SA Roundtable: How Are Dividend Investors Handling Volatility?

The market volatility we have seen so far in 2018 has been the topic of many a discussion here on Seeking Alpha and in the media at large. Not surprisingly, though, there is one group that seems unshakable despite the market madness – dividend investors. Their focus on income appears to help them be better able to manage stocks’ ups and downs with aplomb, and, in many cases, hold on for the long haul while continuing to sleep well at night.

We asked several of our dividend-focused authors on the Marketplace to weigh in on how they’re handling the markets’ mood swings, where they’re seeing opportunities for the remainder of 2018, and their current best dividend ideas.

Here’s our panel:

Canadian Dividend Growth Investor, author of DGI Across North America

David Alton Clark, author of Discovered Dividends

Dividend Stream, author of Streaming Income

Double Dividend Stocks, author of Hidden Dividend Stocks Plus

Fredrik Arnold, author of The Dividend Dog Catcher

George Schneider, author of Retire 1 Dividend At A Time

Richard Lejeune, author of Panick High Yield Report

Rida Morwa, author of High Dividend Opportunities

The Dividend Guy, author of Dividend Growth Rocks

The Fortune Teller, author of The Wheel of FORTUNE

Seeking Alpha: U.S. News recently published this article, dubbing 2018 a “record year for dividend payouts.” Are you finding that playing out in your portfolio? If so, what sectors or companies seem to be delivering most on those payouts?

David Alton Clark: 2018 is shaping up to be a great year for finding fresh high yield dividend plays. The Discovered Dividends High Yield portfolio currently yields 10% on average. There are outstanding high yield income selections in most sectors. The beaten down MLP sectors offer the most bang for your buck at present, I surmise. Nonetheless, not all high yield opportunities are created equal. You must perform rigorous due diligence to ensure the risk is worth the reward.

Double Dividend Stocks: Certain Energy/Basic Materials stocks and Financials have been upping their payouts in 2018.

Fredrik Arnold: The best payouts are found in REITs, Energy, and Industrials.

George Schneider: We are finding this year to be one of consistent dividend growth. Off hand, the tobaccos, like Altria (NYSE:MO) and Philip Morris (NYSE:PM) are handing us hefty increase on the order of 6.1% and 3%, respectively, more than enough to keep us ahead of inflation.

Richard Lejeune: Dividend yields have become very attractive in several sectors, but especially so for midstream.

Rida Morwa: We are seeing strong dividend growth in many of the high yield sectors we cover, including Property REITs and the highest quality Midstream MLPs. Furthermore, many equity closed-end fund (CEFs) that invest in growth stocks are seeing increased dividend payouts. We recommend that high-yield investors have some exposure to these equity stock CEFs in order to achieve diversification. As an example, two equity CEFs that we have been recommending to our investors are Liberty All-Star Equity (NYSE:USA), trading at a 6.3% discount for a yield of 10.7%, and Adams Diversified Equity (NYSE:ADX), trading at a 14.6% discount for a yield of 9.3%. Both of these CEFs have been increasing their payout over the past two years.

At High Dividend Opportunities, we follow a value approach and target stocks and securities trading at attractive valuations, and as a result, we tend to target those CEFs that at trading at a higher than average discount to their peers. Diversification into equity CEFs has been key to successful high-yield investing as it has resulted in lower portfolio price volatility and an improved performance. This comes at a time when many of the traditional high-yield sectors have underperformed the markets in the past 12 months.

The Dividend Guy: My investment strategy revolves around dividend growth. Instead of looking for high yielding companies, I’m picking strong dividend growers. Many of my holdings increased their payout with double-digit numbers last year. The most prolific sector in this regard is definitely the technology industry. “Tech stocks are only good for young investors with no income needs.” This classic thinking about the tech industry cannot be further from the truth today. Companies like, Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT), and Texas Instruments (NYSE:TXN) increased their dividend by 70.59%, 82.61% and 121.4% respectively over the past 5 years. If you want a sneak peak of what will happen in a decade from now, let’s take a look at how an “older” tech stocks dividend list turned out. You will be surprised to see how much dividend growth there is in this sector!

