By Philip van Doorn, MarketWatch
Back in May, Michael Binger, a senior portfolio manager with Gradient Investments LLC, told MarketWatch about six of his favorite dividend stocks at that time.
Binger’s outlook has changed a bit since then, and he thinks dividend stocks as a group are looking pricey. He’s now looking beyond the U.S. for attractively valued dividend stocks.
The change comes after a successful 2016, a year in which value stocks have beaten growth, particularly after the election. Here’s how his “Gradient 50” strategy of 50 stocks has performed, according to information verified by Orion Advisor Services:
|Total return - 2016||Avg. return -3 years||Avg. return - 5 years||Avg. return - since strategy inception, June 1, 2009|
|Gradient 50 strategy||20.4%||8.8%||12.8%||15.0%|
In this table, “total return” for the “Gradient 50” strategy includes cash dividends, while total returns for the index include the reinvestment of dividends. Binger said his firm’s clients tend to be at or near retirement age, so many take their dividends in cash to generate income. As cash from dividends builds up in the fund, it is reinvested in stocks, just not automatically in the same ones that are paying the dividends.
Gradient Investments is a registered investment adviser based in Arden Hills, Minn., with about $1.3 billion in assets under management for affiliated advisers. The Gradient 50 strategy, one of several strategies Binger and his colleagues pursue, seeks to outperform the benchmark S&P 500 /zigman2/quotes/210599714/realtime SPX +0.23% by selecting stocks of what they consider “high quality” U.S. companies, and where dividend yields exceed that of the index. They will sell stocks that have become expensive relative to earnings or cash flow and seek opportunities to buy shares of companies that have temporarily fallen out of favor with the market.
The aggregate dividend yield for the S&P 500 is 2.07%, according to FactSet. Gradient generally selects stocks with yields of at least 2.5% for the Gradient 50 strategy, and the portfolio’s dividend yield now is roughly 3.5%. The 50 stocks held within that portfolio are rebalanced each quarter, so each stock tends to amount to about 2% of the assets.
Gradient Investments, LLC
This chart shows how high the S&P 500 is trading relative to the past 12 months’ earnings. By this measure, the index hasn’t traded this high since January 2004:
Asked if there were alarming signs for stock valuations, Binger replied: “Sure there are. At the current time, I would say the dividend-paying group, as a whole, is subjectively overvalued. If I have a group of 50 dividend paying stocks and the portfolio was up 20% while the market was up 12% [in 2016], what does that tell you?”
This is why Binger said it was a “pefect time” for his firm to roll out a new strategy, which it calls the “Gradient 40 International.” The portfolio includes 40 stocks, and Binger said each “needs to be a blue-chip company domiciled outside the U.S.” They also need to be publicly traded in the U.S., or have American Depositary Receipts (ADRs) traded on U.S. exchanges.
Rather than shifting the holdings of the domestic G50 strategy, Binger said his firm was suggesting that affiliated advisers with clients worried about U.S. stock valuations reduce exposure to the G50 and consider investing in the G40-I, because he believes “global markets are a little bit cheaper than their U.S. counterparts.
Binger named 10 stocks held in the new G40-I portfolio. Here they are, sorted by dividend yield:
|Westpac Banking Corp. ADR||/zigman2/quotes/206661702/composite WBK||Major Banks||Australia||5.52%|
|Kimberly-Clark de Mexico SAB de CV||/zigman2/quotes/203556405/delayed KCDMY||Household/ Personal Care||Mexico||4.95%|
|BCE Inc.||/zigman2/quotes/207623025/composite BCE||Telecommunications||Canada||4.65%|
|Canon Inc. ADR||/zigman2/quotes/210242912/composite CAJ||Electronic Equipment/ Instruments||Japan||4.64%|
|WPP PLC ADR||Advertising/ Marketing Services||United Kingdom||2.99%|
|Toyota Motor Corp. ADR||/zigman2/quotes/200537742/composite TM||Motor Vehicles||Japan||2.80%|
|Nestle S.A. ADR||/zigman2/quotes/210131093/delayed NSRGY||Food: Major Diversified||Switzerland||2.64%|
|America Movil SAB de CV ADR||/zigman2/quotes/205846431/composite AMX||Wireless Telecommunications||Mexico||2.41%|
|Siemens AG ADR||/zigman2/quotes/204584405/delayed SIEGY||Industrial Conglomerates||Germany||2.22%|
|Komatsu Ltd. ADR||/zigman2/quotes/205979659/delayed KMTUY||Trucks/ Construction/ Farm Machinery||Japan||1.81%|
|Sources: Gradient Investments LLC, FactSet|
Revisiting the G50
When MarketWatch spoke with Binger in May, he had just sold the G50’s holdings of AT&T Inc. /zigman2/quotes/203165245/composite T +0.21% and Verizon Communications Inc. /zigman2/quotes/204980236/composite VZ -0.25% . But as long-term interest rates shot up after Donald Trump’s election in November, the share prices of both companies declined sufficiently for Binger to buy them again.
He called the major telecom stocks “a steal” on Dec. 5:
And on Jan. 11 he told MarketWatch he would still buy them, even though they had risen since Dec. 5.
“The drop from $52 to $42 in one day looked like an opportunity for us,” Binger said, “so we bought that position and exited another position, Diebold Nixdorf Inc.” /zigman2/quotes/206289339/composite DBD +4.21%
Binger said he remains very comfortable with Kohl’s because the retailer’s free cash flow provides plenty of coverage for its dividend. According to FactSet, the company’s free cash flow for the first three quarters of fiscal 2016 totaled $689 million, while dividends on common shares totaled $264 million. That’s a dividend payout ratio of just 38%.
“This makes me feel comfortable that the [4.85%] dividend yield isn’t in any danger at all,” Binger said.