What’s Happened to Dividend Stocks?
An “Income-Picker's” Market
My Favorite Dividend Stock
I am a growth guy through and through, but I'm also a student of the markets in general, which is a very versatile attribute—it allows me to identify major trends and turning points in any market without being an expert in all the nitty-gritty in that area. An obvious example would be gold; I can tell you that the price of gold is now in a bear market after topping out for about 18 months, though that doesn't mean there aren't one or two special gold miners with great expansion potential (new mines, etc.).
All of this leads me to the recent mini-panic in interest rate stocks, funds and other securities. Again, I don't pretend to know all the ins and outs of every REIT or MLP or leveraged municipal bond fund, but from a top-down, student of the market perspective, I do have a few observations (some good, some bad) to share on the subject.
1.) In terms of the major trend, I do think we're either just past, at, or close to a bottom in rates. Sure, maybe benchmark 10-year Treasuries will hang in there better than other rates, but it appears the peak of perception (which is what really drives prices) has passed.
I say this because there has clearly been abnormal selling in many of the higher-quality income names in the market. Obviously, it depends on the stock or fund, but when I see something like Realty Income (O), a huge, diversified REIT that's been a great winner for years, simply melt down on huge volume, that is not a normal retreat—in effect, the chart is showing a sudden change in perception for the worse, almost like a blast-off to the downside! And I'm seeing this type of action across many income-oriented names. Thus, I would expect the top is in (or close to it) for something like O; maybe there'll be a topping process from here, but I doubt there’ll be another huge upleg.
2.) That said, in the short term, I do think there's been a bit too much worry over the future of interest rates. Many of the more volatile bond funds (especially closed-end funds that use leverage) have plummeted 15% to 20%; they've gone from trading at a premium to their net asset value to a sharp discount in many cases. And a few preferred stocks and related funds I keep an eye on have also given up months’ worth of upside in just two or three weeks. All this while the 10-year Treasury is under 2.25%!
Backing up the short-term panic scenario is the action of our own Two-Second Indicator, a key market-timing indicator in Cabot Market Letter. Many of the recent new lows have been bond funds and the like on the NYSE, and the number of new lows reached nearly 400 last Wednesday, an extreme reading. Again, longer-term, it does look like something of a kick-off to the downside, but I wouldn't be surprised to see some of these funds and securities put in multi-week bottoms soon.
3.) Going forward, it's hard for me to predict a major bear market in all things income, mainly because the overall trend isn't yet decisively down, and let's face it—with gold and most commodities looking sick, it's unlikely inflation is really going to pick up in a meaningful way.
More likely, I think it will be an "income pickers market." Even now, I see plenty of higher-yielding stocks that are acting just fine; yes, many of the overplayed defensive names (Kellogg, Johnson & Johnson, etc.) look ragged after big runs, but other dividend payers are holding up well. And, of course, even within certain income sectors like REITs, some look a lot better than others. The same goes in the MLP space and elsewhere.
The bottom line is that the throw-a-dart-and-make-money phase of the income move is probably over. Yet if you're dreaming that the bank is going to offer you a 6% CD, keep dreaming. It's going to take some expertise to wade through the volatility and know where and when to buy and sell going forward.
And here comes a shameless plug—we're in the midst of putting together a new Cabot dividend service, designed to provide portfolio-type advice for the income seeker. It will be edited by Chloe Lutts Jensen (the current editor of Dick Davis Dividend Digest), and it's in the middle stages of development, but we're thinking of launching some time in the fall, which I think will be perfect.
We're not even taking orders at this point, but if you're at all interested, contact our Customer Service Manager, Andre Arsenault. Andre will keep you updated on the publication's progress, and take any and all suggestions, and, most important, he’ll make sure you’re first in line to subscribe at a low charter rate.