SA: Has this year’s market volatility impacted your investing approach at all? Why or why not?

DAC: Not really any strategy changes. I still look for high-yield, dividend-paying securities trading for favorable valuations regardless of market conditions. The opportunities definitely change when entering the late cycle as we are. As interest rates rise, growth stocks with valuations based on cash flows 5 to 10 years out lose value as the increased interest rates reduce the value of future cash flows. Value stocks tend to perform better in the late cycle. We are returning to a market environment where one in the hand is worth more than two in the bush. For the last 10 years the smart play was to bet on two in the bush that time has come to an end. High multiple stocks are now vulnerable to multiple compression. The current economic expansion is at 105 months, making it nearly the longest in history. The longest economic expansion was 120 months back in the ‘20s. President Trump’s pro-business agenda could be the factor that keeps the expansion going for at least another year or two. So, I feel there are still plenty of great opportunities out there today. Nevertheless, with renewed volatility in the market today, it is more important than ever to prudently allocate capital. You must have courage in your convictions when initiating a new position in times such as these.

DDS: Those 2% down moves can offer better buying opportunities, when a target stock falls even further on a negative market day.

Higher volatility also opens up other investing strategies as well, such as options selling.

Dividend Stream: I’m looking at dividend growth right now. With interest rates ticking higher and higher, bonds are becoming more and more competitive vis a vis stocks. An increasing payout is one important way that dividend-paying stocks can differentiate themselves from bonds in this environment. As I’ve told my subscribers, now is not really the time to be ‘reaching for yield.’ Instead, now is the time to be getting into companies with growing dividends, and growing earnings fundamentals to back them up, and cushy dividend payout ratios.

FR: In a buy and hold strategy, volatility only happens once a year upon portfolio review.

RL: The Panick High Yield Report has a flexible approach towards high yield investing. As the name suggests we look at the most oversold sectors where there can be investor panic. Midstream issues are currently quite depressed despite strong oil prices, growth and other positive fundamentals.

RM: The markets have not been favorable to many of the traditional high yield sectors, which include Property REITs, Midstream MLPs and Business Development Companies (or BDCs). The reason can be attributed to high investor fears in relation to rising interest rates and a flattening yield curve, as the media keeps reminding us that this could be a sign that a recession is coming down the road.

We totally disagree, as the media experts keep looking through the rear view mirror rather than looking through the windshield in order to forecast the future. We continue to believe the economy will keep strengthening going forward, into the year 2020 at least. As a reminder, the International Monetary Fund (the IMF) has forecasted that global economic growth to be at 3.9% in 2018 and 2019, which is the fastest growth since the financial crisis. A growing economy, higher corporate earnings, and tax reforms will slowly shift the yield curve, and we expect it to steepen with the 10-year treasury breaching 3.25% this year and 3.5% in 2019. Corporate earnings will continue to accelerate as we have been seeing this quarter, which should be a tailwind for equities in general. So do not expect the yield curve to remain flat for a long time. The long-term trend for equities remains strongly to the upside.

TDG: To be honest, I didn’t feel the volatility in my portfolio too much. I continue to follow my investing strategy to the dot and don’t mind the current market noise. Dividend growth investing is all about the length of time you are invested and the power of compounding interest. Back in September 2017, I invested an additional $100K in the market and I don’t regret it at all. My portfolio is still in positive territory, and I’m cashing dividends in the meantime.

The only thing I could say is that I wish I wasn’t fully invested already because there are some great opportunities on the market!

The Fortune Teller: Since we entered this year with a more defensive mode than we had in 2017 – volatility for itself hasn’t changed our thinking, but rather strengthened our take about 2018 being a more difficult year to navigate through. Over the past few months, we have been buying mostly into more defensive sectors/segments and the higher volatility hasn’t impacted that approach because we are bracing for – rather than fighting against – a higher volatility.

SA: What metrics or criteria are you currently using to evaluate your dividend investments? Why are these most important to you?

