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Nick's Picks: 2020

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Includes: AAPL, AMZN, BA, BMY, CMCSA, DIS, EEM, FB, IEMG, IYF, JNJ, MA, MMM, MO, PM, SPY, T, V, VFH, VIAC
by: Nicholas Ward
Nicholas Ward
Long only, long-term horizon, dividend investing, value
Summary

I've beaten the market 4 out of 4 years with this project portfolio, these are my picks in hopes of making it a perfect 5 out of 5.

Value is hard to find in today's market, so I'm focused on a blend of secular growth, cyclical growth, contrarian value, low beta defensive names, and some high yield.

Best wishes to all in 2020!

I'm going to get straight to the point here because this article is likely to be a long one. Nick's Picks is an annual portfolio project that I began back in 2016. It started with me giving myself $100,000.00 theoretical dollars to "invest". My stated goal for the money is to beat the broader market's performance. Thus far, I've been able to do this each year since. Most recently, in 2019, my Nick's Picks portfolio posted gains of roughly 33.5%, coming is well above the S&P 500's (SPY) ~30% total return performance. Since January 1st, 2016, I've turned that theoretical $100,000.00 into $190,707.86. In this article, you'll find out how I plan to invest that ~$191,000 for 2020 as I attempt to stay undefeated against the broader market's performance.

For those of you who haven't been following the Nick's Picks annual series, here are links to the prior articles.

Links to Nick's Picks 2016 pieces:

(Since 2016, I've decided to simplify things and no longer break down the portfolio by sector/industry in the annual introductory pieces).

Here's the portfolio's rules: essentially anything goes. I can "invest" in any publicly traded asset, or simply sit in cash if I wanted to. I didn't want to put limitation on the holdings because I wanted to keep things simple. With regard to simplicity, I don't have any rules with regard to position weightings either. In years past, I've weighted strategically, but in 2019 I went with an equal weight portfolio and in 2020, I'm essentially pursuing that strategy as well. Also, it's worth noting that all dividends received throughout the year by the portfolio's holdings are not re-investment, but instead, simply pooled and put to work at the end of the year when I do my annual re-balancing.

Really, the only rule of this project is that once selections are made on December 31st each year, I don't touch them again for 365 days. Buy and hold investing takes emotions out of the equation for investors and I've found that typically, fear and greed are the main driving forces that lead to mistakes. Maintaining a strict buy and hold plan helps to avoid these two pitfalls.

I also want to make it clear that the Nick's Picks portfolio is not the same as my own. Personally, I have different goals. However, since so many naysayers appear to believe the self-directed investors cannot beat the broader market on a regular basis, I decided to start this project to prove them wrong. Thus far, I'm 4/4.

This pleases me to no end because I absolutely hate the fact that there are individuals out there who believe they cannot achieve success in the market as a stock picker. It saddens me that so many have bought into the idea that the mom and pop investor cannot be better than average over the long term. The professionals in the investing/money management industry have created a sense amongst many of their clientele that the market is this mystifying enigma that only a select few can decipher. Well, I'm here to tell you that it doesn't take a rocket science to beat the broader market (I'm just a lowly English major). I do think it requires knowledge of market forces, fundamental analysis, and market history. And, most importantly, it requires self discipline. I'm not here to say that beating the market is easy. Excellence never happens on accident and success should not be taken for granted. What I hope that you take away from this piece (or more accurately, this series at large) is that it is possible to achieve greatness in the market and if you're passionate about investing and your financial future, you shouldn't buy into the notion that you're destined to fail.

Here's to keeping that streak alive with Nick's Picks 2020!

2020 Strategy in a Nutshell

When it comes to out-performing the market, you generally need to focus on several of basic things. Your stocks either have to have secular growth prospects that have the potential to generate strong fundamental growth throughout a variety of market environments, cyclical upside in the event of a strong economy, or low valuations so that mean reversion and multiple expansion can generate large returns alongside normal bottom-line growth.

Being a value investor myself, I've generally focused on "buying" high quality equities that were trading at or below fair value. Doing so allows the investor to benefit from the operational success of the companies they own as well as the power of multiple expansion via mean reversion as the market corrects its prior irrational mistakes.

However, coming into 2020, I had a really hard time finding wide margins of safety. Simply put, the market is expensive right now. So, with that in mind, I had to change my tune a bit, focusing more on secular trends and the power of cyclical names to outperform in the short term. I've tried to keep the Nick's Picks portfolio balanced by also adding in some defensive healthcare, a deep value pick in the media space, and a few high yield names, though I had to admit that this year's portfolio contains more stocks with speculative valuations than those from years past.

