3 High-Yield Blue Chips I Just Bought For My Retirement Portfolio (2024)

(Source: imgflip)

Due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts.

One will be the weekly watchlist article (with the best ideas for new money at any given time). The other will be a portfolio update.

To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3 rules for using margin safely and profitably (which will no longer be included in those future articles).

To minimize reader confusion, I will be providing portfolio updates on a rotating tri-weekly schedule. This means an update every three weeks on:

• My retirement portfolio (where I keep 100% of my life savings)
• The Best Dividend Aristocrats And Kings To Buy Now (based on the Dividend Kings valuation/total return potential model)
• My new "What I'm Buying Next" series, which explains what companies are on my immediate buy watchlist from which I make all weekly retirement portfolio buys.

Why I'm Still Not Worried About Recession

Many commenters in my articles have said they think it's dangerous to buy stocks right now, because of increased recession risk. While it's true that recession risk at a 10-year high, here's why I continue to buy stocks each week.

US manufacturing is now in a mild recession (two consecutive quarters of negative YOY growth). And the bond market, via the inversion of all important yield curves (other than the 30y-2y) is seemingly convinced that a recession is now a foregone conclusion.

The 10y-3m curve is what research from the St. Louis, San Francisco, Cleveland, and Dallas Federal Reserves indicate is the most accurate recession forecaster. The New York Fed considers it the second-most accurate but still important. This is the curve that bankers, both central and private, watch.

It's also what's most used in recession models, including in both the NY and Cleveland Fed ones. For my real-time 12-month recession risk model (whose estimates have lined up almost exactly with those of the NY Fed, Moody's and Jeff Miller in recent weeks) I use the Cleveland Fed/Haver Analytics model.

This model uses the slope of the yield curve to estimate GDP growth and how likely a recession is to start over the next year. While no model is perfect, this one has been reasonably accurate at estimating growth rates and recession risk over time (GDP growth during the Great Recession was -5.1% and in 2016 it was 1.6%).

(Source: Cleveland Federal Reserve)

Each month Cleveland updates this model, using the average of the past month's yield curve slope to estimate the current growth rate and 12-month recession risk.

What I do is calculate the yield curve slope/recession risk sensitivity over the past three months to estimate how much each basis point of inversion increases recession risk above the Cleveland Fed's latest estimate (if it persists a full month and becomes the new average).

From May to July 2019 each basis point of inversion has increased 12-month recession risk by 0.2% to 0.27%. Take the current inversion, subtract 4 (the average in July) and then multiply by 0.2% and 0.27%. That's the approximate extra risk that the bond market is forecasting with the curve now plunging rapidly.

As I write this, the 10y-3m curve is 48.2 basis points inverted. Which, if the current inversion lasts a full month and becomes the new average, implies that recession risk is now 8.8% to 11.9% higher than the Fed's last estimate of 35.4%.

Approximate 12-Month Recession Risk: 44% to 47%

But this only means that if nothing changes (no positive trade news) then the bond market, with all its frenzied panic buying of risk-free assets, is basically saying that there is a 55% probability that we don't get a recession. If we do, it might come in October 2020 (and would likely be a mild 1% to 2% GDP decline with unemployment rising to 6%).

Since recession risk is slightly less than a coin flip, and in the words of Peter Lynch "time is on your side when you own shares in superior companies" I need a lot more than merely elevated recession risk before I stop buying stocks and start buying nothing but bonds (part of my long-term capital allocation strategy).

Besides, the yield curve is merely one of 19 leading indicators, and all models merely tell you the probability of what might happen based on the past. No model tells you the gospel truth about when a recession or bear market is going to start with 100% accuracy.

Which is why, while models are fun to watch (for econ nerds like me), actual data is far more important. That's why I base my actual real money decisions on the Baseline and Rate of Change, or BaR economic grid, created by David Rice.

This uses 19 leading economic indicators, and then considers how high they are above their historical baseline, as well as how they are changing over time (growing or contracting).

(Source: David Rice)

This is what the economy looked like a year before the Great Recession began. The average of all the indicators (mean of coordinates or MoC) was about 20% above baseline and the 8 most sensitive indicators (which includes the 10y-3m yield curve) was slightly below it, signaling things were deteriorating.

(Source: David Rice)

This is what the economy looked like a month before the economy began contracting. The average of all the indicators was very low, and the 8 most sensitive leading indicators (green LD dot) was virtually at zero and showing rapid contraction (negative rate of change).

Here is what the economy looks like now.

(Source: David Rice)

Not just are the averages of all the indicators 26% above historical baseline but the 8 most sensitive ones are 30% above baseline and their rate of change is slightly positive.

In other words, barring the trade war getting any worse, we can likely expect the economy to stabilize around 2% growth, a far cry from what the bond market is screaming via its frenzied flight to safety.

