U.S. stock market averages posted their third consecutive weekly decline last week, with the S&P 500 Index slipping 3.2% and down 8.8% from its August 16 rally high. In April and May, the S&P 500 had a seven-week losing streak. All sectors slumped into the red, although utilities (-1.5%) and health care (-1.7%) fared the best at weathering the storm of selling. Technology took a 5% hit, and even the robust energy sector slipped 3.5%, due in part to a 6.7% skid in the price of crude oil. The Russell 2000 Small Cap Index fell 4.7%.
Stocks have been hamstrung since Federal Reserve Chairman Jerome Powell talked tough at Jackson Hole about the central bank staying the course with interest rate hikes to cool the economy and squelch inflation. Morning rallies have proved evanescent as the tide turned in the afternoon and the bears feasted.
Interest rates continued to rise. The yield on the 10-year U.S. Treasury note finished Friday at 3.19%, up from 2.61% one month ago.
Equity Income Universe: Selling was extremely widespread last week and dividend-focused strategies did not provide much shelter from the storm. The jump in long-term interest rates was most unkind to mortgage real estate investment trusts, with iShares Mortgage Real Estate Capped (REM -5.2%) posting the biggest decline in the equity income ETF world. The broad REIT index traded via iShares Cohen & Steers REIT (ICF -3.9%) fared only slightly better.
Small caps were underperformers in the broad market and also in the yield universe. WisdomTree SmallCap Dividend (DES -4.6%) suffered weekly losses on par with REITs.
Higher-yielding funds marginally outperformed dividend growth styles. The best performance in the equity income universe, although still negative, came from the Forbes Dividend Investor portfolio, which returned -2.3% for the week.
FDI Portfolio Action: The Forbes Dividend Investor portfolio added five new stocks last week (shown below in green) after each of last week’s buy limit recommendations hit their respective limit prices. Only one of them produced gains, and it was our top performing stock.
Kohl’s Catches A Bid
Kohl’s (KSS +5.2%) triggered its $28.50 buy limit last Monday and proceeded to get one dollar cheaper, but on Friday when Reuters broke news that Kohl’s was in talks with Oak Street Real Estate Capital to sell $1.5 billion to $2 billion worth of its retail real estate to the private equity firm. Oak Street had done due diligence when it was ready to provide financing for an $8 billion buyout of Kohl’s by Franchise Group, a deal which was scuttled earlier this summer.
Kohl’s trades ex-dividend today for a $0.50 per share payout. If you owned the stock through Friday’s close, you’ll receive the dividend.
Deletions: Mobile communications chip designer Qualcomm (QCOM -6.6%) and kids’ clothing maker Carter’s (CRI -4.5%) both violated 10% trailing stops and are removed from this week’s portfolio. We earned dividends this week from both stocks.
I recommend using a 10% trailing stop on all positions to lock in gains and to limit losses: If a stock closes more than 10% below its highest close since you've owned it, you should consider selling it. Continue to hold if it has not declined more than 10%.
Qualcomm Cheap, May Get Even Cheaper
If you are looking for stocks to hold “forever” like Warren Buffett does, Qualcomm certainly falls into that category. Despite the big drop since late July, Qualcomm remains a blue-chip dividend growth superstar with compound annual dividend growth of 12.6 over the past 10 years. Back in 2003, a change in the tax treatment of dividends prompted cash-rich tech companies to initiate payouts, and over the past two decades, Qualcomm blossomed into a veritable yield-gusher. In the days before the March 12, 2003 ex-dividend date for the inaugural $0.025 per share payout, you could have bought Qualcomm for $17 with a dividend yield of 0.59%. Nineteen-and-a-half years later, the dividend has mushroomed 2,900% higher to $0.75 per share, so someone who bought back in 2003 enjoys 17.6% yield on their original cost.
Qualcomm also looks cheap on each of the five measures of valuation that I consider when assessing value. The biggest strike against Qualcomm is on the chart where it would seem that a test of prior lows near $120 is in the future. If things get uglier this month and the market hits a low in October, Qualcomm would be hard to resist buying in late November before the next ex-dividend date.
Additions: None.
Current FDI Portfolio: The stocks in our portfolio are ranked from highest to lowest on a model designed to assess value. Stocks are rewarded for superior rates of dividend growth and revenue growth, as well as for high yields and low payout ratios. Operating cash flow over the past 12 months must be positive, and sufficient to cover the dividend. They also trade at discounts to multiple five-year average valuation measures that include price to sales (P/S), price to book value (P/BV), price to current year expected earnings (P/E), price to cash flow per share (P/CF), and enterprise value/EBITDA.
Click here for instant access to the Forbes Dividend Investor model portfolio with five new buys in chemicals, mining, advertising, retail and REITs.
John Dobosz is editor of Forbes Dividend Investor, which provides a weekly portfolio of high-yielding, value-priced income stocks, REITs and MLPs, and Forbes Premium Income Report, which sends out options-selling trade recommendations on two dividend-paying stocks every Tuesday and Thursday.
NOTE: Forbes Dividend Investor is intended to provide information to interested parties. As we have no knowledge of individual circ*mstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any assets or securities mentioned or recommended. We do not guarantee that investments mentioned in this newsletter will produce profits or that they will equal past performance. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. John Dobosz and members of the staff of Forbes Dividend Investor may hold positions in some or all the assets/securities listed. Copyright 2022 by Forbes Media LLC.