But, I had to play with the hand that the market dealt me. This makes me nervous with regard to keeping my undefeated record. However, at the end of the day, I think I've decided upon a nice, well balanced selection of blue chip names and I look forward to writing the 2020 recap in a year's time.

Nick's Picks 2020 Portfolio

Ticker 12/31/19 Price Shares Year Start Value
AAPL $293.31 43 $12,612.33
AMZN $1,844.32 7 $12,910.24
FB $205.09 62 $12,715.58
CMCSA $44.95 282 $12,675.90
VIAC $41.98 302 $12,677.96
BMY $64.14 201 $12,828.00
JNJ $145.82 88 $12,832.16
BA $325.63 39 $12,699.57
MMM $176.39 72 $12,700.08
MO $49.90 255 $12,724.50
PM $85.04 149 $12,670.96
T $39.07 326 $12,736.82
IEMG $53.74 350 $18,809.00
IYF $137.85 70 $9,649.50
VFH $76.27 124 $9,457.48

Total Equity Investment

$190,700.08
Cash $7.78

Incoming Cash (declared dividends from Q4 2019)

$700.38
Portfolio Value $191,408.24

Technology: Amazon (AMZN), Apple (AAPL), and Facebook (FB)

When it comes to secular growth, there are few places that are better to look than Silicon Valley.

Apple has been in the annual Nick's Picks portfolios since the beginning of this project. Although I believe that the recent multiple expansion that this company has experienced has significantly diminished its margin of safety, this trend is not changing this year. Apple is no longer the no-brainer value investment that it was a few years back when shares were trading with a price-to-earnings multiple well below the broader market's; however, shares still offer solid growth potential, high shareholder returns, enormous cash flows, and one of the best balance sheets in the world. Although Apple isn't a value investment anymore, it's still a S.W.A.N. (sleep well at night) stock that can easily serve as a core pillar of a long-term portfolio. Apple's top and bottom-line growth was essentially flat in 2019. I think the company can return to growth in 2020. Right now, the consensus analyst estimate for fiscal year 2020 EPS is $13.16, which represents 11% y/y growth. By 12/31/20, we could be talking about ttm EPS of $13.50 or more. Now that AAPL is trading well above the 20x range, I suspect that share price movement will be more in-line with EPS movement. With this in mind, I wouldn't be surprised to see shares post returns in the low to mid teens this year. I'd be happy with those results any year.

Facebook was one of the growth picks that I made for Nick's Picks in 2020. As discussed in the introduction, when attempting to beat the market, growth is your friend. Right now, analysts are calling for 2020 EPS to come in at $9.25, representing 45% y/y growth. On a ttm basis, FB shares are trading for 32.5x earnings. Right now, FB shares trade for roughly 22.5x that forward looking number. If shares are able to post roughly 50% earnings growth in 2020, I suspect that strong, double digit capital gains will follow. This is a rare stock that can offer 20%+ growth while still experiencing multiple contraction. I suspect that the company's growth (assuming it comes to fruition) can protect the shares from a broader market downturn if the macro tide turns. This is the benefit that secular growth offers and even though Facebook has had its problems in recent years, its secular growth story still appears to remain intact. The company continues to face headline risks that will likely be intensified as the company is put under the microscope during the next election season. However, I don't think this is going to stop that massive advertising growth that the company is experiencing (on the contrary, I wouldn't be surprised if the election season serves as a boon to Facebook's advertising segment). Throughout all of the negative headlines that the company has experienced, it doesn't appear as though the ecosystem that Facebook has built has lost any of its stickiness. Billions of sets of eyeballs look at Facebook's products and services every day. These eyeballs generate cash and I don't see this changing anytime soon. Facebook has the potential to be really volatile over the next year or so, but when attempting to beat the market, I'm going to need a stock or two like this on the list.

Like Facebook, Amazon is on this year's list because of my desire to expose myself to secular growth. Unlike Facebook, Amazon's valuation is not so low (even relative to its ~33% forward looking growth estimates.) Simply put, Amazon is on this list because it's probably my favorite secular growth stories. I've long said that Jeff Bezos is one of the very best CEOs in the world and I feel comfortable partnering with him as a shareholder. AMZN shares experienced a consolidation period throughout the second half of 2019 and recently broke out above the ~$1800 threshold that appeared to serve as resistance. I wouldn't be surprised if this consolidation eventually serves as a base for a move back up towards prior highs in the $2020 range in the short term. From here, I think continued strong fundamental growth can drive shares even higher. Personally, I own AMZN as a decade+ long play, though I'm happy to hold shares in this annual picks portfolio because of the reliable growth that it's become known for.

