It feels a little like December. No, I’m not talking about the weather. I’m talking about investor sentiment. Indeed, the on-again, off-again, and now on-again trade war has cast a chill over the market, notes Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
A December-like chill, if you will. I was asked recently during a radio show appearance whether it was ridiculous to alter an investment program based on the trade war with China. I said yes, that investors should not be altering a long-term investment strategy because of the trade feud between the U.S. and China.
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However, that’s not to say that the trade riff doesn’t matter, especially in the short run. In fact, if you are a trader, the trade war is a big deal and one that should be reflected in your trading approach.
The biggest problem with the trade war isn’t the tariffs, although they present some problems for specific industries and companies. It’s those first, second, and third derivative issues that trouble investors:
* Will the trade war with China create so much uncertainty that it halts investment spending, expansion moves, hiring, even merger considerations as corporate America hunkers down and awaits clarity?
* When you are having a trade war with a seemingly politically insulated communist regime, can you truly be “successful?” And what does “successful” even mean?
* Is the trade war less about reducing China’s influence on the global trade stage and more about putting U.S. companies on notice that they better move their supply chains out of China and preferably back to the U.S., which would mean more jobs in the U.S.?
* Does that logic even make sense, given that the jobs gained by U.S. companies bringing supply chains back to U.S. might be more than offset by jobs lost by companies that export aggressively to China?
* And how will the U.S.-China trade battle impact our allies and enemies throughout the globe? Now, I just said that long-term investors shouldn’t be overly reactive to the trade issues.
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For example, I don’t believe it makes good investment sense to dump some of the sectors that have already been especially hit hard. And according to the Intermediate Potential Risk Indicator on page 1, some risk has already been pulled out of the market.
Still, if the major impulse for this market continues to be the trade battle — and that probably will be the case until we get to the next corporate earnings season in July — the market is likely to see some rotation into certain sectors that are less exposed to the travails of the trade war.
I’ve put together a “What, Me Worry?” Portfolio (Yes, I’m showing my age by quoting Alfred E. Neuman). These stocks share a number of attributes:
* North American-centric businesses and revenue streams, with little or no China exposure. Solid dividend yields.
* “Steady Eddie” growth prospects.
*Moderate expected volatility.
* And finally, all of the stocks represent solid holdings regardless of the market environment, so owning these stocks makes sense whether you are worried about the trade war or just building a portfolio for healthy long-term investment returns.
Please note that all of the stocks offer direct-purchase plans whereby any investor may buy the first share and every share directly from the company. My list contains two quality insurance plays, Aflac (AFL), which is and Travelers (TRV).
Aflac's feathered spokesperson has helped the company build a strong brand in the U.S. But what might surprise you is the duck is truly an international star.
Aflac estimates that in Japan — an important market for Aflac’s products — nine out of 10 people know the Aflac brand thanks in part to the firm’s mouthy mascot. This strong brand has helped create a steady flow of profits for the firm and a steady flow of dividends for Aflac shareholders.
In fact, Aflac has raised its dividend annually for 36 consecutive years. The stock has performed well this year and is trading around its 52-week high.
The company conducts business in two of the largest insurance markets in the world, the U.S. and Japan, with its policies covering more than 50 million people worldwide.
Business in Japan, primarily medical and cancer insurance, represented around 70% of total revenue in 2018. I expect these shares to continue to perform well and rank them as a solid holding for any DRIP portfolio.
Travelers, a Dow Jones Industrial component, is a leading provider of property casualty insurance for auto, home, and business. It reported a solid first quarter, with core income per diluted share up 15%. The company recorded record gross written premiums of $7.8 billion in the quarter, up 6%, with growth in all segments.
Reflecting the steady performance was the company’s recent 6.5% dividend increase to a quarterly rate of $0.82 per share. The hike represented the 15th consecutive year of dividend increases. The shares have done well of late but still have decent upside potential. And the yield of more than 2% enhances total-return appeal.
Aflac is a classic “Steady Eddie” stock. Paced by a yield of 2.1%, these shares typically provide consistent total returns with a volatility level that is easy on the stomach. Aflac offers a special treat for DRIP investors. The firm’s plan, which allows first-time purchases with a minimum $1,000, has no fees to enroll and no fees on the buy side.
Travelers is a blue-chip stock in a sector that should be shielded from fallout of the trade wars. Travelers’ direct-purchase plan has a minimum initial investment of $250, though the firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $25.
One of the big differences between today’s current market environment and last December is sentiment toward interest rates. The Federal Reserve Board’s pivot early this year to a more dovish tone on rates is a bullish factor that didn’t exist last December.
And that softness in rates — the 10-year Treasury yield recently went to its lowest level since 2017 — is good news for interest-rate-sensitive stocks, such as utilities. An added bonus is that utilities have very limited or no exposure to trade wars.
Ameren (AEE) is the parent company of Ameren Illinois and Ameren Missouri. The firm provides energy services to approximately 2.4 million electric customers and 900,000 natural-gas customers across 64,000 square miles of Illinois and Missouri.
While the stock’s yield of 2.5% is on the low side for a utility, the fi rm should show better growth than the average utility. The stock is a nice play in the utility space and an “Easy Hold” for investors looking for shelter from increased market volatility.
Ameren’s direct-purchase plan has a minimum initial investment of $250. The plan is extremely fee friendly, with no enrollment fee and tiny fees on both the buy and sell side.
Darden Restaurants (DRI) has no exposure to China. The fi rm’s restaurant brands — Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V’s — are all concentrated in North America.
Business has been solid, and Darden raised its fiscal 2019 outlook on same-store sales to a range of 2.5%-2.7% and revenue growth to 5.5%. With historically low unemployment and rising wages, demand for the company’s brands should remain strong.
The yield of 2.5% provides a nice kicker to appreciation potential. I don’t expect these shares to be at the top of the leaderboard in any particular year, but I expect shareholders will receive steady, consistent returns with a moderate level of volatility. Darden’s direct-purchase plan has a minimum initial investment of $1,000.
Another “Easy Hold” stock is Waste Management (WM). The company is not completely insulated from China. Indeed, China’s refusal to accept plastic waste is impacting the company’s recycling business.
However, Waste Management is addressing this issue by building what it calls the “recycle plant of the future,” which should start to take materials in the second half of the year. The company’s core operations remain strong, with organic revenue growth of more than 6% in the most recent quarter.
The company is adding to its core business with the planned acquisition of Advanced Disposal Services. The stock has had a nice run of late. However, yielding nearly 2%, I expect these shares to outperform the market over the next 12 months.
Waste Management’s direct-purchase plan has a minimum initial investment of $500. The firm will waive the initial minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $50.
The final company in this portfolio is Verizon (VZ). I see Verizon’s yield of more than 4% and the stock’s historically moderate volatility level to be especially attractive in the current market environment. Verizon has zero revenue exposure to China.
And the U.S. continues to refuse outsiders entry into U.S. telecom markets — the Federal Communications Commission (FCC) just recently voted unanimously to deny telecom giant China Mobile’s (CHL) application to provide telecom services in the U.S. due to concerns about national security and law-enforcement risks.
Verizon stock has good support in the low-to-mid-$50, and I expect a move across $60 in the near term. Its direct-purchase plan has a minimum initial investment of $250. The firm will waive the minimum if an investor agrees to automatic monthly investment of at least $50.