Storm King Art Center
Yes, You Can Have Both Dividends and Growth
Two Dividend-Paying Growth Stocks
Today we start with a photograph of a tree, an Alexander Calder sculpture, and me and my wife (standing in front of the sculpture).
Taken last month at the 500-acre Storm King Art Center in Mountainville, New York, about an hour's drive north of New York City, the photo is notable for two things, one visible and one not.
The visible is not hard to see: the orange of the maple tree echoes the orange of the Calder sculpture (titled Five Swords) beautifully.
The invisible, however, is what I want to talk about today, and it's this.
That tree's leaves are surely brown and on the ground by now.
And the company that generated the money used to acquire that Calder is gone as well!
Named Star Expansion company, it was in the prosaic business of manufacturing metal and plastic fasteners. It employed hundreds of people and was successful for many decades. But in the 1990s, competition from Asia proved its undoing.
Happily for lovers of nature and art, company President Ralph E. Ogden, way back in the 1960s, began acquiring land in the region fairly cheaply and filling it with art. Today, even though his company is gone, Storm King Art Center is home to more than 100 large-scale sculptures.
It's worth a visit, on any beautiful day.
And what does this have to do with investing?
Everything has life cycles, from plants to animals to corporations to countries to planets. Nothing lasts forever.
Even today's seemingly indestructible companies, like Apple, Boeing, Coca-Cola, Goldman Sachs, McDonalds, Nike, Procter & Gamble, Wal-Mart and Walt Disney, will eventually come to an end, swallowed up by more powerful competitors as they lose their power to innovate and grow.
Just 30 years ago, for example, the Dow Industrials included powerhouses like American Can Company, American Tobacco Company, Bethlehem Steel and Union Carbide. Today they've either disappeared or been swallowed up by stronger entities.
And if they were swallowed up, that event typically came after a difficult period for both the company and investors. It's a fact that the longer you own a stock and the bigger your profit in it, the harder it is to sell it.
But holding on to dinosaurs is no way to make, or preserve, your wealth.
Which is why I like to invest in growth. It helps ensure that I'm more on the front of a corporation's life cycle than at the rear.
But what if you want-or need-dividend income?
You can get it! And you don't need to give up growth!
Dividends and Growth
How do you find growth companies that pay dividends?
Using the Cabot resources, there are two excellent ways.
One is to refer to Cabot Dividend Investor, which recommends three different classes of stocks for its readers: High Yield, Dividend Growth and Safe Income.
For this exercise, I focused on the Dividend Growth group, which currently has nine stocks, four of which are rated buy. Of those, I found three with charts that offer decent entry points today, one an insurance company, one a bank and one a tobacco company. And after a bit of fundamental analysis, I found a favorite:
Maiden Holdings (MHLD)
Insurance companies have traditionally been a great conservative way to build wealth and Maiden Holdings, born in Bermuda in 2007, appears to be no exception. Plus, because it's "small," with just $2.6 billion in revenues, it can grow faster!
Right now, Maiden is growing revenues at moderate double-digit rates-11% in the latest quarter. Earnings growth has been less consistent, but analysts are looking for 31% growth in 2016. And the chart looks like this.
I like the slow but steady uptrend. I like the sharp pullback from 17 to 13 on August 24, as the entire market plummeted for one day. It washed out the weak hands. And I like the recovery since then, followed by a normal pullback in recent weeks.
Last but not least, I like the dividend yield of 3.8%, which will almost certainly increase in the future.
Which brings me to a key point about the stocks recommended in Cabot Dividend Investor's Dividend Growth group.
These stocks are selected not just for growth and dividends, but for growth of dividends.
So while you'll get an annual dividend of 3.8% if you buy MHLD today, you'd have a higher dividend if you bought earlier, as the readers of Cabot Dividend Investor did.
They first bought in September of 2014, and now they not only have a profit of 31% on their investment, they're also collecting dividends of 4.7%-based on their lower cost!
Bottom line: buying dividend-payers with real growth prospects rewards you two ways. If that sounds like a system that would help you achieve your retirement goals, you can find more information by clicking here.
The second way to get growth with dividends is to refer to Cabot Benjamin Graham Value Investor.
Currently, the advisory's Value Model Portfolio has 16 recommendations, which are all rated buy, but only if they trade below their recommended Maximum Buy Price.
I looked them all over, evaluating both the charts and the fundamentals, and here's my favorite:
UnitedHealth Group (UNH)
With revenues of $147 billion, UnitedHealth is 57 times the size of Maiden Holdings. As the largest provider of managed healthcare services in the U.S., its stock tends to ebb and flow with every large change in our health care system.
But the company is growing, with revenues advancing slightly under 10% in most recent years. It pays a solid 1.8% dividend.
And, it's undervalued today, which gets us to the heart of the Cabot Benjamin Graham Value Investor system.
Every stock recommended in Cabot Benjamin Graham Value Investor has been quantified using 44 separate measurements. These include measures of quality (like earnings stability), measures of value (like current PE ratio vs. historical PE ratio), measures of growth (like earnings acceleration) and technical measures (like relative strength).
The result of all these calculations is a Maximum Buy Price and Minimum Sell Price for each stock. If you buy when a stock is below its Maximum Buy Price and then simply hold until it's above its Minimum Sell Price (and you do it with a diverse group of stocks), you'll be a successful investor.
Now, the big news last week was that UnitedHealth complained that the exchange business of the Affordable Care Act were too costly for it, and that it might pull out. (It's not the only company making that threat.)
The result was a high-volume selling day that took the stock down just three points to 110, which is basically where it's bottomed four previous times over the past three months.
Which means there's support there. Some institution has been repeatedly buying at that level.
Which means the odds are high that this is a bottom. Which means that if UNH is selling below its Maximum Buy Price today, it's a good buy!
And you can discover this Maximum Buy Price simply by becoming a regular reader of Cabot Benjamin Graham Value Investor.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory