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,
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 (
), 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
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
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
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
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.
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
, 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
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