Media and entertainment: Comcast (CMCSA) and ViacomCBS (VIAC)

The Media place has historically played a big role in Nick's Picks portfolios due to my use of Disney (DIS) and a core position. Disney is the second largest position in my personal portfolio (behind only Apple) and generally speaking, when thinking about projects like this, I like to put my (theoretical) money where my mouth is. However, Disney has experienced significant multiple expansion in 2019 and moving into 2020, I decided to avoid the stock for my Nick's Picks list due to the company's high valuation and negative EPS growth prospects. Yet, I still really like the secular growth trends that I see in the media space with regard to demand for content in a world becoming ever more efficient. Long term, I really like Disney because it's the best-in-breed name in this space; however, in the short term, I prefer other names that offer better valuations.

Trading for just 14.5x earnings, I think the Comcast is one of the few values available in the blue chip DGI space. While I think Disney is the absolute best-in-breed name in the media space, Comcast is a solid second. This company is well diversified, offering attractive content creation and global distribution, a very profitable internet segment, theme parks, cellular technologies, and in 2020, we'll see the launch of the Peacock streaming service, which could help to bump up the company's blended multiple assuming it sees some traction with subscribers. Comcast has proven itself to be one of the best and most reliable dividend growth names over the last decade or so. While Disney froze its dividend in late 2019, I expect to see CMCSA continue on its double digit dividend growth path in early 2020 when the company announces its upcoming dividend increase in late January. Assuming this is the case, we should be looking at a ~2% forward yield. Analysts are expecting to see CMCSA produce 7% EPS growth in 2020. This bottom-line growth, combined with company's dividend yield, and prospects for multiple expansion via mean reversion, leads me to believe that CMCSA has the potential to produce double digit total returns in 2020 and that's a great expectation to have for any given year.

I'm very long CMCSA in my personal portfolio; however, I am not long the other media pick that I'm making here: ViacomCBS. To me, this is a speculative, deep value play in the media space that comes with more risk that I'm typically willing to expose myself to (however, I admit that I am considering buying shares of VIAC for my personal portfolio because of the company's dirt cheap valuation). I don't think VIAC's content portfolio is nearly as strong as Disney's, Comcast's, AT&T's, or Netflix's. And, making matter worse, unlike these larger media rivals, VIAC doesn't have an OTT distribution platform associated with it. Instead of investing heavily in distribution, VIAC plans on selling its content to other distributors. The market is frowning on this plan, as shown by the single digit P/E multiple being applied to shares. Even after its December rally, VIAC is trading for just 8.4x ttm earnings. This makes the stock a deep value play with a potential M&A kicker (personally, I don't like making investments with M&A speculation involved; however, I do acknowledge the power of a buyout premium and when trying to beat the market, I was happy to place a bet of VIAC since the blue chip names I'd typically buy are so expensive). VIAC does pay a 2.3% dividend yield, so if I'm wrong about multiple expansion in 2020 due to mean version back towards the industry average and/or M&A bullishness, at least I'll be paid a bit for my time. Analysts are calling for high single digit earnings growth from VIAC in 2020, so once again, we arrive at the same calculation that I had with CMCSA. M&A or not, if the company produces 7% EPS growth, this, combined with the 2.3% dividend yield, and any sort of multiple expansion towards the 10-12x range that media names have historically traded at, has the potential to result in double digit returns.

Healthcare: Sticking With Blue Chips, Johnson & Johnson (JNJ) and Bristol-Myers Squibb (BMY)

Although I am a bit worried about headline risk in the healthcare space as we near the 2020 election, I wanted exposure to these two companies because their valuations appear to be fair and that's a rare thing for blue chip names in today's market. Lowering healthcare costs appears to be about the only thing that U.S. politicians, on both sides of the political aisle, agree upon. However, the methods for achieving this goal remain controversial and the healthcare lobby is strong. At the end of the day, I think the most likely scenario when it comes to healthcare reform is more of the usual, which means, political gridlock and little forward progress. Obviously things could change depending on who wins the Democratic primaries, what he or she chooses to prioritize as core values of their running platform, and whether or not we see change in the White House. All of that is entirely too speculative for me to use when making investment decision, however. Instead of play the political guessing game, I'm pretty happy to just own best-in-breed type stocks in the healthcare space at these acceptable valuations.

JNJ trades for just 16.6x ttm earnings. This is below the company's long-term average of ~18.5x. The company's recent headline concerns regarding the opioid crisis as well as the talcum powder law suits have caused investors to lower their expectations for JNJ. However, in 2019 I was happy to buy this dip myself because I thought JNJ will continue to be a long-term winner. I decided to put it on the Nick's Picks 2020 list as well because of the attractiveness of its valuation relative to the rest of the S.W.A.N. type stocks that I track. If JNJ's multiple expands back to the historical average in the 17-18x range, shares could trade in the $170 area by the end of 2020 when factoring the expected 5% earnings growth. Add the company's 2.6% dividend yield on top of this and you arrive at roughly 20% returns. I also like JNJ because if the market turns defensive, for whatever reason, this will likely continue to be the type of name that shelter seeking investors flock to. A defensive investment with ~20% upside? Don't mind if I do.

Bristol-Myers doesn't have the long-term dividend growth history that Johnson & Johnson does, though I think most investors agree that it's a blue chip name. I wrote a piece recently describing my own bullish stance growing stronger with the news that the company's management team was being more generous in 2019 than in years past with the dividend increase. To me, this implies confidence moving forward past the Celgene (NASDAQ:CELG) acquisition. Right now, BMY trades for 14.4x ttm earnings. To me, that's not a bad price to pay for a blue chip bio-pharma name. BMY has evolved into the world's leading oncology company now that the Celgene assets are under its umbrella. The company has a well diversified portfolio of products and an impressive pipeline to boot. And because of this, analysts are expecting the company to post massive EPS growth in 2020 due to the addition of CELG's cash flows. The current consensus for 2020 EPS here is $6.36/share. In 2019, BMY's EPS grew 9%, from $3.98 to $4.35. This was great. However, it pales in comparison to the 2020 expectations and if those expectations are met, I think this stock could legitimately trade for $100+ by end of the year. A $100 price tag would represent a 15.6x multiple on the current 2020 EPS expectations. That's not a stretch, by any means, for a blue chip company in this space. Combine that capital appreciation potential with BMY's 2.9% dividend yield and you have the total, total return package.

Industrials/Cyclical Exposure: Boeing (BA) and 3M Company (MMM)

During a bull market, strong cyclical names have the chance to post solid out-performance. With this in mind, I wanted a bit of exposure to such names in this year's Nick's Picks.

I went with Boeing, because although it certainly isn't cheap right now looking at trailing twelve month fundamentals, I continue to believe that the stock may prove to be a coiled spring if/when the FAA allows the 737 Max to fly. I continue to believe that the plane will fly. And, I think that when deliveries begin, the market will quickly forget about BA's prior woes and instead, focus on the enormous cash flow potential that all of those stockpiled planes sitting on runways that the company has produced over the last year or so will have. If BA is able to turn on the cash flow spigot again with its narrow bodied planes, I wouldn't be surprised to see BA shares quickly rise back towards the highs in the $440 range that the company made in early 2019. The market is thirsty for reliable profits and regardless of the past issues, Boeing maintains its status as a key player in a global duopoly in one of, if not the most exciting growth market in the industrial sector (aerospace).

If I'm being perfectly honest with you, I acknowledge that this pick could end up being what makes or breaks Nick's Picks in 2020. If the 737 flies, then I think we're looking at a $400+ stock by the end of the year. However, if there are further delays, issues, or even nastier surprises that arise in the new year, I could easily see shares continuing their slide in the other direction. Only time will tell if Boeing rises or falls, but the consolidation that we've witnessed in the second half of 2019 has the potential to serve as a really nice set up for patient investors moving forward.

And, sticking in the industrial sector, I decided to go with what is probably a much safer name: 3M Company. MMM shares have traded poorly in recent years since hitting highs in the $260 range in early 2018. For much of 2019, shares hovered in the $150-$180 range, showing just how far this once loved blue chip has fallen.

The trade war caused much of the concern that led to MMM's significant multiple contraction. In early 2018, MMM shares were trading for more than 27x. I think it's clear that at that point in time, shares were irrationally priced. However, at their recent lows, the multiple being applied to MMM shares had fallen to less than 17x. To me, this doesn't represent an incredible value (it's worth mentioning that during the depths of the Great Recession, MMM shares were trading for just 8.9x earnings). During the next recession, MMM will experience significant multiple contraction as well, due to the cyclical nature of its business and its reliance on a robust economy for growth. However, when I looked over the industrial space (and the broader market in general), MMM was one of the few blue chips that was trading below its long-term average P/E ratio and with this in mind, I'm including it on the 2020 list because I think mean reversion and continued multiple expansion can result in solid returns in the short term (assuming we dodge a macro slowdown during the next 12 months).