Canadian Dividend Growth Investor: For DGI Across North America, I maintain a list of quality U.S. and Canadian businesses with sustainable payouts because getting stable income is one key benefit of holding these companies. A company with growing profitability is generally preferred (over one that has stagnant profitability) because it implies increased dividend safety and the potential for future dividend growth.

DAC: The three main factors I like to see prior to putting money to work in a dividend-paying security are a solid long-term growth story, stable predictable cash flow, and a history of returning capital to shareholders. Furthermore, the factors that determine whether or not to buy any security, dividend payer or not, are assessing the market macroeconomic and geopolitical state of affairs, sector and industry status, individual stock technical and fundamental indicators, as well as having a company-specific product or service catalyst. The dividend yield should be the last thing you consider, the icing on the cake so to speak.

DDS: Dividend coverage is very important to us. If a company isn’t covering its payouts, we dig further, and see if this is a temporary timing issue.

For example, a company may have acquired new assets, which aren’t fully integrated yet, but the company is still paying increased interest charges for the new assets.

FR: Key metrics are: Price; Dividend; Gains. Additional metrics are: 1 year price target; dividend increase longevity; analyst ratings (1 buy to 5 sell); Extraordinary events, e.g: mergers, acquisitions, spin-offs, sale, etc.

GS: We are most interested in CAGR, compound annual growth rate as well as metrics that indicate cash flow covers dividends, including FFO and AFFO. As dividend income investors, our main concern is that our income grows, year to year, larger than inflation. Those in retirement must always be vigilant about this. If this metric is ignored, the investor in retirement without other sources of income can easily find himself/herself falling behind the inflation eight ball, able to buy less and less goods and services in retirement.

RL: My focus is on cash flow type metrics such as DCF (distributable cash flow). DCF works better for sectors such as midstream than GAAP (Generally Accepted Accounting Principles) earnings. An oil or natural gas pipeline system will tend to increase in value as it matures and more production is connected. This results in higher DCF. For GAAP accounting purposes the same asset would be depreciated (lose value) over time.

RM: First, we are “value investors” before being high-yield investors, and one of our most important criteria is “low valuations.” Basically, our strategy includes buying undervalued stocks with a positive company-specific outlook and solid sectors’ fundamentals. Each sector in the high yield space requires a different valuation method. For example in the case of Property REITs, we tend to look at Price/”Funds from Operations” (or FFO). In general, a Price/FFO ratio of below 10 times is attractive. For Midstream MLPs, we look at the Price/”Distributable Cash Flow” (or DCF). A Price/DCF ratio of 8 times or lower is attractive for us. Value investing reflects a practical, down-to-earth attitude, and it is a strategy that has proved to pay-off handsomely for long-term investors.

TDG: The most important metric for me is the company’s dividend growth. My 7 investing principles are built around this metric. I follow the company’s revenue and earnings trend and make sure its payout and cash payout ratios are in line. My objective is to pick companies that show strong growth vectors to support their dividend growth policy.

TFT: First and foremost we are always looking at the dividend coverage, expecting/hoping for a no cut as a starter. Having said that, valuations of income plays have gone down quite substantially over the past (almost) two years so in many cases we find ourselves (looking for and) finding a wide margin of safety that allows for us to invest in companies that otherwise may have not moved through our filters solely based on the dividend coverage metrics.

SA: Where are you seeing opportunities for the greatest dividend growth through year-end?

DAC: Dividend growth requires EPS growth. The sector I see growing EPS the most over the next 12 months are the energy and tech sectors. Nevertheless, the banking sector could be the big dividend growth sector through year end. This is due to the fact that the Fed will most likely allow the banks to return a much larger portion of EPS to the shareholders. We will find out in June how it turns out. For example, Bank of America (NYSE:BAC) currently has a payout ratio of just 19% implying there is plenty of room for the dividend to grow, and Moynihan has pretty much stated that is their number one goal.

