Two years ago, I wrote an article listing my top five dividend stocks for young investors for 2017. While I did skip a year - last year, 2018 - I still receive the occasional message from young investors referencing that article. I wrote it at the end of May in 2017, and this year I want to ensure I get 2019's article out earlier.
Like last year, this year I will ensure the stock picks are in diverse industries. New for this year, however, I want to focus more on high-yield dividend stocks. Young investors can invest more aggressively, and I can help them locate stocks with "artificially high" yields due to pullbacks.
Before we begin, let us review the results of 2017's picks, from the date of the recommendation to the end of 2017.
Cross Timbers Royalty (CRT)
This pick was a high-yield natural gas play that offered monthly dividends for the impatient youth who wants a monthly allowance. I mentioned this stock to be a riskier pick, with fluctuating dividends and its reliance on macro issues, namely natural gas prices. At the time, I felt one attractive point of CRT was its low PE relative to its industry: 17x to the industry PE of 24x; now, both PEs are lower - 8.5x to 12.2x, respectively. The stock trended sideways over 2017, but the monthly dividends were stable:
Kronos Worldwide (KRO)
This pick was one of the more interesting because of the sector in which Kronos operates: titanium dioxide pigment production. This was primarily a fundamental play, as my studies found that this stock reacts more to financials than other factors. Some commenters took issue with this pick, disagreeing with my claim that KRO is relatively low risk. However, things worked out well, as my prediction of excess earnings and cash flow over 2017 was not wrong:
As expected, 2017 was a great year for KRO because of both its own growth metrics and growth metrics of global titanium dioxide markets. The stock responded appropriately:
Many readers also took issue with my recommendation of Target:
I knew that sentiment was low for this stock at the time and therefore called it a contrarian play. Amazon (NASDAQ:AMZN) was scaring investors away from brick-and-mortar stocks. I believed the scare would be temporary and saw a good technical entry point. The stock had a few pullbacks during the year, but eventually produced a 19% return:
Pebblebrook Hotel Trust (PEB)
This play was in part macro-based, focusing on the strength of the US dollar and a speculation on the real estate market. PEB has a strong record of hiking its dividend even in subpar environments. PEB's dividend has remained stable since my recommendation, and the stock performed well in 2017:
WisdomTree Investments (WETF)
For this pick, I was attempting to leverage the trend in which investors are increasingly moving away from stocks and into ETFs. This trend has continued into 2019. I had expected WETF to trend sideways and recommended the stock simply for the dividend and possible upward pressure from the capital influx. However, WETF actually performed quite well:
Let's aim for an equally successful year. Here are my picks for 2019.
Delek Logistics Partners (DKL)
This is a logistics and marketing company whose clients are in the crude oil industry. The oil market took a dive at the end of 2018, but 2019 is looking better. DKL has already showed a strong February, and this is expected, from a seasonal analysis:
It might seem that we are getting in a bit late, but the oil market macro factors outweigh the intra-year seasonal trends of an oil stock. As DKL offers a yield of over 10%, investors can handle the small and temporary pullbacks predicted by the seasonal profile. From another perspective, the current buy-in point is opportunistic, as the stock is presenting a strong momentum profile with only one bearish trend: a little profit-taking on days when the stock opens high (71% probability of selling off during the day, as per the Markov chain model below):
Discounted cash flow valuations also place DKL as highly underpriced. This valuation predicts an upside of 129%:
While the company has a negative price-to-book value due to its negative assets (debt), the price-to-earnings and price based on expected earnings both point to good value:
Earnings are projected to grow 20% annually, which is double than the oil market average (10%):
This represents a turnaround for the company. The previous few years showed zero to negative earnings growth. This is in part due to the efficient use of its assets; the company is showing a 17% return on assets, 10% higher than the oil industry average.
The main concern with DKL is its debt:
Its debt outweighs its assets. That said, the company's interest payments on the debt are well covered by earnings. Earnings before interest and tax cover interest payments to the tune of 300%.
