Stefanie Kammerman, the Stock Whisperer, to tell you the Whisper of the Week: GLD and SLV in my week...
Do dividends suddenly seem attractive as the market tumbles? Where ya been all my life? Check out the latest update to my Dividend Income portfolio
05/06/2011 8:30 am EST
I’m seeing evidence that investors are making a defensive shift as the global growth story gets less certain and as more central banks embark on cycles of interest rate increases to fight inflation. (And this was the case even before the recent rout in commodities.)
From August 2010 to February energy, materials, cyclical manufacturing, and commodity stocks led the market. What are called defensive sectors such as utilities, consumer stapes and healthcare lagged behind.
That looks like it changed at the beginning of April. Energy and commodity stocks have started to under perform. In April the healthcare, consumer staples and utility sectors have out performed.
Contrast two stocks, miner Freeport McMoRan Copper and Gold (FCX) with major drug maker Abbott Laboratories (ABT).
In 2010 Freeport McMoRan killed. The shares returned 51.94%, far better than the 15.06% return on the Standard & Poor’s 500 stock index. Abbott got killed. The stock returned a negative 8.08% for the year. That’s more than 23 percentage points worse than the S&P 500 index.
Over the last month? It’s just one month so Freeport McMoRan can’t be said to have collapsed but the stock has lost 2.96% for the month. Abbott, on the other hand, even if we are just talking about a month, did kill. The stock returned 8.02% for the period.
Whistle “The World Turned Upside Down” (1643 version) if you know it.
And it’s not just Abbott. Merck (MRK), a drug stock that went nowhere in 2010 (total return 2.79% for 2010 and that was all due to the dividend), climbed 10.1% in that one month. The major drug makers as a whole were up 8.7%.
Sectors like consumer staples, healthcare and utilities are attractive to investors when the market seems risky because the stock prices at these companies tends to hold up better than at say, a technology or cyclical mining stock—because revenue and earnings hold up relatively well when the economy hiccups. (When the economy goes into crisis, nothing holds up especially well, unfortunately.)
And it also helps that these defensive stocks pay dividends—and relatively high dividends at that. Merck’s stock price may not have shown a gain for 2010, for example, but the stock’s better than 4% dividend pushed the total return for that year to 2.79%. Better than a money market and better than the yield on most Treasuries.
This is the background for my latest revision of my dividend income portfolio.
I last did a major overhaul of my picks for the best dividend stocks on May 28, 2010. (Although I added Intel (INTC) to the portfolio in September 2010.) The environment then was very different. A lot of stocks were still selling at depressed prices and therefore offering exceptionally juicy dividend yields. In that update I added Banco Santander (STD), yielding 8.5%, and Total (TOT), yielding 6.5%. Those two picks have done more than okay. Besides their hefty dividend payouts over the last year, the stocks had appreciated in price by 20.9% and 32.1% respectively, as of May 3. (To see how the entire portfolio has done since its re-launch in October 2009 and since May 2010, go to the top of the portfolio page for my Dividend Income portfolio at http://jubakpicks.com/
But now we’re looking at a stock market that has rallied pretty much non-stop for the last year so that many of the hefty yields of yesterday have been turned into much more modest payouts. Banco Santander, thanks to the euro debt crisis, still pays 6.87%, but the yield on Total is down to 4.65%. On Intel, which I added when the stock was yielding 3.4%, a 24.4% gain in price since September 2010 has taken the yield down to 2.84%.
At the least I need to replace those stocks that have done so well by us in terms of price appreciation that their dividend yield is now relatively paltry with something that pays better.
How much better? If you’ll remember, the original goal when I set up this portfolio was to find a stock that would appreciate in price and pay more in income than the current yield on the 10-year U.S. Treasury.
That’s a moving target, of course. When I added Intel to this portfolio in September 2010, the yield on the 10-year Treasury was just 2.75%. Today, May 4, the 10-year Treasury pays 3.22%. I certainly want to beat that with every stock in this portfolio.
I’m still searching for that elusive free lunch, so I can’t promise you some mythical combination of a yield higher than that on a 10-year Treasury but with less risk. Higher yields always come with more risk. My goal in this portfolio is to minimize that extra risk with good stock picking. Sometimes that works: Banco Santander has clearly been less risky—so far—than its 8.5% yield in May 2010 indicated. Sometimes it doesn’t work: Telkom Indonesia (TLK) was down, as of May 3, 4.03% since I added it to this portfolio in February 2010. That pretty much wiped out any dividend payments during the last year plus.
Today, if I read the market and economy correctly, I think you can find better than 10-year Treasury yields at risk that is less than the market perception expressed in those higher yields in the defensive sectors that I mentioned at the top of this piece. They have lagged through all of 2010 so yields are relatively high but it looks like the market and economic cycles have turned in a way that give these stocks a good chance to appreciate in 2011.
So what exactly am I dropping from the portfolio today and what am I adding?
As you might expect from the above I’m dropping both Intel and Telkom Indonesia. I’m dropping the first since the price appreciation in the stock has reduced the yield below my goal. And I’m dropping Telkom Indonesia because I think right now an emerging market telephone company is sufficiently risky that it should be paying more than the 3.56% yield on Telkom Indonesia.
I’m also dropping Navios Maritime Partners (NMM) from this portfolio despite its high 10.4% yield. This is an extremely volatile stock that is extremely sensitive to shifts in the growth rate of the global economy. The stock was up 17.9% from March 18 to April 28. It’s been weakening since on the increase in worries about global growth. I’m happy to take that profit.
My adds to replace those stocks include AmBev, which I’m moving from my Jubak’s Picks portfolio to this list on expectations of slower earnings growth. The stock pays a dividend of 3.75%. That plus the prospects of modest earnings growth (slower growth as opposed to no growth) make this very stable consumer stock a good fit with this portfolio.
I’m also adding two drug company stocks to this list, Abbott Laboratories (ABT) with a 3.4% yield and Merck (MRK) with a 4.1% yield. I think both of these stocks stand a good chance of gaining in price thanks to the search for safety that is going on in the U.S. market right now.
I’ll post more complete explanations for each of these buys and sells over the next day or two on this blog.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Santander and Freeport McMoRan Copper and Gold as of the end of May. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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