(Source: David Rice)

Basically, rather than cower in fear (and buy nothing but bonds) I'm actually watching the data, via the MoC, and what that's signaling about how far away a recession appears. Using the last three recessions as guides (I just need to be roughly right, not perfectly so) I am using MoC at 19.9% above baseline as my signal that recession is now likely a year away. That may actually be overly aggressive based on the 2001 and 1990 recessions (which were two of the mildest and shortest we've ever had).

What does David Rice actually say about his interpretation of the state of the economy?

On July 1, he wrote

If everything did begin to unravel, with the MoC currently at 29% above the baseline, the MoC could plausibly move into the recession zone within a year and a half. However, there are many ifs. For example, if the Fed responds with interest rate cuts, the economy could plod along for a much longer period of time.

At this point, a reasonable strategy is to diligently follow critical economic indicators and adjust portfolios as the likelihood of a recession, or not, becomes clearer." David Rice (emphasis added)

And here's what he wrote on August 28

To investors, I can't say anything more than I said in my last article. Which was: keep an eye on economic indicators. If you follow the BaR and the MoC drops below 20%, take note. Even though, as Grids 1 and 2 show, the MoC can hover around 20% for a while, based on Table 1, the MoC will be approaching some dangerous territory." - David Rice (emphasis added)

Here is how I am personally using the MoC to adjust how I invest my new monthly savings (I'm not touching anything I already own).

This is merely my personal marginal capital allocation strategy, designed for new money only (I'm not selling out of fear of recession because I'm not a market timer).

Note that I'm still buying stocks each week, with an emphasis on defensive names (though not exclusively in case we avoid recession). Mr. Rice's confirmation that MOC at 20% above baseline is indeed the danger zone, is nice to have, but again, unless the 8 leading indicators are below that, still not a reason to worry excessively (much less sell all your stocks and go all into bonds).

The trade war might end sooner than we expect (most analysts now expect no deal next year). Trump is in the driver's seat on that and I don't even try to speculate about what he's thinking or will do next.

My approach is not based on going "all in" on directional bets, such as selling everything now and then hoping to buy back in at the bottom. I merely need a consistent and reasonable fact-based strategy that will maximize the chances of both allowing my 31 companies to compound my income and wealth over time while stockpiling sufficient dry powder for any future corrections or bear markets.

Whenever the next bear market becomes official (S&P 500 closes at -20% from all-time high) I go into bear market buy mode, buying four companies per week (standard weekly buy size X 1.1+however much the market is down as a percentage) worth of

• 1 Super SWAN (off the Dividend Kings' Super SWAN valuation/total return potential list)
• 1 high-yield deep value (off our Top Weekly Buy List)
• 1 double-digit dividend grower (tech gets priority as I am aiming for 25% tech exposure over the long term)
• Brookfield Asset Management (BAM): up to 10% position size

This plan has me balance top-quality dividend stocks (Super SWANs like UNH, MMM, TXN, MSFT) with fast growers (like LOW, HD, V, and MA), high-yield deep values (MLPs that might be yielding 10% to 15% in a bear market), tech stocks (like AAPL, AVGO, and SWKS), and Brookfield, the world's best hard asset manager (and likely to keep delivering near 20% long-term total returns for many years to come).

But as I just explained, we're a long way off from a bear market right now (the next one may still be several years away). So rather than hoard cash/bonds, here are the stocks I'm buying right now.

Why I Bought SPG, MO, And PM Over The Last 3 Weeks

Over the last three weeks here are the stocks I bought for my retirement portfolio.

• 8 shares of Simon Property Group (SPG) at $148.3 ($0.36 commission with Interactive Broker tiered pricing)
• 20 shares of Altria at $46.91 ($0.37 commission)
• 12 shares of Philip Morris International at $74.93 ($0.35 commission)

Due to current economic conditions and recession risk (high but not yet the most likely outcome) I've been focused on defensive stocks in recent weeks.

While REITs are not traditionally considered "defensive" Simon's historical beta (volatility relative to S&P 500) is 0.4 since 1994 (equal to JNJ). What's more, its superior quality and the lowest valuation in 10 years (lowest ever when adjusted for quality and dividend safety) mean it's likely to decline less than the broader market if we end up getting a correction or bear market.

SPG, MO, PM, Dividend Aristocrats And Bonds During Late 2018 Correction

(Source: YCharts)

Mind you "defensive" doesn't mean "goes up during a correction." Very few stocks can pull off such a feat, even high quality undervalued blue chips. The famous dividend aristocrats are known for outperforming during declining markets, which they did during the worst correction in 10 years (that nearly became a bear market).

SPG managed to decline half as much as the S&P 500 and fell less than the aristocrats. MO and PM, traditional defensive stocks with long-term betas of 0.29 and 0.56, respectively, fell as much or slightly more than the broader market.