I believe we are seeing an inflection point for this high-yield oil logistics company. The entry point seems sound, and the yield is still double digits. This pick is a bit speculative on macro issues, but could easily bring considerable returns for aggressive young investors as oil prices stabilize.
B&G Foods (BGS)
B&G is a manufacturer and distributor of packed and frozen food. As a consumer staple stock, it is considered defensive in that it outperforms the market during bearish times. You can see this in action by plotting the ratio of consumer staple stocks to consumer discretionary stocks - this ratio moves in the opposite direction to the general market:
This makes stocks such as BGS good picks when your economic outlook is bearish. And BGS is a rare stock in that its dividend yield is nearly double-digit - currently at around 8%. This is an opportunistic buy, as the yield was pushed upward as a result of the recent selloff, which itself was fueled by a product recall, slightly lower earnings (see the charts below), and concerns over dividends.
I think this selloff will be erased over time, as the long-term prospects for this company are still strong. You can lock in the 8% yield by purchasing now, but you might be concerned that the stock will continue to sell off. Like the previous pick, BGS is following its seasonal trend. Februaries are particularly bad for this stock, and the bullishness tends to pick up in March:
This company has done much in the way of growing earnings over the past decade, and a temporary drop in EBITDA is likely just that - temporary:
Because earnings typically lead stock prices, we can predict that BGS's rising earnings per share will help the stock retrace its recent pullback. EPS is higher than it was when the stock was at its peak, but there is always some lag time due to cold feet:
This is an opportunistic play on a stock that is suffering a temporary setback. At its current price, BGS offers a higher yield than most defensive stocks in the consumer staples sector. The stock is still undervalued relative to earnings and sales growth. Discounted cash flow valuations put the stock at 35% underpriced.
CorEnergy Infrastructure Trust (CORR)
CorEnergy's name is misleading. It is not so much an energy stock as it is a real estate stock. This is a real estate investment trust - REIT - which invests in property and distributes the majority of its income to its investors.
This stock offers investors a method to directly invest in the main assets used by energy companies: storage terminals, rights-of-way, and distribution lines. The stock has been on a tear since the year started. I found a momentum pattern in CORR's recent movements, but a strange one: The stock shows many up area gaps at market open, but the post-gap pullbacks do not erase the gap gains over time. In other words, the best entry point for this stock is at the end of the day, allowing you to squeeze out a bit more ROI by avoiding the daily pullback while also gaining exposure to the overnight gain. White candlestick days are the safest for end-of-the-day buying, with a 70% chance of seeing an overnight pop:
And the momentum is likely not over. Insider buying not only shows management's confidence, but is also a strong predictor of future stock price. We have seen insiders continuing to buy CORR even after its run-up:
The technical signals agree:
Important here, in my opinion, are the Fibs. Bullish Fibs from all time perspectives imply that the stock has a consistent habit of retracing its pullbacks. Thus, if you are worrying about buying CORR before a dip, you will likely recoup those losses over time.
Investors bearish on oil also need to worry too much about the energy sector leading the stock. The correlation between CORR and oil prices is moderate at best. Real estate prices explain just as much variance in CORR's stock price as does the price of oil (together, these two factors explain 60% of the variance). Thus, this pick gives you not only high yields from a decade of stable dividends but also a sort of diversification between the oil (as well as natural gas) and real estate sectors.
PennyMac Mortgage (PMT)
If you like the idea of investing in real estate without actually buying real estate - and do not want your real estate investment trust to be tied up with the oil market - consider PennyMac, which invests in residential mortgage loans.
Like many of the stocks in this list, I chose PMT in part because of a buy-in opportunity. Not only did it recently release a highly optimistic earnings report for the previous quarter, but it also has a strong post-earnings pattern. This stock tends to rise after earnings for the two months after earnings.
