Two important inflation readings last week came in lower than expected and propelled stocks higher on hopes that monthly data showing a deceleration of price increases will temper the fervor of the Federal Reserve for hiking interest rates, which it has been doing since March. The Labor Department’s Consumer Price Index report released on Wednesday showed prices rising 8.5% year-over-year in July, down from 9.1% from June. Stocks jumped on the news, and caught another lift on Thursday when the July Producer Price Index report showed a 0.5% decrease from June, the first since April 2020, and an annual increase of 9.8%, down from 11.3% in June.
Interest rates barely budged, with the yield on the 10-year U.S. treasury note finishing the week at 2.85%, up lest than one-third of a percentage point from last Friday. Crude oil finished the week at $92.09 per barrel, gaining 3.5% on the week as it battled to retake its 200-day moving average at $94.81. The situation is similar to the challenge that crude eventually overcame at the 200-day average in December.
The energy sector was the week’s biggest winner, jumping 7.4%, while financials, materials, and the Russell 2000 Small Cap index all gained more than 5%. Real estate and midcaps both returned more than 4%. The S&P 500 rose 3.3%.
Equity Income Universe: With few exceptions, it was a great week to be in high-yielding stocks and energy master limited partnerships. The top weekly returns among yield-oriented funds came from the SPDR S&P 500 High Dividend (SPYD +5.3%%) and the Alerian MLP (AMLP +5.3%) ETFs.
Gaining more than 4.5% for the week were the iShares Select Dividend (DVY), ALPS Sector Dividend Dogs (SDOG), and S&P 500 High Dividend Low Volatility (SPHD).
Smaller stocks as a rule outperformed larger stocks in the overall market. In the dividend universe, WisdomTree MidCap Dividend (DON +4.9%) and WisdomTree SmallCap Dividend (DES +4.3%) were big winners.
The moderation in long-term interest rates helped real estate investment trusts in the iShares Cohen & Steers REIT (ICF +4.1%). The ICF has rallied 17.7%,over the past two months, but it is still down 10.8% year-to-date.
FDI Portfolio Action: Last week’s Forbes Dividend Investor portfolio of 23 stocks gained an average of 2.65% last week.
Our best performance last week came from momentum-infused shares of H&R Block (HRB +13.5%) which took flight after the company on Tuesday posted better than expected quarterly earnings, hiked its quarterly dividend by 7% to $0.29 per share and announced a new $1.25 billion stock buyback, representing one-sixth of the company’s outstanding shares at current prices. H&R Block is nearly a double for us since its addition to the portfolio in January of this year, and it is up 92% in the past three months.
Also up double-digits last week was Sinclair Broadcast Group (SBGI +10.2%), which reported earnings two weeks ago and trades ex-dividend on August 31 for a $0.25 per share payout.
Deletions: Two stocks are being removed from this week’s portfolio for violating 10% trailing stop loss levels. GSK plc (GSK -11.2%) fell hard on news that suits claiming Zantac causes cancer will move to a trial. This could be a buying opportunity in the long run, but with the recent uncertainty over the spinoff of Haleon (HLN), it’s time to leave this British brand behind. If it has not fallen 10% from the highest close since you owned it, you may want to hang on for the dividend later this month. The same is true for Tyson Foods (TSN -6.5%), which is also removed from the FDI portfolio but trades ex-dividend on August 31.
Addition: Coterra Energy (CTRA $28.66)
This is a value stock play that is ultimately dependent upon crude oil and natural gas prices. Houston, Tex.-based Coterra Energy (CTRA) is an oil and natural gas exploration, development, and production company with domestic U.S. projects in the Permian Basin, Marcellus Shale, and Anadarko Basin. The company dates back to 1989 and adopted its “Coterra” name following the October 1, 2021 merger of Cabot Oil & Gas with Cimarex Energy.
Coterra’s revenue this year compared to last is expected to jump 141% to $8.59 billion, with earnings higher by 121% to $4.97 per share, giving CTRA a price-earnings ratio of 5.8, 60% its five-year average forward P/E or 14.4. It also trades at a 36% discount to its five-year average price-sales ratio, and 30% below its average price-to-cash flow ratio. Free cash flow per share of $3.10 over the past 12 months is up 109% since 2019.
The stock’s current dividend yield reflects a $0.15 “base” quarterly dividend plus an additional “variable” amount, which was $0.50 in the most recent quarter and $0.45 in the first quarter of 2022.
It is worth noting that billionaire investors Ken Fisher, Stanley Druckenmiller, and Louis Bacon have stakes in Coterra.
Current FDI Portfolio: The stocks listed below 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.
To start a dividend stock portfolio, you could buy equal dollar amounts of each stock. If you do not purchase every stock, keep in mind that the stocks above are listed from most attractive to least attractive from top to bottom. 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.
I provide weekly rankings of a representative selection of the dividend ETF and mutual fund universe so that you may find a fund that could fill in gaps in your dividend portfolio, or to go with the momentum of the market leaders.
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 circumstances, 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.