Most income stocks have seen their values trimmed by rising interest rates. I can understand the fru...
A New Twist on Dividend Investing
01/24/2014 10:00 am EST
Using a proprietary, quantitative system, the Cabot Dividend Investor is a new service tailored to various stages of retirement investing; here, editor Chloe Lutts Jensen explains the strategy behind this new advisory service and highlights some favorite dividend ideas.
Steve Halpern: We're here today with Chloe Lutts Jensen, editor of the newly launched advisory service, Cabot Dividend Investor. How are you doing today, Chloe?
Chloe Lutts Jensen: Great, thank you.
Steve Halpern: The Cabot Advisory Group published some of the industry's most widely read and prestigious newsletters with a 43-year publishing history. Could you tell our listeners a little about the background of the organization and your editorial role over the years?
Chloe Lutts Jensen: Absolutely. I've actually been involved with Cabot my whole life, in a way. My grandfather founded the company, so I've been reading the Cabot Market Letter since well before I actually had any money to invest. I think I had a savings account.
Officially, I've been an editor at Cabot for four and a half years now, and, until recently, I was producing the Dick Davis Investment Digest and the Dick Davis Dividend Digest. I was reviewing about 200 to 300 advisories a month for the digest and I thought I saw a need that wasn't exactly being served, which is what inspired my current project.
Steve Halpern: Now, you're taking a big step by launching your own newsletter, which will be called the Cabot Dividend Investor and is scheduled to come out next week. Now, the overriding goal of the service is to generate retirement income in a lower interest rate environment. Could you give our listeners an overview of what they can expect from the new service?
Chloe Lutts Jensen: Well, as you said, today's low interest rates have changed a lot of the rules for retirement investing and there are a lot of choices for investors to make.
Just putting a higher percentage of your portfolio into bonds, as you get older, doesn't really work anymore, but many investors still want to focus on safer investments as they get older and they need some income too, but they aren't sure how to get those things anymore.
I created Cabot Dividend Investor to help these investors find the right mix of income and other investments to take them into and through their retirement.
In practice, that is going to mean that subscribers will get information about all different types of income investments, like dividend paying stocks, in addition to MLPs, and CEFs, and what not. We'll also give them advice on what mix of investments might work for them. Of course, there will be specific recommendations.
We have a model portfolio, and we'll check all our investments, and issue Selects, and give weekly updates, and all that good stuff, so investors never feel like they're in the dark or aren't sure what to do.
Steve Halpern: The Cabot Dividend Investor will be using a proprietary system called IRIS that has taken, some, four years and over half a million dollars to develop. Could you briefly explain what IRIS is?|pagebreak|
Chloe Lutts Jensen: IRIS is our individualized retirement investing system. She does the quantitative part of the investment analysis for Cabot Dividend Investor.
We put in all the data and IRIS calculates two main ratings—a dividend safety rating and a dividend growth rating. Then we use those to choose our recommendations, and our subscribers can look at those ratings and decide which stocks are more appropriate for their portfolio.
It's all very black-box and secret proprietary science, so I can't tell you exactly how it works, but it focuses on the important things about dividend paying investments.
Steve Halpern: Now, one fascinating thing about your service is that it will tailor its advice to where individual investors stand, in terms of their retirement age, whether it's a 40-year-old planning ahead for retirement, or somebody who's already well into their retirement years. Could you explain this approach and how you are going to implement that?
Chloe Lutts Jensen: Well, IRIS will help a lot with this. In addition to the dividend, safety, and growth ratings that it generates, we also divide our portfolio into three tiers—safe income, dividend growth, and high yield.
If you are only 40, you probably don't need income from your portfolio yet; you're still collecting a paycheck, but you know you want it down the road.
You'll be focusing on the investments in the dividend growth tier of the portfolio, which we think will have even larger payouts in the future, and maybe you'll be reinvesting your dividends in those for now, to plan ahead for your retirement, when you want that income.
The investor who is already well into their retirement, on the other hand, probably doesn't care so much about what their portfolio is going to be yielding in two decades.
They want income now, and preferably high income, so that they can maintain their standard of living, and that's why we have high income tax stuff like MLPs and BDCs that are generating really high payouts today.
The safe income tier is where you put the money you can't afford to lose. These investments are all dividend paying and they're, kind of, designed to be like bonds for the new low interest rate world.
Steve Halpern: Now, if you look at those different tiers, perhaps you could share a few specific dividend investments that you are currently recommending or that you will be recommending in the new service.
Chloe Lutts Jensen: Definitely, one of our highest rated stocks in the dividend growth tier right now is Ensco, symbol (ESV), which just increased its dividend the whopping 50% last quarter, and now yields about 5.5%.
They run offshore drilling rigs and they're growing pretty fast, which is supporting higher dividends.
IRIS gives Ensco a dividend growth rating of 9.7 out of 10. Their cash flow is a little uneven, but their 33% payout ratio shows they have some breathing room, even with the big name dividends.
Then, for something a little less volatile, you'd look in the safe income tier, where we have Steady Eddie names like Aflac, symbol (AFL).
Aflac has been consistently increasing their dividends for 30 years, so it earned a dividend safety rating of 9.8 out of 10, so the five-year dividend growth is not bad either, at about 11%, so the dividend growth rating is also pretty good. The yield is small at 2.3%, but it's reliable and growing.
Then, in the high-yield tier, we'll have a few more complicated things, but subscribers will get full explanations of those, so they know if they're right for them.
Steve Halpern: Well, thank you for joining us and good luck with the launch of the new product.
Chloe Lutts Jensen: Thanks for having me.
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