Displaying items by tag: dividends
Dividends have had a tough year. Because of the pandemic, many companies have had to cut their dividends in the face of losses or declining profitability. Even some who have maintained or raised dividends cannot really afford to do so. Therefore stable, rising dividends with healthy underlying companies are very prized right now. Here are some good names to look at: Whirlpool, Avery Dennison, American Electric Power, and Crown Castle International. All four have recently raised their dividends on the back of robust business. Whirlpool, a major appliance manufacturer seems to be riding the home improvement wave, while Avery Dennison, which makes packaging, is likely benefitting from ecommerce gains. The others (a utility and a cell tower company) have inherently durable businesses.
FINSUM: Cell towers, utilities, and packaging materials seem like very strong areas even if the pandemic gets worse this winter, and there is almost zero rate risk at present.
Dividend stocks have gotten a whole lot harder to choose this year. It used to be that you could pick a wide selection of stable decent-yielding stocks and hold them for the long haul. However, COVID has disrupted that in many ways, as it has disproportionately weakened some sectors and disrupted many business models. With that in mind, here are three key lessons to remember when choosing dividend stocks in 2020: expect lower payouts, be wary of financing, don’t chase after yields. The first one is simple—many companies have had to cut dividends and many more will. The second is highly related to the first: be wary when companies have to use debt in order to maintain a dividend. In that sense, simply maintaining the dividend is not necessarily a sign of strength. Finally, and most interestingly, is the lesson about not chasing yields. Because yields are so low, dividend stocks are likely to see gains anyway, so it is more important to focus on the sustainability of dividends than chase yields that might collapse.
FINSUM: All of these lessons make a great deal of sense in the current environment. We particularly like the idea that stocks which don’t have the very highest dividends might actually produce the best combined returns.
High yield stocks have been wounded during the pandemic. The 100 worst performing S&P 500 stocks since the pandemic began have returned minus 39% and yield an average of 3.07%; the top 100 have returned over 35% and yield just 0.85%. However, now might be the time to buy in as there are some exceptional values. The core idea is that many of these wounded names are going to be bid up over the next several months as yield-starved investors try to find some income.
FINSUM: Right now it is very important to be selective about dividend stocks, as their returns are all over the map. For example, the Vanguard Dividend Appreciation ETF (VIG) has returned 4% this year, while the iShares Select Dividend ETF has returned minus 18%! The reason why is that the latter was weighted towards utilities and financials, which have suffered. Be careful what you choose!
The market is split over dividend stocks. On the one hand, about half the market thinks the huge wave of dividend cuts are over and that most of the damage has been done. One the other, many worry that not all the deleterious effects of COVID have manifested themselves on corporate behavior and that further cuts may still be in the works. The overall picture seems to be one where caution is due given the big jump in valuations and the continued possibility of further cuts. For instance, bank and credit card companies look likely to cut further as high unemployment leads to worsening credit quality and more delinquency. Wells Fargo just announced a dividend cut, for instance.
FINSUM: Our thinking here is to be careful. Even if the economy does not have another lockdown, the full effects of this recession may take a little time to fully show themselves in dividend cuts.
For those interested in dividend investing, REITs have always been a key area. While rate sensitive, they can also provide strong and steady income streams. REITs may seem particularly risky as a whole right now because of the ongoing reckoning in commercial real estate as a result of the pandemic, but there are still some good opportunities to be had. The reason why is that REIT dividends, which have fallen 20% since the beginning of COVID, have likely hit their floor. JP Morgan says “that the current 3.5% dividend yield for the REIT group should be sustainable at this point.” Some of JPM’s best REIT picks right now include Brandywine Realty Trust (BDN, yielding 7.6%), Four Corners Property Trust (FCPT, 5.5%), Welltower (WELL, 5%), Medical Properties Trust (MPW, 6%), and W.P. Carey (WPC, 6.3%).
FINSUM: As obvious as it is to say, in our view, the key to REITs right now is the area of real estate they focus on. Mall REITS—probably not, storage/industrial RETS—much better.