Transcript: Are Dividend Stocks Getting Too Expensive? w/ Vita Nelson

Announcer:  It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest hitting half hour about you and your money. And now, here’s Marc Lichtenfeld.

Marc Lichtenfeld:  Welcome everybody to Marc Lichtenfeld’s Oxford Club Radio. I am Marc Lichtenfeld. Glad you are with us. We have a great show today. We are gonna be talking a lot about dividends. We’re gonna first start the dividend talk off with Vita Nelson. She’s the editor of the Money Paper and the co-manager of the MP63 Fund. It’s a no load mutual fund that investment dividend payers and we will talk to her all about that fund, the strategy and what she thinks of dividend stocks in the market right now.

We’re also gonna talk about are dividend stocks getting a little expensive. You might be shocked at some of the numbers I’m gonna throw at you regarding dividend stocks. So you definitely wanna stick around for that if you’re an income investor.

We’re also gonna talk about the way not to handle a crisis when you are a CEO. So that’s coming up in just a minute.

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So I wanna kick things off today by talking about the way not to handle bad news. This was textbook crisis management and the opposite of what you should do. So let me set the table for you here.

Portola Pharmaceuticals, a biotech company, and Portola and admittedly this was a company I liked, Portola had a drug that was supposed to be getting a decision from the FDA on Wednesday the 17th. So typically what happens, it’s called a PDUFA date. The FDA will either grant approval or reject a drug. It can be a flat out rejection because they say the drug doesn’t work. It can be a temporary rejection where they say to the company, “All right, well answer these questions. Get these ducks in a row and we’ll take another look at it.”  That kind of a thing. Or they can approve it.

So Portola got a complete response letter, which outlines the problems that the FDA found. So it wasn’t that the drug didn’t work. There were some questions about the manufacturing. There were some other questions about its interaction with two of the four drugs that it’s supposed to interact with. So it wasn’t a flat out rejection. Actually the data for the drug, the safety and the efficacy, was actually quite, quite good. So these were other issues that the FDA had a problem with.

So everybody knew that the 17th was the date for Portola. Investors were anxiously waiting it, for the news. There hadn’t been any news in the morning. The afternoon goes by. Stock is drifting lower a little bit, but the market was down a little bit. Wasn’t too big of a deal.

Then around – I think it was 2-2:30, the stock starts selling off hard. It was trading at about $25.00 and suddenly it just tanked to below 21 temporarily. It ended up closing at 23 and change, but it did go below $21.00 and very quickly. People started to freak out. Somebody knows something. The drug’s gonna get rejected. People know something. There was a leak. Blah, blah, blah.

Portola doesn’t say anything. Four o’clock comes around. Now that the market is closed we should hear something because typically companies will release very important information before the market opens or after the market closes so they’re not releasing it in the middle of the trading day.

Don’t hear a word. I’m sitting by my computer 5:00, 5:30, 6:00. I finally go home. Eat dinner with my family. Seven o’clock put the computer back on and I’m just sitting there waiting and waiting.  The company did not release the information until 11:30 at night that the drug was rejected.

Now, it’s possible that the FDA didn’t contact them till let’s say 9 or 10:00 at night and it took an hour to get the press release together, but highly improbable. The FDA pretty much works normal business hours. So most likely Portola had this information probably by 4, 4:30 at the latest and they waited until 11:30 at night when no traders are watching the stock or at their computers to release it. So A, that was number one.

B, they never even addressed the fact that the stock sold off hard during the day; a potential for a leak. They completely bungled and mishandled the situation. When there is bad news, whether you’re an individual like a Ryan Lochte who gets caught lying about a robbery in Brazil or a politician gets caught in a scandal or you’re a company that has bad news like this, crisis management 101 says you acknowledge it right off the bat. You’re honest. You are blunt. You’re brief and then you move on.

Why this company waited till 11:30 at night to kind of bury the lead when everybody was watching and waiting for this thing and then not to even mention anything, either in a press release or in the conference call the next day about the unusual trading activity just shows to me that this management is not ready for primetime.

I sincerely hope that they get some media training, crisis management, PR training, what have you and I encourage every CEO and anybody who ever has to face public scrutiny for something that they did wrong basically how to handle it because this was as screwed up a situation as you can imagine. Bad news already and then they just made it worse and just poured gasoline on the fire.

So a big thumbs down to Portola Pharmaceuticals. Not because their drug got rejected. I think personally they could have done some things to make sure that that didn’t happen. That being said, it was more how they handled the situation. It was just so amateur. Really, really amateur. As you can tell, I’m a little ticked off by it.

All right. I’m gonna try to calm down during the break and when we do come back we’re gonna talk with Vita Nelson. We’ll talk about one of my favorite things. Dividend stocks.

This is Oxford Club Radio. I’m Marc Lichtenfeld. Stay with us.

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Announcer:  And now back to Marc Lichtenfeld’s Oxford Club Radio.

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Marc Lichtenfeld:  Welcome back to Marc Lichtenfeld’s Oxford Club Radio. I’m Marc Lichtenfeld. Once again, the website www.oxfordclubradio.com.

Well, my next guest, she was into dividends before dividends were cool. I jumped on the bandwagon when there was still plenty of room on the bandwagon. It really wasn’t much of a bandwagon yet, but she is really one of the pioneers of dividend investing and particularly dividend reinvestment plans and investing in those dividend reinvestment plans.

Vita Nelson. She’s the editor of the Money Paper and co-manager of the MP63 Fund. Vita, welcome back to Oxford Club Radio. Tell us about the MP63 Fund. What are its objectives and what kind of stocks are you investing in?  I’m assuming it’s gonna have something to do with dividends knowing you.

