sensei is long BMY.
Canadian Dividend Growth Investor is long BABA and TCEHY.
Richard Berger is long DE.
The other authors have no positions in any stocks they mentioned.