DS: Regarding dividend growth to year-end, I am not exactly sure. However, I believe the greatest dividend growth over the next few years will come from companies that are leading the way in the ‘digital transformation.’ The implementation of AI, ‘deep learning,’ and automation is transforming business across industries. E-commerce is a big part of that, so is the growth in mobile data traffic, but really, this is a trend that is manifesting itself in a myriad of ways.

My focus for the foreseeable future will be to find the dividend-payers among these companies. I strongly believe the greatest dividend growth and earnings growth will come from these names. As an income investor, one of the biggest challenges is to be forward-looking. After all, dividend payers tend to be companies in the mature part of their life cycle, but a portfolio full of declining businesses can be hazardous to your long-term wealth.

DDS: The Financials and Energy/Basic Materials sectors should hold some attractive dividend growth opportunities in the balance of 2018.

FR: Opportunities for dividend growth are found in low-priced, beaten-down stocks with steady dividends and great future business potential.

GS: In our subscription newsletter, we’ve been guiding subscribers in a way that creates their own dividend growth, even if a particular company does not provide it organically itself. This is accomplished by buying companies on sale (REITs have been on sale for many months). Buying at deep discounts to 52 week highs give us greater value, increased potential for greater capital gain, and automatic boosts to yield and income.

RL: The market is not currently rewarding dividend growth for high yield issues. The focus is on companies that can maintain high dividends while reducing balance sheet leverage.

RM: Since early 2017 “growth stocks” have strongly outperformed “value stocks” (or cheap stocks with a low valuation ratios), and notably value dividend stocks. Investors have been under-allocating Property REITs, BDCs and Midstream MLPs in favor of growth and momentum stocks such as Technology and FANG stocks (FANG being Facebook, Apple, Netflix and Google). This has resulted in some over-stretched valuation in growth stocks at the expense of high-dividend stocks. In fact, many of these sector are trading today at their lowest valuations in years and currently presenting some unique buying opportunities. We would like to say that it is very likely that it is one of the best time to load-up and start building a portfolio. Of course, as prices retreat, yields go higher, and this has resulted some highly attractive yields that investors can lock in today. Our “Core Portfolio” is currently yielding 10.5% with some of the best names in the high yield space.

TDG: I think tech stocks will continue to dominate the market in terms of dividend growth (not yield, obviously). The old techs have plenty of cash in their bank account, they are in the process of repatriating a part of their cash offshore, and they have been more than generous in the past few years. There will be several double-digit dividend growers in this sector in 2018.

TFT: Financials remain a top sector for us because the rising yields and the trading activity. The improved profitability is likely to allow financials (mostly lenders) to increase payouts and we remain bullish on the sector for the rest of 2018.

SA: If you could give your younger investing self one piece of advice about dividend investing, what would it be?

DAC: To get started earlier! When I first began investing in stocks in the mid-’90s, my portfolio was primarily oriented towards growth stocks rather than dividend stocks. Over the years, the percentages have shifted towards mostly dividend-paying stocks. My father was a stock broker and told me early on that dividends account for a significant percentage of the total return in stocks. In fact, for the past 80 years, dividends have accounted for over 40% of the S&P 500’s annualized total return. Since 2002, dividends have accounted for about 30% of the S&P 500’s annualized total return. That is a substantial portion of the total returns. Even so, I still have a certain portion of my portfolio dedicated to growth/speculative equity boosting opportunities for diversification purposes.

DDS: Don’t chase yield. Determine if the dividend is well-covered. If it isn’t, look for more solid alternatives.

Always reinvest the dividends, if you don’t need the income.

When asked what was his favorite invention of mankind, Albert Einstein replied, “Compound Interest!”

FR: Start investing and learning the nuances of dividend investing at age 10.

GS: The best advice I would give to my younger self, if I could avail myself of Michael J. Fox’s time machine, or Stewie’s time traveler, would be to simply invest sooner, invest regularly, and invest the largest sums possible. In truth, this is what I actually did from the time I was 11, investing all of my earnings from being a weekend rocker with my band. I never stopped the investing habit and have continued this approach all my life. So, actually, if I had the chance, I’d tell my younger self, “Good job. It all paid off.”