Investing is probabilistic, and defensive just means stable cash flows and usually falls less during corrections/bear markets. Every downturn is different and tobacco sentiment at the time was very bearish, which it remains today.

So why did I buy MO and PM if part of the goal of recent buys was to outperform during a future correction and bear market?

A few reasons. First, here's the fundamental stats on these companies.

(Source: F.A.S.T. Graphs, FactSet Research, analyst consensus, management guidance, Gordon Dividend Growth Model)

These are the current discounts to fair value (for 2019's results), and total return potentials based on realistic growth rates and either a return to historical P/E or P/FFO or Chuck Carnevale/Ben Graham's 15.0 rule of thumb.

I use them to estimate a realistic 5-year CAGR total return potential, that has a historical margin of error (for this model) of about 20%.

SPG has 4% to 7% growth potential, MO 4% to 9% (using Morningstar's very bearish low-end growth estimate) and PM 6% to 10%.

The quality of these companies averages a 10/11 (SWAN quality), meaning 1% or less average recession dividend risk cut.

(Source: Moon Capital Management, NBER, Multipl.com)

As you can see, the average US corporation (level 7/11 quality) doesn't cut its dividend much during a recession, just 0.5% to 1.2% depending on which statistical measure you use.

But just as credit rating agencies are very conservative with ratings (BBB - = about 2% default risk), I'm rather fanatical about avoiding dividend cuts. If the average corporation (with average dividend safety, business model that sustains industry average profitability, and average management quality) has 0.5% to 1.2% dividend cut risk, I prefer to recommend and buy companies with payout cut risk that's even lower.

After all, the entire reason for owning high-yield defensive stocks is that during a recession you sleep well at night knowing your dividends are safe and will likely keep growing.

With an average yield of 6.5% (if I were to buy them today, in equal weighting) I'm definitely being paid handsomely to ride out any future recession (doesn't matter when it finally happens).

Similarly, the discounts to historical fair value are all highly attractive, resulting in strong double-digit return potential, up to private equity/venture capital style 20% CAGR style returns.

So why did I buy Altria (the winner of my latest "Which of These Stocks Am I Buying Next?" article)? I bought it the day after it raised its dividend for the 50th consecutive year (adjusted for spin-offs) becoming a de-facto dividend king.

The next week came rumors that PM and MO were considering merging, causing PM to crash up to 10% at one point that day. I bought PM, the highest quality tobacco blue chip, that day, though I bought it after it was down 5%.

Both stocks have continued to fall lower, over concerns about what a merger might mean.

This week I'm doing an article looking at the pros and cons of such a potential deal (far from certain to happen) and where I personally stand on whether I want to see two companies I own merge into one industry-leading giant.

The pros of the merger are obvious and would result in a company that

• was the largest tobacco company on earth
• had the strongest premium brands
• first-mover advantage in heat sticks
• a 35% investment in Juul (dominant name in US vaping and rapidly growing overseas)
• a speculative investment in Cronos (cannabis company with just $15 million in sales)
• owned 10.2% of BUD (world's largest beer company)
• owned a premium wine business (small but growing at a modest pace)

The potential downsides include a possible effective dividend cut for MO shareholders (depending on how the deal is structured).

There is also the fact that PM's payout ratio rose as high as 92% of adjusted EPS in recent years, and so the company has been growing the dividend at a more modest 5% to 6% annually to bring that down (now 85%).

Combining PM and MO (who just took on $16 billion in debt) could mean a lower yielding NewCo with slightly slower dividend growth (for a year or two) than what MO investors thought they were buying.

However, I should make clear that I don't consider even a worst-case scenario (effective MO cut) to be a thesis breaking event. And I should point out that most analysts view this merger favorably, including Morningstar Director Philip Gorham, who had this to say about the potential deal

What Is the Market Smoking? Potential PMI-Altria Merger Makes a Lot of Strategic Sense...

Frankly, we do not understand the market's negative reaction to the news that Philip Morris International and Altria are in talks regarding a potential all-stock merger of equals....It has been our long-held view that this combination would occur, primarily to align the interests of both parties in the distribution of iQOS in the U.S., but also because of the potential for cost synergies, the ability to manage the world's largest cigarette, heated tobacco and vaping brands under one roof, and for PMI, the natural foreign exchange hedge that U.S. distribution will bring. We reiterate our fair value estimates for both companies and think the sell off creates an attractive entry point to an already undervalued group." - Morningstar (emphasis added)

I agree that both companies are now highly undervalued, and both remain on my shortlist in terms of new weekly buys. I recently decided to target 15% portfolio allocation to tobacco, specifically 5% position targets on PM, BTI, and MO.

In the event of a PM/MO merger, that would be 7.5% in BTI and PM. This leaves me with a lot of room to keep adding all three companies as we wait to see whether or not a deal happens at all (and what the specifics are).

