4 Dividend-Paying Investments to Buy Include a Fund Favored by Kevin O’Leary
By: Paul Dykewicz,
Four dividend-paying investment to buy include an exchange-traded fund (ETF) of Boston-based O’Shares ETFs that is recommended by its Chairman Kevin O’Leary, who has gained fame for its regular appearances as a panelist on the “Shark Tank” television program.
O’Shares FTSE U.S. Quality Dividend ETF (OUSA), a fund O’Leary discussed in a recent video conference with ETF Trends, is designed to track the results of publicly traded, large- and medium-capitalization, dividend-paying issuers in the United States that meet size, liquidity, quality, low volatility and dividend-yield thresholds. The other three of the four dividend-paying investments to buy include an aerospace and defense company that appears on the rise again, a consumer products stock and a dividend-paying infrastructure fund that should climb as the economy rebuilds amid the ongoing COVID-19 recovery.
Dividend-paying ETFs that track indexes require caution as many of the stocks they hold struggle to sustain their payouts while their coverage ratios are weakening, O’Shares ETFs Chief Executive Officer Connor O’Brien said. In contrast, OUSA is an ETF that features large-cap, “high-quality companies” that pay dividends reliably, he added.
Paul Dykewicz meets with Kevin O’Leary for an interview in the days before COVID-19 social distancing.
Dividend-Paying Fund Offers Defense Against Inflation, O’Leary Said
“The bottom line: I’m not just using OUSA for just dividends but for defense against inflation,” O’Leary said.
One key reason is that the companies OUSA holds have pricing power and sustainable cash flows if inflation hits, O’Leary said.
“They’re very high-quality companies in every sector that are able to increase prices in the case of inflation,” O’Leary said. “Everybody should be thinking about that when you put that $5 trillion [in emergency federal funding] to work and helicopter it in. Twenty or 30 months from now, will inflation show up? And if it does, you don’t want to be in long-duration assets like utilities, like REITs.”
OUSA’s share price closed on $33.10 on May 29, when it traded at a one cent discount to its net asset value of $33.11. The fund offers a current yield of 2.71% and has a 52-week trading range of $24.50 to $37.54.
Chart courtesy of www.StockCharts.com
O’Leary Personally Plans to Shift His Allocation to 70% Stocks and 30% Fixed Income
Personally, O’Leary said he planned to change his asset allocation to 70% stocks and 30% fixed income investments, compared to his previous stance of an even split between them. He also advocated the need to stay invested.
“In the market’s recovery of roughly 30%, the majority of the returns came within 11 days,” O’Leary said. “If you had not been invested in those 11 days, you would have missed it.”
An investor should consider his or her personal risk tolerance but remain invested through the volatility because it is unpredictable when the market may rise 20% quickly, O’Leary said.
“That is the lesson I’ve learned from being an investor almost 40 years now,” O’Leary said. “So, I just stay the course.”
O’Leary said he does allocate between sectors, as well as fixed income versus equities but favors stocks for the next 36 months while he waits to see if inflation is coming.
4 Dividend-Paying Investments to Buy Should Help to Avoid Risk
O’Brien warned that stock indexes have “a lot of equities” that will go to zero.
“Avoid the companies that are going to disappear,” O’Brien urged.
Years of experience in hiring managers to invest his personal wealth on the equity side taught O’Leary about the wisdom of analyzing balance sheets in choosing investments.
OUSA has $480.1 billion in total net assets and an expense ratio of 0.48 percent that is a bit on the high side. The fund is down 8.53% year to date but rose 25.02% in 2019. The biggest holdings of the 136 equities in its portfolio, as of May 29, were Apple Inc. (NASDAQ:AAPL), 5.31%; Johnson & Johnson (NYSE:JNJ), 5.14% and Exxon Mobil Corp. (NYSE:XOM), 4.21%.
Bryan Perry, editor of the high dividend-focused Cash Machine service, said a review of the top 10 holdings for OUSA indicates they only occupy 38% of its total assets, revealing the ETF is well-diversified.
“The two top spots, Johnson & Johnson and Apple Inc. are terrific market leaders,” Perry said.
His favorites within the top holdings are Home Depot (NYSE:HD) and Intel Corp. (NASDAQ:INTC).
“I’m not a fan of the holding in Exxon Mobil, since I’m a bear on the energy sector, but this is clearly a dividend growth portfolio where great companies double their dividend payouts on an average of every seven years,” Perry said. “Hence, the 2.8% yield, which might seem stingy to some, is actually a pretty fat payout for dividend and growth. It’s a solid buy and hold from my perspective.”
Boeing Is One of the 4 Dividend-Paying Investments to Buy, Despite Suspending Its Payout
O’Leary cited the recent rise of Boeing Co. (NYSE:BA) shares, which jumped from $96 to $145 after the Fed backstopped the junk bond market, allowing the company to issue a substantial amount of debt to aid its finances. Boeing is one of the 35 largest holdings in OUSA.