4.) Back to the market, I think any backup in interest rates from here can be a good thing ... depending on what your goals are. If you've been what I call an "income speculator" in recent years (meaning you're buying income stocks because they're going up and you want to make money), that game is probably over. Like I said, I anticipate an income picker's market.
However, if your goal is more centered around cash flow, either current (you're retired and use the payouts to pay some expenses or let them build up in a check-writing account) or future (you're building your own annuity by investing in various income products, hoping to tap the cash flow in the future), then this is all good news!
I know nobody likes to see their portfolio values head south, but it's likely we'll start to see payouts from fixed-income securities rise, which will increase your future cash flow. I'm not trying to trumpet sunshine, but as long as you're not obsessed with where your account will stand in six months, gradually higher interest rates could help many income investors.
5.) Last but not least, I think the rise in interest rates is another piece of the puzzle telling us the long bear market in stocks (since 2000) is close to—or at—an end. During the last decade-plus, just about everything BUT stocks has enjoyed a good run. Commodities went nuts on the upside, led by gold but eventually oil, unleaded gas, copper, food, you name it. Housing had a huge run, of course, before that bubble popped. And anything and everything interest rate-related has done quite well despite the up-and-down action from the S&P.
Now, though, more and more of those secular (very long-term) moves seem to be ending. And, in my opinion, that tells me the best place to be for the next decade or two is likely to be common stocks—especially growth stocks.
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I can’t follow up that income-related discussion with a recommendation of a growth stock today, so I’ll talk about one of my favorite income-related ideas today.
Paul Goodwin, editor of Cabot China & Emerging Markets Report, has been following the company on-and-off for many years. He discovered the story, and I think there’s years’ worth of steady growth and dividend increases ahead of it.
I’m talking about Seaspan (SSW), a leading owner and operator of containerships. Hey, that’s not exciting, but that’s kind of the point—the company has 69 vessels on the water today, with contracts to have another 20 built by 2015. Long-term, there’s room for even more vessels as global trade picks up.
The big attraction from an income perspective here is that Seaspan is not what’s called a speculative builder—it doesn’t build new vessels and hope a big company uses them. No, all of its vessels built are chartered to fixed-price, multi-year deals (mainly with huge Asia shippers) ahead of time. It’s like buying a commercial property only after you have a bunch of tenants signed up for 10-year leases.
That business model has allowed the firm to expand quickly, an average of 20% per year in terms of its overall vessel capacity. And since 2004, its lowest utilization rate has been 98.9%! As of May, the firm had more than $6 billion of contracted revenues in the years ahead from its various charters.
All of this has led to big cash flow, which Seaspan’s management is committed to returning to shareholders. It’s paid a dividend each quarter since its IPO in 2005; there was a dividend cut during the bust in 2009, but the payout has soared in recent years and should keep increasing going forward. The quarterly dividend was 19 cents per share in early 2011, then it was hiked to 25 cents in February 2012, and to 31 cents in March of this year. Seaspan also has a small share repurchase plan.
Just as impressive as all that is the stock itself. It traded very tightly for much of last year, then had a nice run earlier this year, moving from about 16 to 23 with little volatility. It’s since dipped only a couple of points and is still standing around its 50-day moving average, despite the carnage in other income stocks.
Sure, in the short-term, SSW could fall lower, especially if the market falls and interest rates continue to rise. But the dividend payment looks not only safe, but likely to increase in the years ahead, and the major trend of the stock remains solidly up. I like it.
All the best,
Editor of Cabot Market Letter
and Cabot Top Ten Trader
Editor's Note: Michael Cintolo is the editor of Cabot Market Letter, which as been uncovering stock market leaders since the 1970s, like American Medical Systems back in the late 1970s--up 1,097%, or Triangle Industries--up more than 150% in the late 1980s, or Yahoo!, Amazon and more in the late 1990s! And Mike is using Cabot's time-tested market timing and growth stock picking system to select the very best stocks of this bull market, like Green Mountain Coffee (GMCR). Don't miss another issue! Click here for details.