Admittedly, it's unfortunate that I find myself picking between the lesser evils in terms of potentially overbought blue chips. In past years, I've had a much easier time finding best in breed names trading at or below my personal price targets. But, right now, I think the market is pretty expensive and these values are few and far in between. I could have gone heavily into cash or fixed income in the 2020 Nick's Picks list, but ultimately, I acknowledge that the market can stay irrational for long periods of time and although I think the majority of equities are expensive right now, in an effort to continue to beat the S&P, I had to stick to the equity space (because I'm certainly not willing to make the bet that cash or low yielding bonds will out-perform equities in the short term).

MMM shares had a nice rally in December of 2019 because of the trade agreement. If relations between the U.S. and China continue to improve, I could easily see MMM shares trading in the 22-23x range. If this were the case, we'd be talking about a ~$215 share price in December of 2020. This growth potential, alongside the company's reliable 3.2% dividend yield, made it a relatively easy selection in an otherwise expensive stock market.

High Yield Plays: Tobacco and Telecom

The cyclical plays above are in the portfolio in case the current rally continues. However, I wanted to have exposure to some low beta, high yield plays in case the market sentiment shifts towards the bearish end of the spectrum. However, due to the current T.I.N.A. market environment that we're investing in, it's difficult to find appropriate value in the high yield space. Equities with reliable yields are being bought left and right by yield starved investors who can't find the income they need in the fixed income space. When looking to add high yield to Nick's Picks this year, I didn't want to reach for yield, risking the sustainability of the dividends, nor did I want to pay outsized and irrational premiums for shares that have been over bought. Thankfully, there are a few bastions of hope in the space with regard to high quality, high yielding names trading at fair value or better. That's how I arrived at the un-loved tobacco names Altria (MO) and Philip Morris (PM) and the debt laden AT&T (T).

Both MO and PM were on Nick's Picks last year. MO was the worst performing name on my list and as I discussed in the Nick's Picks 2019 review article that was published last week, MO is cheaper now than it was when I picked it a year ago. MO has been caught up in the storm created by the vaping illnesses and deaths that became headline news in 2019 due to its significant exposure to JUUL. I wrote a handful of articles throughout the last year or so highlighting the value that I continue to see in MO, regardless of the negative headlines, because throughout it all, management here continues to grow the bottom-line. To me, this is incredibly impressive. It means that the company's 6.77% dividend is safe (in the short term, at the very least). It also means that once the market changes its tune and decides to focus its negative attention elsewhere, the consolidation that MO has had in the $40-$50 range for the last couple of years could easily result in shares shooting higher, rather quickly, in the short term. MO trades for less than 12x ttm earnings when its long-term average ttm P/E ratio is ~14.1x. In short, mean reversion is likely to be MO's friend and I want exposure to the stock when this happens. And what's more, in the meantime, MO shares provide a hefty dividend yield, paying me for my patience.

PM has performed much better than MO in recent years due to the fact that it doesn't have to deal with the political and regulatory pressures that MO is seeing domestically. PM still has to deal with falling cigarette volumes, however. PM has to deal with currency issues and volatile growth in the emerging market economies. Unlike MO, I don't think PM is irrationally cheap. PM shares trade for ~16.4x ttm earnings. This is right in-line with this company's long-term average. Forward growth expectations are also in-line with longer term performance, leading me to believe that the historical norm remains correct in the present. However, even if PM doesn't benefit from the same coiled spring effect that MO may in the coming months/years, the company still offers a reliable 5%+ yield and high single digit earnings growth expectations. Right now, analysts are calling for 7% EPS growth here in 2020. Combining this with the company's 5.5% dividend yield is an equation that has the potential to result in double digit total returns.