O’Leary mentioned an upgraded May 21 rating on the defense business is another reason for optimism about Boeing.
Hilary Kramer, host of a national radio program called “Millionaire Maker” and head of the Value Authority and GameChangers advisory services, observed OUSA appears to have limited its exposure to the financials sector, since it only accounts for 2% of its portfolio. The move has been a boost to the fund’s performance so far this year, she added.
However, Kramer described the OUSA holdings as “plain vanilla.” It seems more like an Index fund that omits the non-dividend-paying, mega-cap tech giants, Kramer said.
Instead, Kramer said she likes stocks in her Value Authority service that pay a good dividend, such as Unilever (NYSE:UN), a company that offers products in beauty and personal care, home care and food and beverages, while paying a 3.5% dividend yield.
Unilever’s first-quarter 2020 sales were flat with volume growth of 0.2%. Sales growth in developed markets reached 2.8% but slid 1.8% in emerging markets during the first quarter.
Chart courtesy of www.StockCharts.com
COVID-19 had an unprecedented impact on people and economies worldwide during the first quarter and Unilever structured by focusing on five areas: supporting its people; protecting supply; serving demand; contributing to society; and maintaining its financial strength, said its Chief Executive Officer Alan Jope in a statement.
Consider Long-Term View When Assessing 4 Dividend-Paying Investments to Buy
A challenge with dividend-paying funds is that their managers can feel obligated to sell underperforming holdings to chase winners, Kramer said. In the process, shareholders lock in “big temporary losses” that the dividends cannot always cover.
“Instead, I urge people who want income to pick a few stocks that are here for the long haul — Boeing Co. (NYSE:BA) is definitely one of my favorites — and don’t sell,” Kramer said. “When you don’t sell, you don’t have to worry about the stock price day to day or even year to year. And companies like BA have a talent for keeping the dividends climbing, so you’ll fight inflation that way.”
Chart courtesy of www.StockCharts.com
For now, income investors would need to be patient, since Boeing suspended its dividend payouts amid the COVID-19 crisis, along with other cost-cutting moves.
Boeing Suspended Its Dividend Amid COVID-19 Woes but Should Survive and Rise Again
As the COVID-19 pandemic cuts airline passenger traffic, Boeing expects reduced demand for new commercial airplanes and services, with airlines delaying purchases for new jets, slowing delivery schedules and deferring elective maintenance. To align the business for the new market reality, Boeing is taking actions such as reducing commercial airplane production rates.
Boeing also enhanced its near-term liquidity by drawing down on a term loan facility; reducing operating costs and discretionary spending; extending its existing pause on share repurchases and suspending its dividends until further notice. It also reduced or deferred research and development, as well as capital expenditures, while eliminating pay for its CEO and chairman this year.
Boeing reported first-quarter revenue of $16.9 billion, GAAP loss per share of $1.11 and core loss per share (non-GAAP) of $1.70, mainly reflecting the impacts of COVID-19 and the 737 MAX grounding.
Two Boeing 737 MAX 8 crashes within five months of each other led to the aircraft’s grounding last year. The pilots could not control the planes sufficiently to return to the respective airports where they had begun their journeys, causing airline regulators around the world to ban the Boeing 737 MAX jets.
“Boeing’s priority remains a safe return to service of the 737 MAX,” according to a joint statement by its President and Chief Executive Officer David Calhoun and its Chief Financial Officer and Executive Vice President Greg Smith.
“Despite this challenging time, we operate in commercial aviation, defense and global services markets estimated at $8.7 trillion for the next 10 years, and we remain focused on capturing these opportunities and delivering on our commitments,” they added.
Pension Fund Manager Chooses One of Four Dividend-Paying Investments to Buy
Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets, said long-term dividend investors should put a portion of their portfolio in infrastructure companies, such as utilities, tower companies, data storage and others.
“These companies tend to have reliable cash flows that increase over time, and their payouts increase over time,” said Carlson, who also leads the Retirement Watch advisory service.
“I like Cohen & Steers Infrastructure Fund (NYSE:UTF), a closed-end fund that has about a 30% leverage ratio,” Carlson said. “The fund is actively managed. The managers reduce their exposure to sectors that could be hurt in the current economic environment and increase exposure to sectors that are likely to do well.”
Chart courtesy of www.StockCharts.com
Another fan of dividend-paying stocks is Mark Skousen, PhD, Presidential Fellow at Chapman University, recipient of the inaugural Triple Crown in Economics in 2018 and honoree as one of the 20 most influential living economists. He has long favored dividend-paying stocks and funds.
Mark Skousen, a descendant of Benjamin Franklin, meets with Paul Dykewicz in Philadelphia.
Skousen, who also writes a monthly investment newsletter called Forecasts & Strategies, currently is recommending a number of stocks and funds that pay dividends.
For income investors who want to avoid stocks and funds that may struggle to sustain their payouts amid the COVID-19 crisis, these four dividend-paying investments may be well worth considering. With the market on the ascent again, capital appreciation should enhance the total returns of investors.