The move higher in bond yields since the election has slowly been creating some new opportunities in stocks that pay higher dividend yields. These types of stocks tend to be owned for the dividend income so they are usually more affected in the short-term by changes in the bond market (changes in relative yields) than the broad stock market. As the prices of these stocks fall the dividend yield rises, and as discussed last week, investing in companies that pay large and increasing dividends can be a very beneficial strategy for retirement income focused investors.
Here are 3 new “Income” investments I made over the last month.
Tupperware Brands (TUP)
Tupperware is a household name. What you may not know is that approximately 90% of their sales come from outside the US, with almost 70% of the total coming from emerging markets. Because of this, TUP tends to track the emerging market stock index more so than any US index. Tupperware gives us access to the growing middle class consumer base of the emerging markets with the quality and transparency of a US company. I bought the stock when it was trading at a 4.5% dividend yield. They increased the dividend almost 100% between 2012 and 2014 but haven’t increased it since. This corresponds to when the EM currencies came under pressure against a rising US dollar (also why the stock has traded lower the past couple of years, off over 30% from its high) but I bet we see another increase to the dividend in the not too distant future.
TUP – 5 years (weekly)
Flowers Foods (FLO)
Flowers Foods is one of the largest bakeries in the US. About 75% of their business is fresh breads, buns and rolls with the remaining 25% being snack cakes and frozen breads. In recent years they’ve been acquiring smaller bakeries with a focus on healthy/organic breads, like Dave’s Killer Bread, the best selling organic bread in the US. The investment thesis is rather simple: bread is a consumer staple that people eat through good economic times and bad. Business is relatively stable, posting slow but steady growth, which allows Flowers to payout a good portion of profits each year as a dividend. Future increases will be fueled from new acquisitions, expense reductions and price increases over time (i.e. inflation).
The stock was knocked off it high in late 2015/early 2016 from a slowdown in growth and a labor dispute with its delivery drivers. The dispute was recently settled for a mere $9 million (it’s a $4 billion company) leading to the big bounce in December from $15 back up to $19. However, the stock still trades below where it was 4 years ago despite the dividend being 50% higher. The company is also implementing a multi-year revamp to streamline operations and cut costs. This should turn 2%-4% sales growth into high single digits earnings and dividend growth for a while. We had sold put options under FLO last year and earned a solid return but now that the labor dispute is resolved decided it was time to actually buy the stock. We picked it up at a 3.25% yield. Flowers has paid a dividend for 29 straight years, increasing it each of the last 15.
Here are some of Flowers Foods’ brands:
FLO – 5 years (weekly)
Wells Fargo Preferred Stock (WFC-L)
I’m not a big fan of the large, mega-center US bank common stocks but I do like some of their preferred shares. Preferred stock is a stock/bond hybrid investment. It is technically considered stock (equity) but it trades/acts like a bond. In the capital structure it comes before common equity (which is the type of stock you buy when you think of the “stock market”) so in the rare event of bankruptcy is safer to own. More importantly, banks cannot pay a dividend on their common stock or buyback shares unless they’re paying the dividend on the preferred stock. And since all of the banks want to maintain or increase the dividend on their common stock, this ensures the dividend on the preferred won’t be skipped. However, like a bond, preferred stock tends to pay fixed income – meaning no increases over time. This is a negative but to compensate the yields tend to be relatively high, plus the dividend income is “qualified” when it comes to taxes so it’s a much lower rate than bond interest at ordinary income rates.
This class of preferred stock was assumed by Wells Fargo when they took over Wachovia in 2008. It’s a 7.5% non-callable, convertible security. The non-callable feature means that Wells Fargo can never redeem (“call”) the security at par value so it essentially has no maturity. Wells Fargo is stuck paying 7.5% on this preferred every year until… The convertible feature allows the investor to convert each share of preferred stock into 6.38 shares of Wells Fargo common stock at any time. With Wells Fargo trading around $55, you would incur a substantial loss by converting the shares at this price, and thus you wouldn’t do it. Wells Fargo also has the ability to force conversion if the stock trades above $203.80 for 20 days out of a consecutive 30 day period. So basically they can’t force conversion until the stock rises by almost 300% which is going to take a very long time. I’m not going to get into all the details but the fact that Wells Fargo is stuck with this makes this class of preferred stock very special and beneficial for us as investors to own. I purchased the security a couple of weeks ago at a yield of 6.25%. That equates to a 8.45% taxable equivalent yield for top income earners. In a world of low yields, this is very attractive! I can only hope it trades lower to buy more.
WFC-L – 5 years (weekly)
Thanks for following!
-Nick
good stuff.