It also has outperformed the real estate market, though it presents more risk in its larger drawdowns:
Mitigating this risk is the 9-10% dividend yield at this buy-in point. My pattern recognition analysis has found PMT to move in cycles. Within its current cycle, it is predicted to rise at least 3% before a pullback or sideways trend. PMT's predicted movements are excessive, and this is likely due in part to this stock having a stable book value for a mortgage REIT.
The recent earnings report supports the upward movement and has uplifted investors. However, the stock pulled back after the earnings rally and is now trading lower than its post-earnings high. The down area gap will likely fill:
My backtests on this gap in PMT show that the company does indeed fall after such gaps, but eventually retraces the pullback. The gap begins to fill after around two weeks - i.e., the stock is usually at a higher price than the post-gap price after 10 days:
Overall, we have many technical, seasonal, and earnings-based reasons to go long on this 9% yield dividend stock. While you do have other residential mortgage REIT choices, I could not find any that could both match this dividend yield and show the same implications of a strong March entry point.
Outfront Media (OUT)
Outfront is a diversified marketing company that offers a 6.5% yield. While this yield might seem small compared to our other picks, the yield is lower than usual as a result of the stock hitting a new high. The company gapped up on earnings:
This gap looks like an area gap and will likely fill. But interested investors can watch OUT for this pullback, get in post-gap - avoiding the pullback - and collect a slightly higher yield. The timing is also good from a seasonal perspective:
Though OUT is a relatively new stock and thus has fewer data points on which to calculate seasonal pattern, March still looks strong, with no months ending in the red. This month offers the highest Sharpe ratio of all months and has produced an average 3% return.
On January 31, Citigroup downgraded this company from a "buy" to a "neutral." However, the stock has risen since then and surprised on earnings. This is just another piece of evidence supporting the idea of ignoring analyst upgrades and downgrades. Instead look to the insiders: A large number of insiders added positions right before the earnings report:
And these additions were most likely not short-sighted. My lexical analysis of Outfront's earnings transcripts shows a 43% increase in sentiment year over year. As management sentiment can predict stock price movement over the quarter following earnings reports, this implies good things for OUT in the coming months.
A few sentences flagged by my analysis as bullish forward-looking statements follow.
"Looking more closely at U.S. Media on Slide 5, 11% growth in total was balanced in dollar terms between Billboard which was up 8.5% and a strong ramp in our Transit business with revenues surging nearly 17%."
- Growth in multiple segments, with one showing double-digit growth.
"We also saw growth in our Sports Marketing business and enjoyed a $3 million non-core revenue increase related to the sale and installation of digital screens in sports stadium."
- Growth in a non-core segment; unexpected revenue.
Total digital revenues were up 27.6% in Q4, an impressive growth achieved through a combination of increase yield, digital billboard conversions and new transit inventory.
- Outfront's newest segment is digital. With this statement, the company is experiencing growth in all its marketing segments.
"This reflects slower early deployment and more importantly better revenue outlook than originally forecasted due to success we're seeing in Boston and D.C. with our Liveboards and the general strength in our transit business, which help us feel very positive about our MTA opportunity."
- Unexpected revenue and the implication of better guidance. Even management was too conservative on the company's outlook.
Both the analysts and the management itself have underestimated Outfront's growth. We should see these groups become more optimistic as we move forward into 2019. The stock price should in turn respond to the company's growth and increasing sentiment, allowing investors to see return in the stock while still collecting a relatively high yield through quarterly dividends.
Young investors have both more time to invest and higher risk tolerances. Together these two factors point to high-yield dividend stocks as a suitable type of investment for a sizeable chunk of your portfolio. These five stocks offer high yields and should do well in 2019 for various reasons.
I ensured that the recommended stocks are currently showing strong buy signals so that investors will not be buying before a probable dip. Although used more often in trading than investing, seasonality and technical patterns can help us locate profitable entry points for long-term holdings. Whatever your time horizon, these five stocks should prove profitable at least over the year; I will update everyone with an article in 2020, along with another five dividend picks.