Follow the stock market challenge dividend portfolio all year to put cash in your pocket
When the stock market crashes, all you have are those dividends for a positive return.
And it looks like 2019 could be a wild ride for investors. That's why I'm starting a new dividend portfolio as part of a 2019 Stock Market Challenge.
I’m starting 2019 with a dividend portfolio that will produce solid returns no matter what happens to the market. In this first video, I’m revealing how I pick stocks and my five favorite dividend stocks.
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2019 Stock Market Challenge
Today’s video is a big one, the first in a year-long investing challenge with some of the biggest channels here on YouTube. I and the other YouTubers in the 2019 Stock Market Challenge are going to be tracking our portfolios, updating you each month to see who can produce the highest returns.
2018 closed in the red and this year could be a turning point for investors so these are going to be some great ideas to help you make your money work for you.
In this first video of the challenge, I’ll show you how I’m setting up my portfolio for max returns this year. I’m revealing how I pick dividend stocks and my five favorite high-yield stocks to start the portfolio.
To track my portfolio of stocks, I’m investing $1000 on M1 Finance, a no-fee platform that let’s you pick your stocks and automatically invests any new deposits across your group. Unlike some of the other investing apps, M1 doesn’t charge a monthly management fee which is why I’m using it for no-cost investing.
Why You Need Dividend Stocks in 2019
Subscribers in the community here know that I usually recommend a diversified portfolio of growth stocks, dividends and value but there are a few reasons I’m focusing on dividends for the challenge portfolio.
This late in the economic cycle, I want to stay away from growth stocks. These are companies that have been bid up over the last ten years on sales growth, think companies like Netflix and Facebook.
It’s not that these can’t be good investments but that growth theme could run face-first into a slowing economy and these will be the stocks that get hit the hardest.
While I like the value investing theme, I also want to get that positive cash return from dividends. If the stock market crashes, those dividends are a big part of the return to investors and a great opportunity to buy into the market at lower prices.
Dividends have accounted for between 17% to 73% of the total return to stocks. In decades with bad crashes like 2000, dividends accounted for almost 100% of the returns.
So I’m using some of the value investing techniques we see in The Intelligent Investor and those used by Warren Buffett, as well as important dividend metrics, to put together a portfolio that not only produces cash flow but also has solid price upside.
How to Pick Dividend Stocks
Now I spent more than a decade as an equity analyst for venture capital and private clients. For each of the dividend stocks I’ve picked for the portfolio, I’ve created a full cash flow analysis and report.
We won’t cover everything in there here but I want to take you through the most important measures I use when looking for these stocks. Then, I’m going to highlight the first five stocks in the portfolio and why they should be in your dividend portfolio.
First, I like to do an initial screen of increasing revenue and cash flow from operations. I’ll also look for a debt-to-equity ratio below the industry average and that total debt is declining for the last couple of years.
This is just a basic check on financial health but makes sure you get started right with companies that are growing organically instead of through debt-fueled growth.
From this quick screen, I’m going to look at stocks paying a 3% dividend yield or more. The broader market pays about a 1.8% yield so we’re filtering here for stocks with the commitment to returning shareholder cash.
Finally, I’m going to look at some qualitative ideas like a competitive advantage the company has over competitors. I’ll be looking at the payout ratio, or how much of the company’s earnings are paid out as dividends, and dividend safety to make sure the company can support those payouts.
Best Dividend Stocks for 2019
My first pick for the dividend portfolio is from a theme that could be one of the biggest opportunities of 2019. I’m talking about Chinese stocks and specifically the China Life Insurance Company, ticker LFC with a 3.1% dividend yield.
Long before the U.S. stock market started crashing in October, Chinese stocks were already tumbling into a bear market over fears of slowing economic growth and the trade war. A lot of these stocks are down thirty- and forty-percent from their highs and trading for half the price multiples of U.S. stocks.
Years from now, when we look back on 2019, this could be one of the biggest opportunities, being able to pick up these Chinese dividend stocks at a huge discount. Look, I’m a patriot to my bones but there’s no denying that China is going to be a bigger part of the global economy.
You need exposure to the market, exposure to china-based firms that are going to benefit in a way that U.S. companies trying to do business there just can’t get.
With that massive drop in Chinese stocks last year, there are two forces that could drive these names higher in 2019. First is just the sheer size and growth in the economy.
Even at a slowing rate, China’s economy is growing at 6.5%, about three-times the economic growth in the States. That means the Chinese are adding nearly $900 billion to their economy, almost twice what’s being added to the U.S. economy.
Second here is that China is a command economy, the government has more power in controlling the economy than I think most investors give it credit. President Xi has tremendous resources from that trade surplus and economic growth, he’s not going to let the economy slow and isn’t going let it look like he’s losing the trade war.
Going into the 2020 elections, President Trump doesn’t want a protracted trade war that’s going to weigh on the U.S. economy. The odds here are excellent that the two get together to find a solution that makes both look good and resolves the trade war this year.
As for China Life, the company controls 19% of the Chinese life insurance market, a country of almost 1.4 billion people. That’s more than four-times the population of the U.S. but the market is still undeveloped and penetration is low in China. I like China Life as a good rebound play and dividend in 2019 but this is definitely one of my top picks for a long-term investment as well.
The shares trade for 11.2-times earnings, that’s about a 40% discount to the average of 18-times earnings on shares of U.S. life insurers. China Life has a payout ratio of just 31% so plenty of earnings there for growth and dividend sustainability.
Our second dividend stock here is specialty chemicals company Olin, ticker OLN and a 4.2% dividend yield. The company is a leader in chlorine derivatives and epoxies, number one in many of its markets, but also has this Winchester firearms division that frankly makes very little strategic sense.
The Winchester segment accounts for just 10% of sales and 5% of earnings so certainly not a material driver. I would not be surprised at all if the segment is spun off or sold sometime in the future to allow management to focus on strategic areas. This could unlock some significant value and push the shares sharply higher.
Pricing in chemicals has been weak over the last few years but is turning and the company could see a turnaround this year. Shares trade for just 10-times earnings, a discount compared to other chemicals companies, and earnings are expected 12% higher over the next year.
The payout ratio is just 41% so that 4.2% dividend is fairly safe and there’s a lot of room for price appreciation here.
The third dividend stock in our portfolio is another theme I’ve been following lately and one of the biggest investments in Warren Buffett’s portfolio.
Banks and community banks specifically have a great opportunity to do well over the next few years on less regulation and higher long-term rates. So I’m adding Bank OZK, ticker OZK with a 3.7% dividend yield.
The regional bank has 251 branches mostly in the Southeast and Texas and has been named the top performing bank in the country for eight consecutive years. Just about every measure here from return on assets to return on tangible equity and non-performing loans, two very important bank measures, are all better than the industry average.
The shares trade at a price-to-book value, a better measure for banks versus price-to-earnings, of just 0.76-times. So shares trade for less than book value of the bank and about a third the average for banks. Against that valuation, Bank OZK has increased its tangible book value at a 22% annual pace over the last decade.
There’s a lot of upside here. Not only are the shares trading at a steep discount, so if investors come back to the stock it could see a 30% return just trading at book value, the shares are also going to appreciate as that underlying book value increases.
Dividend Funds for 2019
Our next two dividend picks are going to be from a recent video on the channel about my favorite dividend stocks that aren’t really stocks. We’re talking about real estate investment trusts, REITs, and master limited partnerships or MLPs.
These two investments are special types of companies, partnerships in companies that own real estate or energy assets like pipelines and storage. Because of the way they’re set up, they pay dividends two and three-times higher than traditional stocks and they add some excellent diversification to your portfolio.
Now something I detailed in that prior video is the fact that you can’t value these REITs and MLPs like you do other stocks. You cannot use price-to-earnings because earnings just don’t make sense in these businesses that have high amounts of depreciation.
For our two picks in the dividend portfolio, we’re going first with the REIT and MLP funds here to get that broad exposure to the themes. I’ll be adding some solid individual REITs and MLPs later but wanted to start off with diversified bets across real estate and energy assets.
So first we have the Vanguard Real Estate ETF, ticker VNQ, which is probably my favorite exchange traded fund. It holds shares of 187 real estate companies spread across all the property types and across the United States.
The fund pays a 4.2% dividend yield and has returned 14.7% annually over the last decade. Beyond the solid cash yield and return, this is a great opportunity to take a little risk out of the stock market and have it in a real asset like real estate.
The fund has been under pressure over the last couple of years because of those rising interest rates. Obviously with the leverage used in real estate, any time you have rising rates, that’s going to weigh on returns but we’re seeing signs that the Fed will slow its rate hikes in 2019 and that could unleash a lot of value in real estate.
We saw the real estate fund in blue here outperforming stocks through 2017 when rates started heading higher. Looking more recently with that market crash and we’re seeing real estate outperform again.
Our fifth dividend stock is in the Alerian MLP Fund, ticker AMLP. The fund holds shares in 25 companies that own energy pipelines, storage and processing with an average company size over $11 billion.
Just like those REITs, MLPs pay out most of their profits to dividends so that means an extremely high dividend yield. For the AMLP, that’s an 8.5% dividend yield which is more than four times what you get on most dividend stocks.
Now that also means that the share prices of these companies doesn’t increase as much as stocks of companies that hold a little more back for growth. You can get some great returns though if you time these investments in MLPs for times when the industry is hurting.
MLPs really took it hard in 2014 when oil prices bottomed and have started to come down again on another bout of weakness in energy. But if you look at where they bottomed in February 2016 and then rebounded 47% to end the year, that was double the return on the broader market and I think we could be in for something similar this year.
I’m adding five more dividend stocks to the portfolio next month but we’ve already got a portfolio with an average 4.7% dividend yield. That’s more than twice the average on the S&P 500 and there is a lot of price return potential in some of these names. Make sure you subscribe to the channel and follow the portfolio. You can also set up your own dividend portfolio through M1 Finance and create your own 2019 stock market challenge.