US Videos

4 Dividend Opportunities for 2019

Michael Hodel, CFA

Michael Hodel: The last year or so has been a wild ride for income investors, as interest rates have moved up and down, and more importantly, interest rate expectations have moved up and down as well, as economic growth has ebbed and flowed. But with interest rates now falling back down again some investors may be looking for places to generate income with an equity portfolio. There are number of sectors that we think have been beaten up unfairly through this period of market volatility that offer nice opportunities to add income to a portfolio. 

One stock that we would highlight is UPS. UPS shares have been beaten up a little bit on economic concerns and some execution missteps at FedEx. But we still think the company is extremely well-positioned competitively, thanks to its ability to ship packages globally. It's really unmatched across the industry. We view the shares as about 15% undervalued here, yielding about 3.8%. This isn't a company that's going to grow extremely rapidly over time, but we can think that thanks to consumers continuing to ship more packages to themselves from websites like Amazon, and UPS's initiatives to expand internationally and to move into healthcare, we think this is a company that can grow a little bit faster than the economy as a whole. While there might be ups and downs with economic growth, we do think that UPS is a firm that can do extremely well over time. It has a very strong balance sheet as well, and it expects to pay out about 60% of free cash flow as dividends this year, so there's a nice cushion. If there is some economic softness going forward we think that the firm is very well-positioned to continue to pay its dividend and grow that dividend over time. 

Another stock that we find interesting here for income investors is Wells Fargo. Wells Fargo has certainly been in the news a lot over the last year or so because of the scandal surrounding that business. But despite that scandal, we still think the firm is very well-positioned competitively. It's still the largest deposit-gathering institution in the U.S., which we think gives it a strong position in the banking industry. In addition to that, it's trading at about a 25% discount to our fair value because of all the negative sentiment around the business. The stock is also yielding about 3.8%, trading at about 11 times earnings. Dividend payments in the banking industry are heavily regulated. Wells Fargo pays out about 40% of its earnings as a dividend today. We think there's room for that to grow over time. But, again, that will be regulatorily driven. In the meantime Wells Fargo has the ability to use its excess cash flow to buyback stock at what we think are extremely attractive prices, which at some point down the road should lead to a very strong dividend growth as well. 

The third stock that we would highlight is ExxonMobil. Oil, obviously, has been in the news a lot recently because of the decline in oil prices. Exxon is in our review one of the strongest firms in terms of its ability to whether swings in oil prices because of its deeply integrated supply chain. From producing oil, to refining oil, to its chemicals business, no firm can do as much across the value chain in energy as ExxonMobil can. In addition to that, we view its balance sheet as the best in class. We would call it fortress-like, which we think gives the firm the ability to sustain dividend payments, regardless of the price of oil over time. In addition to that, the firm, even with swings of oil prices that we've seen in recent years, in most quarters it's able to cover its dividend payment out of cash flow, which is something that most oil companies can't say. With the weakness in oil that we've seen recently ExxonMobil shares have followed suit as well. We think the stock is trading at about a 25% discount to what it's worth. ExxonMobil shares are yielding about 4.8%, which is on the high side of where that stock has provided for income investors over the last several years. Given the recent volatility in oil prices we think there's a really nice opportunity to pick up the best operator in the oil industry here in ExxonMobil. 

The last thought that we would highlight is KLA-Tencor in the technology industry. Technology has certainly been beaten up with market volatility over the last several weeks, and KLA-Tencor is no exception. But we think the firm is very well-positioned in its niche within the semiconductor equipment manufacturing industry. It's deeply ingrained with its customers and how they manufacture semiconductors. We think that that position will remain in place for a very long time. KLA-Tencor certainly will be cyclical. The semiconductor equipment industry is very cyclical with demand for semiconductors overall. But this is a firm that's generated free cash flow every year for the last couple of decades. It's covered its dividend each of the last eight years with free cash flow. It has a very strong balance sheet with net cash on the balance sheet, more cash than debt. This is a company that we think can continue to payout a very nice dividend. The stock is yielding about 3.5% here. We think it can grow that dividend handily over the next several years, as consumer demand for semiconductors continues to increase over time.