My Recent Retirement Portfolio Buys (Since March 2019)

(Source: Morningstar) - as of August 29

Portfolio Stats

• Annual dividends: $5,653 (5.0% YOC)
• 1-Year organic dividend growth (payout hikes): 14.4%
• 5-year organic growth: 12.3% CAGR
• 10-year organic growth: 9.6% CAGR
• Dividend growth during Great Recession: 4.1% CAGR
• Long-Term expected growth rate: 6% to 7%

My primary goal is safe and rising income, even during severe recessions. What I've been buying delivers on that.

(Source: Morningstar)

I've invested 55% of my money into defensive names since March. Until recently that wasn't by design, merely buying deeply undervalued dividend stocks, many of which were beaten down healthcare and consumer staples (tobacco stocks).

• weighted forward PE: 10.5 (10.3 was March 9, 2009, low forward P/E for S&P 500)
• weighted price/cash flow: 8.3 (vs. 15.0 Chuck Carnevale/Ben Graham "reasonable" buy rule of thumb)

As you can see, I've been steadily buying deep value stocks for many months, now, and I'm sitting on a lot of high-quality, high-yielding coiled springs.

Whether or not we get a recession in 2020 or 2021 I'm happy to collect my generous, safe and growing income while I let my management teams work hard to prove my facts and reasoning right.

My Full Retirement Portfolio (My Entire Net Worth)

(Source: Morningstar) -as of August 29

Portfolio Stats

• Annual dividends: $16,267 (5.4% YOC)
• 1-Year organic dividend growth (payout hikes): 16.8%
• 5-year organic growth: 13.7% CAGR
• 10-year organic growth: 10.4% CAGR
• Dividend growth during Great Recession: 12.4% CAGR
• Long-Term expected growth rate: 7% to 8%

(Source: Morningstar)

• weighted forward P/E: 12.5
• weighted price/cash flow: 8.7

My sector caps are 25%, industry caps 15% and holding caps 10%. Those are newer risk management rules that I've almost aligned with (ABBV is my single overweight position right now).

Bottom Line: Recession Is Still The Less Likely Outcome But Even If It Were Coming Tomorrow I Wouldn't Lose A Wink Of Sleep

Recessions are no fun, I get that. I've lived through two, as well as three separate 50+% market/sector crashes. The key is to remember the only things that matter, what I call the 5 Fs

• family
• friends
• fundamentals (for the economy and your portfolio)
• fido (pets in general)
• food (I enjoy my weekly family dinners immensely)

When it comes to my portfolio, I don't fear a recession, even if the probability of one were much higher (I'll let you know when it becomes likely).

I've built my financial life into a bunker with

• two emergency funds ($10K in one, $11K in another, vs. $1,000 per month average living expenses)
• multiple streams of income (36 in total including my 31 dividend stocks)
• high savings rate (about $9,000 per month discretionary savings)
• retirement portfolio with an average weighted quality score of 9 (blue chip quality, sub 2% recession dividend cut risk)
• am using a reasonable and prudent capital allocation plan based on the best available economic data to ensure I'm ready to buy aggressively whenever a bear market does happen (don't care when I'll profit from it when it does)

Do I recommend you mirror my retirement portfolio? Heck no. The entire one is unbalanced, and everything I own, including before I had my risk management rules in place, my quality scoring system, and was basically focused 100% on undervalued blue chips.

My more recent buys are likely appropriate for shadowing but you still have to remember that I have very different goals/volatility tolerance/time horizons than most people.

I don't even bother checking my portfolio value. I call it "portfolio value sobriety" and I'm now almost four weeks sober.

Once per year is as often as I'll check my portfolio value (birthday or end of the year). And only if the market is back to all-time highs. If we end up with a correction or bear market, I may go years without knowing my portfolio value.

It doesn't matter to my long-term strategy, which is 100% focused on maximizing safe dividend income over time. The only thing that matters is that each week my portfolio's annual income goes up. As long as that remains true I'm always one step closer to financial freedom and retirement that can be funded entirely by 50% of my post-tax dividend income.

----------------------------------------------------------------------------------------

Dividend Kings makes it easy to know the best safe dividend stocks to buy at any given time via our valuation/total return potential lists. Membership also includes

• Access to our four model portfolios (Fortress, Deep Value Blue-Chip, High-Yield Blue-Chip, $1 Million Retiree Portfolio)
• over 24 exclusive articles per month
• Our Weekly Podcast
• 20% discount to F.A.S.T. Graphs
• real-time chatroom support
• an exclusive database of 650 preferred stocks
• exclusive weekly updates to David Fish's (now run by Justin Law) Dividend Champions list

Click here for a two-week free trial so we can help you achieve better long-term total returns and your financial dreams.