And lastly, we leave the tobacco space and enter into telecom land. AT&T has been my favorite name in the high yield equity space for a while now because of the massive discount that the market placed on shares after the Time Warner deal. T was on the 2019 Nick's Picks list too and ended the year as one of the portfolio's top performers. T experienced massive multiple expansion throughout 2019 and now the stock trades with a much narrower margin of safety than it did a year ago. I don't expect to see the same 44% performing in 2020 that we did in 2019, but I think double digit returns are totally possible for 2020 again. T's multiple has risen from roughly 8x to nearly 11x in over the past 12 months. This is massive expansion, yet I think the stock has more room to run. I think a 12-14x multiple makes sense for a reliable high yield name like this. Analysts expect T's EPS to grow by 2% in 2020, to $3.63 by the year's end. Placing a 13x multiple on those expectations, we arrive at a $4 price tag. If shares were to end the year in the $50 range, we'll be talking about ~25% capital appreciation plus the stock's 5.33% dividend yield, resulting in ~30% total returns. That would be amazing. But, if T only produced half of that, I'd be satisfied as well. At the end of the day, if your defensive, low beta, high yield plays can generate double digit total returns, you're setting yourself up for success. This is why I'm happy to have exposure to these 3 particular high yielders, regardless of what the broader markets do in 2020.

Diversification: Financial and Emerging Market ETFs

The 2019 Nick's Picks included the iShares MSCI Emerging Markets ETF (EEM). I like this type of fund because of the growth and value that can be found in the emerging markets. The forward looking P/E ratio of the emerging markets is less than 13x, whereas the major United States stock market averages are trading for something like 18x on a forward basis. The EEM underperformed the S&P 500 in 2019. Actually, the emerging markets space has underperformed the U.S. markets for a while now. To me, this makes it a value play and in a year where I was struggling to find attractive blue chip value to add to the list, I think it made sense to stick with the emerging markets as a diversification measure.

However, in 2020, I'm switching funds from the EEM to the iShares Core MSCI Emerging Markets ETF (IEMG) because while this funds top holdings and backward looking performance appear to be close to the EEM's, the IEMG offers a much smaller expense ratio. EEM's expense ratio is 0.67% and IEMG's is only 0.14%. By going with the IEMG instead of the EEM, I'm saving myself roughly 50bps and that could ultimately end up being the difference between beating the SPY and not.

I want to give a big thanks to one of my subscribers for pointing this expense ratio discrepancy out to me. Admittedly, as someone who invests primarily in dividend growth stocks, I don't pay all that much attention to the ETF space and the different offerings available there. When I brought up the fact that I was including the EEM in the 2020 Nick's Picks list, IEMG was brought up as a potential (cheaper) alternative and I was happy to take such advice.

Sticking to the ETF space, I'm building myself a diversified basket of U.S. oriented financial stocks by including both the iShares U.S. Financials ETF (IYF) and Vanguard Financials ETF (VFH). I decided to own both because the top holdings in each fund are actually a bit different. The IYF gives me significant exposure to some of the big credit card companies such as Visa (V) and Mastercard (MA) whereas the VFH seems to be more oriented towards the big banks and insurers. Owning both gives me broad coverage of the entire financial sector, which I wanted to have to increase the domestic economy heats up and rates begin to rise.

I'm not here to predict a return towards normalization when the Fed meets in 2020. However, I wouldn't be totally surprised if we saw a rate increase or two during the coming 12 months. The domestic economic data remains strong. The job market is healthy. Wages are growing. Unemployment is near record lows. To me, all of this points towards a time when the Fed should be tightening, not loosening with regard to its policy making decisions. I've felt this way for a while now. Simply put, I hope that the Fed raises so that it had some ammunition to fire off when a real recession hits. I'd hate to see the U.S. follow other central banks into negative interest rate territory. I know the market pushed back against the normalization process in late 2018. Since then, the Fed has cut rates 3 times in an attempt to find neutral. Some say that it's here, in the ~2% range on the 10-year. However, I think the economic data can support a 3-4% yield on the 10-year treasury note. If I'm correct, I wanted some exposure to the financial space because these companies will be the biggest beneficiaries if rates do increase.

Furthermore, while I don't trust big bank dividend growth and shareholder returns over the long term, I do expect to see strong CCAR results in 2020 resulting in enormous shareholder return figures in the short term. I think this has the potential to continue to lift multiples across the sector. Once again, we arrive at a situation where I'm banking on rising multiples, strong dividends, and continued fundamental growth to result in solid increases. But, rather than pick and choose individual companies in a sector that I admittedly don't follow all that closely (due to the sustainability issues that I see with regard to dividend growth long term), I thought the safest thing to do was simply play the index game.

This article was previously published for members of The Dividend Growth Club.

Disclosure: I am/we are long AAPL, AMZN, BA, CMCSA, BMY, DIS, JNJ, MA, MMM, MO, T, V. 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.