RL: In the aftermath of the financial crisis I was actively trading many bank stock preferred stock issues and baby bonds at around 20 cents on the dollar. While I did very well with those trades, I sure wish I had held them longer.

RM: Successful investing requires discipline and a long-term view. This is specially true for “value investing” as some stocks tend to fall out of favor for a significant period of time. In this case, bargain hunters should remain confident that they are holding stocks that are cheap, and keep focusing on the fundamental as they tend to almost always prevail. Another advice is to keep well-diversified across all sectors in the high yield space as this results in stronger performance and lower price volatility.

TDG: Start today. The best timing to invest your money is yesterday, the second best is today, and the worst is tomorrow. I started investing in dividend paying stocks only 7 years after I started my investing journey. If I could start my investing story over, I would definitely start by picking dividend growth stocks on day one.

SA: What is one of your best dividend ideas, and what’s the story?

DAC: Enterprise Transfer Partners L.P. (NYSE:ETP) units currently represent an excellent buying opportunity for long-term high-yield income investors looking for capital gains as well as income. One of my favorite quotes from investing icon Sir John Templeton is:

“Invest at the point of maximum pessimism.”

Templeton is known as a contrarian investor. He referred to his investment philosophy as “bargain hunting.” His guiding principle was:

“Search for companies that offered low prices and an excellent long-term outlook.”

I feel this statement perfectly illustrates where ETP units lie at present. The reward far outweighs the risk at the time. There is still a wide gap between the bullish sentiment level regarding ETP and the natural gas and energy sectors. The stock may have already bounced off the point of maximum pessimism, yet that only increases the margin of safety for investors opening a new position. ETP’s newly combined assets have created a strong foothold in the most prolific producing basins for the MLP. This should augur well for organic growth for years to come. The over 12% yield, coupled with adequate coverage ratio of better than 1, establishes a solid margin of safety. The ETP is under-owned and oversold presently. I still see 30% upside in the stock. If we can break through resistance at the 200-day SMA, we could be off to the races. Discovered Dividends members are up 10% on the units in the past month alone with a 14% yield on cost locked in. The current yield is still a healthy 12.6%.

DS: I like United Parcel Service (NYSE:UPS). It fits the bill in all the criteria I mentioned before. The rise of e-commerce is really increasing package volume in the US and elsewhere, and that has resulted in consistent, high single-digit top line growth, and bottom line growth approaching the low double-digits. Shares have been beaten down by a holiday season where UPS underestimated package volume, but the long-term fundamentals are definitely there. You’ll get a 3.2% yield with high single-digit dividend growth ahead. Also, the dividend itself remains less than 60% of earnings per share. Tough to go wrong with this one.

DDS: StoneCastle Financial Corp., (NASDAQ:BANX), is a closed-end management investment company, which invests in US community banks, one of the most stable parts of our financial system. BANX invests via preferred equity, subordinated debt and common equity investments in local banks. BANX yields around 7%, and offers retail investors the most attractive yielding access to US community banks.

Hidden Dividend Stocks Plus subscribers are enjoying a 10%-plus total return on BANX so far in 2018, vs. a negative return for the market.

FR: Best dividend idea: General Cable (NYSE:BGC) – bought for $13.80 as of 10/14/16, paying a $0.72 annual dividend. Recently priced at $29.65 as of 4/20/18; still paying the $0.72 annually. (BGC’s yield fell from 5.217% to 2.43% in the past 18 months, but the price upside was 118%.)

GS: With the cloud that AT&T (NYSE:T) has been under with its merger plan with Time Warner (NYSE:TWX) and disappointment with it latest earnings report, we have T in our sites to take another bite shortly. Our subscribers picked up excellent yield on T several months ago when it fell to $32.60 and gave us a 6.13% yield. On Thursday, the disappointing earnings report kicked T’s price to the curb, lower than our last bite. It hit $32.55 then bounced once investor realized what a bargain it had become, once again. Its usual dividend yield is closer to the 5% range. Should the market misprice T further, down to the $30 range, we’ll be picking up more shares and enjoying nearly a 7% yield on this Dividend Aristocrat.

