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- The Dividend Investor's Edge Newsletter - April 4th 2022
The Dividend Investor’s Edge is a weekly newsletter designed to give you, the investor, a full picture of where the stock market is, and to equip you with important information I came across during the week, and what to look for in the week ahead, all constructed in an easy to understand format.
This newsletter is designed for investors of all levels.
Each Week I will discuss:
• An update on the Stock Markets major averages
• Stock Market: On The Horizon
• Notable Upgrades/Downgrades
• Dividend News
📈 Quick Look At The Markets 📉
As a reminder or for those of you new readers, in the “Quick Look At The Markets” section I plan to give you a recap on the prior week for the S&P 500 as a whole as well as the top performing and worst performing sectors. In addition, I will touch on volatility and fear, which are important factors to consider when investing.
Can you believe we are already a quarter of the way through the year? The first few days of last week continued the upwards momentum investors saw from prior weeks, but from Wednesday on things faded out and the stock market was relatively flat by the close of Friday.
March was a solid rebound for the broader market and the better news is the fact that April has historically been the strongest month for stocks. On average, the S&P 500 has climbed an average of 1.7% in the month of April.
Consumers still remain negatively impacted by surging inflation and extreme prices at the pump. The Biden Administration moved to help lessen the blow by announcing last week that they would begin releasing 1 million barrels of crude oil every day from the US reserves. It won’t make a huge impact, but at least it is something. Per CNBC, Roger Read, senior energy analyst at Wells Fargo Securities, noted that Biden’s planned daily release from the SPR is about 1% of daily global production and 5% of U.S consumption.
That covers some of the positive macro news, now for the bad news of the week. This week the bond markets flashed is BIG warning sign to investors. This past week we saw an inversion in the spreads between the 2-year yield and the 10-year yield. This inversion was the first to happen since 2019. We also saw an inversion between the 5-year yield and the 30-year yield for the first time since 2006.
Remember, the bond market is MUCH larger than the stock market, so it is a key thing to watch when investing. If you are new to investing or not as familiar with the bond markets you may be asking what all this means.
A bond yield, similar to a dividend, has an inverse relationship with the underlying investment. So, when a short-term yield surpasses a long-term yield, this means a lot more money has been flooding short-term bonds for fear of where the stock market is heading during that period.
When short-term yields have surpassed longer-term ones, it can signal market concerns that the Federal Reserve might raise interest rates too quickly. Yield inversions have also signaled that a recession is around the corner. This does not mean immediately, but within the next two years based on history. So the key is to prepare with a strong portfolio of high-quality investments.
Looking at the heat map below, as I mentioned above, the markets were relatively flat on the week. Year-to-date the S&P 500 is still down 5.2%, after squeaking out a small 0.10% gain last week.
Here is look at the S&P 500 heat map from last week:
Top Sectors For The Week
Real Estate +4.43%
Utilities 3.71%
Consumer Staples 2.33%
Worst Sectors For The Week
Financials -3.28%
Energy -2.40%
Industrials -1.49%
Fear Factor
Volatility levels continued its downward momentum last weeks, as the VIX got back to more normal levels were are accustomed to seeing.
Fear and uncertainty is often expressed in the stock market through volatility. One way for investors to understand where the market as a whole is in terms of volatility is by monitoring the CBOE Volatility Index (VIX). The VIX represents the market’s expectations for near-term price changes within the S&P 500 index. The index is derived from index options with near-term expiration dates, projecting a 30-day forward projection.
The VIX ended the week with a reading of 19.63 with the 50-day moving average finishing at 26.68. After watching the 50-day MA move higher for six consecutive weeks now, we finally saw the latest drop in volatility finally pause the 50-day MA climb. A reading under 20 is when I consider things to be closer to normal, which is where things stand currently.
Here is a look at the VIX chart with the 50-day moving average:
Another resource you can look at is the Greed and Fear Index that measures market sentiment based on the following seven factors: put/call ratios, junk bond demand, stock price breadth, market volatility, stock price strength, safe-haven demand, and market momentum.
