Look for safety and growth in these high-paying dividend stocks
The market just had its worst week of the year, falling every day last week. Does that mean a stock market crash is coming and what can you do to protect your money?
In this video, I’m revealing three of the highest dividend paying stocks that will not only protect your money but KEEP GROWING YOUR PORTFOLIO. I’ve also got an update on our 2019 dividend stocks challenge and the 11 stocks that are doubling the market return.
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What Happened to the Stock Market?
Well, I hoped you enjoyed the big bounce because it looks like stock market volatility is back. The S&P 500 was down every day last week for it’s worst of the year and in fact, the worst week since the mid-December stock market crash. We’ll talk about some of the reasons and how you can invest to not only protect your money but grow it in this video.
I’m combining this video with our March review of our 2019 stock market challenge of dividend stocks. Our stock dividends portfolio is down a little since the February update but not by much and we’re still at about twice the return of the market. I’ll review the portfolio and a few of the picks then I’m going to reveal three high-paying dividend stocks that I’ve been looking at for safety and cash flow as the market moves against us.
I’m putting this video into our 2019 Stock Market Challenge playlist so if you haven’t seen the other two updates, check those out. Along with some of the biggest investing channels here on YouTube, I created a $1,000 portfolio in January and will be tracking it all year long.
To track my portfolio of dividend stocks, I’m investing $1000 on M1 Finance, a no-fee platform that lets 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. It also has retirement accounts available, something Robinhood doesn’t have so that’s important anytime you’re investing in high yield stocks paying dividends.
Why is the Stock Market Down?
Here’s our 2019 dividend stock portfolio at 17.9% through last week that’s against the stock market return at 8.7% and the Vanguard Dividend Appreciation ETF at an 8.3% return on the year. So even on that lower return since mid-February, it’s hard to be disappointed when you’re doubling the market return.
When we look into the 11 dividend paying stocks in the portfolio, we see that all but two are beating the market. These two, the iShares European Financials fund which we talked about last month and the Alerian MLP fund which I’ll review in a bit. This ConAgra Brands position we added last month so that 4.7% return is one-month and outperforming the broader market over the period.
Let’s look at why the stock market’s down and I’ll review a couple of the stocks in our portfolio. Then I’ll show you how to pick stocks that will protect your money and keep growing even if the market tumbles further.
So the message since February has been all about slowing global growth. Europe and China have just revised down their expectations for growth. Europe even went so far as to talk up the need for more government loans to banks. China’s February export numbers were horrendous, a 20% drop in one month, which some of that was because of their New Year but it was still bad.
Here in the U.S. we’ve been seeing signs of slowing growth and last month’s jobs number was the worst since September 2017, adding just 20,000 jobs compared to over 300,000 jobs added in January.
So investors are spooked and probably rightfully so. I still think any U.S.-China trade deal announcement will help and there are some other points I’ll make in how to pick those safety dividend stocks after we review two stocks from the portfolio.
Two Great Dividend Picks with Room to Grow
Back to our portfolio, let’s look at the Alerian MLP fund, ticker AMLP, because even though it’s one of the laggards in our portfolio with a 5.6% return, this is probably my favorite pick going forward and the best opportunity for those of you just getting into our dividend stocks.
Now this fund holds 23 companies in the energy pipeline and storage space, everything you see in this midstream section of the graph. These are special types of companies that avoid paying taxes if they pay out most of their profits to investors.
This is why the fund pays that hot 8.25% dividend yield and the outlook is excellent for the group. Oil and gas production is hitting record highs in the U.S., now the world’s top oil producer and I was reading a report last week that estimated Permian shale production in Texas could jump four-fold over the next five years. That means constant demand for these pipelines and storage.
Since 2014, management at the MLPs have focused on productivity and costs against those weak oil prices so they’re moving more for less. The CEO of Chevron said on Bloomberg last week that its new break even price for oil is closer to $30 a barrel versus fifty or sixty dollars just a few years ago.
But the biggest reason though for holding this energy fund is some research I’ve done on the return versus interest rates. So what we’re looking at here is the yield spread or the dividend return of the AMLP minus the rate on the ten-year U.S. treasury bond. That’s the blue bars. That red line is the forward return, the return over the next year when that difference between the AMLP dividend and treasuries when the difference is at certain points. So for example, right now the AMLP pays a dividend yield of 8.25% while the ten-year treasury is just 2.6%. That’s a difference of 5.65%.
We look along the bottom here for 565 and see that when the difference has been so high, on 20 years of data, that the AMLP has produced a return around 40% over the next year.