RL: One of my top investing ideas is ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN (NYSEARCA:MLPQ). Please note that this type of 2X leveraged midstream play is not for widows and orphans. However it does provide a very effective way to receive a high yield and potential capital gains while taking advantage of an anticipated rebound in the oversold midstream sector.

RM: Again, there are many opportunities today in the high yield space. We would like to name two of our best picks to buy and hold for the next 2 years at least. First we have been recommending the Washington Prime Group (NYSE:WPG) with a yield of 15.6%. WPG is a mall REIT with one of the best management in the industry. They have successfully re-positioned their portfolio and balance sheet and substantially reduced their risk profile. WPG is now less and less dependent on traditional retail stores. Tier One enclosed and Open Air properties represent 64% of their portfolio. WPG is a classic case of a high-yield stock that has gotten so beaten down that it represents a unique buying opportunity. The price of WPG could easily increase by 50% and the stock would still be trading at reasonable valuations.

Another stock we are bullish on is Energy Transfer Partners (ETP) with a yield of 12.4%. The Midstream MLP sector has witnessed weakness which can be attributed to a great deal of confusion about the impact of the recent tax law changes and a FERC ruling and their impact on MLPs. This has resulted in a pullback in the price of ETP which is one of the largest player with a highest quality assets. The stock is trading at just around 8 times Distributable Cash Flow and offers investors a tremendous upside potential in addition to the very generous dividend.

TDG: I’ve mentioned a few tech stocks already, but one of my favorite companies now is probably Starbucks (NASDAQ:SBUX). The stock has been dead money for the past two years and it’s definitely a good timing to invest. First, Starbucks’ incredible membership programs will push sales higher. Starbucks now counts 14.2 million members. SBUX membership program doesn’t only encourage repetitive spending from its members, but also provides management with A-class marketing information. This is how the company is able to modify its menu, its store size, and design according to what people want.

Starbucks also shows strong momentum in China. Chinese markets will grow nearly double-digit numbers for a while as SBUX is successfully implementing its coffee shops over there. During the last quarter, China comp sale increased by 6%. SBUX is opening over 600 stores per year in China. This territory will become the next “USA land” for the great coffee maker. Oh… did I mention the 25% dividend growth last year and the 500% dividend growth over the past 5 years?

TFT: Past: NEWT, GAIN. These are two unique BDCs that aren’t only making money out of (traditional) lending but also out of VC-like activities.

Future: ENB (midstream-MLP), D (utility). Two distressed stocks that are now paying about 7% and 5.15%. The latest move by both was massive increases to their payouts. While we don’t expect ENB to increase as much going forward, we see in both stocks an attractive combination of income and price appreciation potential from their current prices ($29.60 and $64.70 respectively).

***

Thanks again to our panel:

Canadian Dividend Growth Investor, author of DGI Across North America

David Alton Clark, author of Discovered Dividends

Dividend Stream, author of Streaming Income

Double Dividend Stocks, author of Hidden Dividend Stocks Plus

Fredrik Arnold, author of The Dividend Dog Catcher

George Schneider, author of Retire 1 Dividend At A Time

Richard Lejeune, author of Panick High Yield Report

Rida Morwa, author of High Dividend Opportunities

The Dividend Guy, author of Dividend Growth Rocks

The Fortune Teller, author of The Wheel of FORTUNE

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Alton Clark is long BAC and ETP. George Schneider is long T, MO, PM and all the stocks in the Fill-The-Gap Portfolio. Richard Lejeune is long MLPQ. Rida Morwa is long WPG, ETP, USA, ADX Dividend Stream is long UPS. Double Dividend Stocks is long BANX personally and in client accounts. The Dividend Guy is long SBUX, MSFT, TXN, CSCO. The Fortune Teller is long NEWT, GAIN, ENB, D. Robyn Conti holds positions in T, ENB and BAC.