When it comes the the Greed and Fear Index, things have been improving on this front as well, in line with what we have been seeing from the VIX as this index moved to a NEUTRAL reading. Currently, the index has a reading of 45, which is closer to where we stood in the prior week with fear levels lowering with volatility.
📰 Stock Market: On The Horizon 📰
In this section labeled “Stock Market: On The Horizon” I will discuss a variety of different topics that have gone on in the market and are on the horizon.
Over the past few weeks we have been hearing the call of “the lows are in” for the stock market in 2022. Fundstrat’s Tom Lee believes the lows are in and he takes it a step further calling for a “full risk-on” in terms of asset investments for the second half of the year.
What does this mean you might ask? Well, for starters, the next three months he believes the market will remain choppy, but as the Federal Reserve’s plan for rates becomes more clear, it will allow investors to digest and adjust their models to allow for stocks to move forward. In terms of the “full risk-on” comment, this alludes to investing in positions that have some more risk, such as growth stocks. This is a welcome sign especially for many of the dividend growth stocks that I discuss here often.
Think of companies like Apple (AAPL) with all its products, Visa (V) with the pent-up demand on travel, and The Walt Disney Company (DIS) with its media offerings with Disney+ and its theme parks and resorts crushing it. I know Disney is not a dividend stock, but I personally invest in them and like where they are headed and believe they will once again pay a dividend in the future. Right now they are investing heavily in expanding Disney+ to more countries, which will further expand the brand.
Now that spring is upon us, another area to pay close attention to is housing. Spring season is peak selling season for a housing industry that is facing some headwinds. Rising costs are eating into profits and although builders are trying to pass those rising costs to buyers, it also prices out some of the first time homebuyers. Another headwind for the industry is rising interest rates, which are now well over 4%, meaning buyers can afford less house than they could a year ago.
Speaking of housing, this brings me to a sector that has been hit hard in the stock market of late and that is the home improvement sector. Shares of Lowe’s and Home Depot are down 21% and 25%, respectively, on the year. I like both of these companies, but really like the upside in Lowe’s under the leadership of CEO Marvin Ellison, who used to be an executive at Home Depot and knows exactly what made that company so efficient.
If you are not yet subscribed to my YouTube Channel, head over and click that subscribe button so you are notified any time I drop a new video. In my latest video, I detailed out two dividend stocks to buy in the month of April, and I will give you a hint: one of them was Lowe’s. Watch as I explain more:
You can also check out my latest Dividend Portfolio update from a few weeks back to see the positions I currently own in my Dividend portfolio. Here is that video:
I will be looking to add to my Home Depot and Lowe’s positions this week and taking a closer look at some REITs, as I look to beef up my portfolio yield in some high-quality stocks. Starbucks continues to get hit with bad news, so may continue to add to that position as well, as former CEO Howard Schultz takes the reins today on an interim basis.
Looking at non-Dividend paying stocks, Alphabet (GOOGL) and The Walt Disney Company (DIS) are two I own and would like to add to as well. Alphabet trades on a forward earnings multiple of only 20.9x, which is well below that of Apple (27.3x) and Microsoft (29.3x).
⏫ Stock Upgrades/Downgrades ⏬
In this section moving forward, I will add any notable analyst Upgrades or Downgrades I came across during the previous week.
General Electric (GE) price target lowered to $115 at Barclays
CVS Health (CVS) downgraded to hold at Deutsche Bank
Stanley Black & Decker (SWK) price target lowered to $170 from $237 by JPMorgan Chase
Whirlpool (WHR) price target lowered to $221 at JPMorgan Chase
Proctor & Gamble (PG) downgraded to HOLD at JPMorgan Chase
💰 Dividend News
In this section I will detail what I am watching and any Dividend related news.
UnitedHealth Group (UNH) made an acquisition of LHC Group for $5.4 billion
Watsco (WSO) increased their dividend by 12.8%
PNC Financial (PNC) increased their dividend by 20%
TJ Maxx (TJX) increased their dividend 13.5%
EPR Properties (EPR) increased their dividend 10%
Other Resources
Here are a few of my latest YouTube videos to watch:
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Have a Great Week!
Mark
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