Execution is King in Choppy Markets

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Today’s notable market participants and the media alike are fixated on a few central themes that have painted the investing landscape for most of 2015. Those factors include the 50% rally in the dollar against the euro, the 50% decline in the price of crude oil and natural gas, the piling on of global quantitative easing (QE), the 35% decline in the 10-year Treasury yield, asset bubbles, liquidity issues and, lately, the sharp contraction in first-quarter profit growth. Keep in mind those growth forecasts came from the most respectable Wall Street economists and chief investment officers.

While the talking heads on CNBC, Bloomberg and Fox Business fan the flames of worry and fear about what lurks behind the curtain of the Q1 earnings season, it makes sense to turn down the volume on the set-top box and pull up some charts of those not-so-glamorous dividend-paying stocks that are quietly leaving the high-beta hares in the dust year to date. The oxymoron that there is genuine truth behind the fable penned by Aesop is representative of where money is gravitating to when the level of uncertainty is elevated.

Let’s put some perspective on the beauty of exercising patience and endurance to win out over the long term. We’re 14 weeks into 2015 and the S&P 500 is quoted at 2,095 after beginning January 1 at 2,060. That 35-point move higher translates to a 1.7% gain on the year, which could be wiped out with a single headline, as we already have seen on more than one occasion this year.

Yesterday, Walgreens Boots Alliance (WBA), a drugstore chain, saw its stock trade above $93 after beginning the year at $75. At $75, the dividend yield for shares of Walgreens was about 2.0%. So, not surprisingly, at a share price of $93, the yield is reduced. But no one is complaining when the stock has appreciated +24% in three-plus months. While not a sexy cloud, mobile or digital media play, the stock of WBA is outperforming those of Apple (AAPL), Facebook (FB), LinkedIn (LNKD) and other market hares.

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Surveying the trading landscape, other blue-chip household stocks with more attractive yields are stealing the rabbit’s thunder in what is now the widely accepted view of a slow-growth economy. Shares of Pfizer (PFE), paying a current yield of 3.2%, are up on the year by 13%. The stock of J.M. Smucker (SJM), paying out a 2.2% yield, is up 16% for 2015. The last I heard, Smucker’s makes peanut butter and jelly.

Kraft Foods Group (KFRT), a company that puts out processed foods like Cheez Whiz, Cool Whip, Velveeta Cheese, Kool-Aid and Miracle Whip, which nutrition critics pan, began the year trading at $62 and paying a 4.2% dividend yield. But Kraft just returned 50% to shareholders after its acquisition at $90 per share.

A company left for dead, General Electric (GE), announced a spinoff of GE Capital along with a $50 billion stock repurchase plan, sending shares to a new 52-week high of $28. GE is up 10% so far in 2015 while offering a 3.3% dividend yield.

CEOs and activists alike are taking measures to unlock deep value in what are usually considered stodgy and boring companies. And the best news is that there is likely a lot more of this kind of activity to come in the months ahead.

With the Fed having gone back to the drawing board about how to stimulate inflation and justify how to raise short-term rates, Cash Machine holdings like AllianceBernstein Holding LP (AB) that I’ve highlighted previously are making a strong case for strategic high-yield investing. The shares are up by 20% for 2015 and still sport a current yield of 7.4% while trading at a fresh 52-week high.

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I believe similar examples, such as Cash Machine holding New York Community Bancorp (NYCB) with a 5.9% yield, will make their way out of the shadows of the limelight stocks in what likely will be a very tough year for pure growth stocks. Pundits who dominate the airwaves and business content are too focused on whiz-bang, game-changing technologies and fail to understand that the slower gross domestic product (GDP) growth determines multiple expansion or contraction.

High-beta stocks might be all the rage in terms of transformational change in various industries, but supporting lofty price-earnings (PE) ratios in a neutral market is akin to swimming upriver. In market terms, that situation is called “fighting the tape.” Bond yields are low and will remain so for a long, long time. When adjusting for 1-2% core inflation and taking on another 20% for taxes on investment income, a typical 3% qualified dividend yield nets out roughly 2% when adjusting for inflation and taxes.

All the financial engineering by the Fed may have driven down the cost of borrowing capital, but it also has made it very difficult to replace conventional fixed income assets, almost forcing investors to rotate into dividend-paying equities. For what lies ahead, it’s my view that a blend of a healthy weighting in high-yield assets and in blue-chip stocks that offer products that dominate the kitchen and bathroom is how investors can stay ahead of inflation and the tax man while benefitting from a mergers and acquisitions (M&A) wave.

The sands of economic growth have shifted underneath the stock market to where not only the first quarter will show weakness, but quite possibly the second quarter as well. Most investment professionals likely would agree the market has priced in a slow Q1. But much will hinge on forward guidance for the economy. If my hunch about lingering softness for the economy is correct, those same pundits talking up a spirited rebound in the second quarter will be quickly changing their tune and falling back in love with dividends. It’s a time-tested and historically documented method of how investors really win the race.

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In case you missed it, I encourage you to read my e-letter column from last week about the impact of Fed interest rate changes. I also invite you to comment in the space provided below my commentary.

Upcoming Appearance

I invite you to join me at the MoneyShow Las Vegas, May 12-14, 2015. With stock picking taking on renewed importance as the market shows signs of volatility, this event offers an opportunity to hear from a number of experts, including my Eagle Financial Publications colleagues Mark Skousen, Doug Fabian and Chris Versace.

Be a guest of Eagle Financial Publications and register for FREE by using priority code 038657 and calling 800-970-4355 (toll free in the United States and Canada) or signing up online.

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