There’s a lot that goes into that chart and a lot of other factors that might drive that return higher or lower but I can tell you that the odds are very good for this investment.
I want to look at one more dividend name in our portfolio before revealing how to find safety stocks and the three highest paying dividend stocks I’ve been watching. Here we’ll look at Olin Corporation, ticker OLN, and even though it’s up almost 16% this year I still think it has room to run.
The chemicals manufacturer blew away earnings estimates last quarter by almost 20% and I’m estimating at least a 6% increase in earnings over the next year. That would put the shares at about 12-times earnings and way under the industry average. I’m looking at a price target over $26 a share on top of the 3% plus dividend yield. AND if we get any kind of news that the company is spinning off or selling it’s firearms division, we could get the pop I’ve been expecting.
Overall I’m happy with our dividend income portfolio. We’ve seen some solid returns and it hasn’t dropped as hard as the market. Make sure you check out those earlier videos in our 2019 challenge and watch for that April update.
Three More Dividend Stock Picks for 2019
So I’ve been looking at a few high-yield dividend stocks as safety plays that I might add to the portfolio and it seemed like perfect timing for our review. With that poor jobs number and slowing global growth, the Federal Reserve has been stepping all over itself lately to talk down the idea of higher interest rates this year. Chair Powell has even said that they’d be willing to let inflation overshoot the 2% target for quite a while so I think the odds of any rate hikes are pretty much nil at this point.
That means that some of those traditional safety sectors like utilities, real estate and consumer staples could outperform as an income alternatives to bonds. The idea here is that higher dividend yields in these sectors pull investors out of bonds and the businesses in the sectors are less exposed to the economy.
We’ll look in all three of these sectors but I’d recommend staying mostly in utilities and consumer staples. That real estate sector, especially the office and industrial space, will be more volatile around the economy and business spending.
First here I’m going to look for stocks in these sectors and some of those factors we talked about in the first video, the quantitative screen I use to pick stocks. Here we’ve got some basic fundamentals like increasing revenue and cash flow as well as lower debt compared to peers.
From this quick screen, I’ll filter out for stocks paying a 3% dividend yield or more. The broader market pays around 1.8% so we’re looking for companies that have made that commitment to returning shareholder cash.
Finally, I’ll apply some of that qualitative analysis like looking for a competitive advantage and a payout ratio that leaves room for growth.
What we get is a list of three stocks with some great fundamentals, solid dividend yields and the potential for growth even as the market stumbles.
First let’s look at Dominion Energy, ticker D and a $60 billion energy company that shifted from exploration to a more utility and pipeline focus in 2017. This is giving it stronger cash flows and supporting that four and a half percent dividend. Now the big question mark around Dominion has been it’s Atlantic Coast Pipeline project but management guided to some good news in the 2018 investor day and expects construction to restart this year which would relieve a big overhang on the shares.
Next is Kimberly-Clark, ticker KMB, a $40 billion leader in household products including the Huggies, Kotex and Kleenex brands. Now you don’t get much more stability in a stock than diaper sales, OK. You’re either a Huggies family or a Pampers family and Kimberly Clark controls a third of the baby diaper market AND more than half the adult diapers market…I guess we’re supposed to call it the adult undergarments market.
Now the entire personal care and household segment struggled last year against cost inflation and sluggish sales but Kimberly Clark managed to report positive sales growth. An efficiency program resulted in $510 million in profit savings and management expects profitability improvement this year. The company plans on increasing the dividend 3% and buying back up to $900 million in shares which will make the ninth consecutive year it’s returned $2 billion or more to investors.
Now I know I said to focus on utilities and consumer staples but I also wanted to point out Digital Realty Trust, ticker DLR, as a high-paying dividend REIT that you want to watch.
This $23 billion owner of data centers pays a 3.8% dividend yield and is in a great space if you’re looking at internet growth and data traffic. The data center segment of real estate investment trusts is growing at a 12% annual clip, well above the other real estate segments we see here, yet is priced at just 1.4-times its funds from operations. That’s less than half the price multiple we see in the other property markets.
I think 5G is really going to unlock something in data centers because it’s promising those ultra-fast speeds but that means you’re going to need more local and regional data centers rather than the spacing we see in the industry now. That’s going to mean an opportunity for Digital Realty and should mean solid returns for investors.
Be sure to click through to that 2019 dividend investing playlist of videos to see how we picked stocks for the portfolio. I’m also leaving a link here to M1 Finance, the no-cost investment platform I’m using for the challenge that’s going to save you all those fees whenever you rebalance. Dividend investing could be your best chance this year at protecting your money but still growing it as well.