Vita Nelson:  Well, that’s correct. As a matter of fact the symbol is DRIPX. It is distinguished from other funds in that all the companies in our portfolio offer direct investment plans to the public. So while we don’t invest through the DRIPs for the fund, so many of our subscribers invest in these very same 63 companies. That’s why it’s called MP63. We thought 63 companies would provide us with enough diversification so that no one company was going to have a profound effect on the fortunes of the fund.

Marc Lichtenfeld:  So what are the qualifications for being chosen by the fund?  It’s just having the drip program?

Vita Nelson: No. We look for the market leaders. We look for the stable companies that we believe are going to withstand all market cycles and be there to reward our subscribers. Now the reason we started the fund was because people who invested in DRIPs wanted to do it through their IRAs. That’s not an easy thing to do because you must have a custodian.

So we started the fund basically for our own subscribers to the Money Paper. Really we don’t advertise it. Our fees are very low. We keep them way under 1 percent; .79 or .80. So these are pretty much the same well-educated people who came into the fund originally back in 1999. Some of them are taking out their forced, mandatory withdrawals. You don’t have to have an IRA to be in the fund, but quite a large number of our shareholders do have their IRAs invested.

Marc Lichtenfeld:  Now you talked about you’re looking for the market leaders and stable companies. Is this a quantitative screen or is it more qualitative?  Are you doing analysis on the company’s businesses and management and things like that –?

Vita Nelson:  Well, the way we started the fund is in 1994 we picked a group of 63 companies that we thought in every sense, both traditionally just from a fundamental point of view and from every point of view that we could look at, we liked these 63 companies from among the more than 1,000 companies that offer DRIPs. We watched them for five years.

We started our index in 1994 and in 1999, having been satisfied that our drip index so to speak, was way ahead of all the other indexes with these 63 companies. We started the fund with those 63 companies. These are market leaders. I won’t go through the 63 names, but you’ll know them all. They’re all listed. We are completely transparent. Every one of our companies is listed at the website and you can see which are our top ten holdings. What more can I tell you.

These are educated shareholders who support each other. We had not one liquidation or sale during 9/11.

Marc Lichtenfeld:  Wow.

Vita Nelson:  We’re doing very well and we always credit the shareholders because they keep providing us with money so we invest just all the time and reinvest the dividends in these outstanding companies. Even though we have such a tiny fund, we manage to beat most of the other ones.

Marc Lichtenfeld:  I wanted to ask you and especially that you mentioned 9/11 and performance. I know long term you guys are beating the broad market since its inception by a very wide margin, but how does the fund perform during bear markets?

Vita Nelson:  It holds up better than most funds.

Marc Lichtenfeld:  That’s what I would expect. That’s one of the reasons I love dividend stocks, but can you elaborate a little bit on how well it’s held up better and why?

Vita Nelson:  Well, it holds up because we are not forced to sell at the wrong time. Instead, we accumulate more shares during those times when there’s such anxiety in the market and people are liquidating their shares. Our shareholders stay put and we continue to invest. We’re just calm.

Marc Lichtenfeld:  We have about a minute left. Where can people get more information on the fund?

Vita Nelson:  Well, the symbol is DRIPX. If they just type in DRIPX.com – we don’t have a fancy website – or if they wanna know more about DRIPs, we’d be very happy to send them our guide, your listeners, if they call our 800 number.

Marc Lichtenfeld:  What’s the 800 number?

Vita Nelson:  It’s 800-388-9993.

Marc Lichtenfeld:  We’ll have that up on our website. If you’re listening to the show now on Oxford Club Radio or if you’re listening on the radio, if you go to Oxford Club Radio we’ll have the transcript. So that number will be there for you.

Vita Nelson:  We should say what DRIPs are. I always say DRIPs, but of course they’re Dividend Reinvestment Plans that let you invest directly without going through a broker right into the company.

Marc Lichtenfeld: Well, we’re up against the clock. I do have to thank you for all your work that you’ve done. Like I said, you were one of the pioneers in this area and it’s only because of you that people like me can do what I do. So thank you for all your work and continued success –

Vita Nelson:  Aw. Thank you, Marc. I appreciate it. I really do.

Marc Lichtenfeld:  That’s Vita Nelson. She’s the editor of the Money Paper and co-manager of the MP63 Fund.

When we come back we’re gonna talk more about dividend stocks and if they’re getting a little pricey or not. This is Marc Lichtenfeld. Stay with us.

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Announcer:  And now back to Marc Lichtenfeld’s Oxford Club Radio.

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Marc Lichtenfeld:  Welcome back to Marc Lichtenfeld’s Oxford Club Radio. I’m Marc Lichtenfeld. As I mentioned, Vita Nelson, really one of the pioneers of DRIP investing. I remember the ads on CNBC for her newsletter, the Money Paper, back – gosh – back in the mid-90s at least. I’m not sure when it started, but ire member them in the mid-90s. So she’s been doing this a long time.

I do wanna talk about dividend stocks. It’s not a secret that they’ve done well for a while, particularly in this low interest rate environment. Everybody is searching for yield. They’re willing to do anything to get a little bit of yield because it makes sense. If you’re gonna buy a 10-year treasury and get 1 ¼ percent or 1 ½ percent, you can’t get anything in a money market. There’s nowhere to go. There’s absolutely nowhere to go for yield.

I remember when I first started working, coming out of school I had a checking account that paid four percent. My money market paid four percent. So if you’re sitting in cash that cash made money. Now granted inflation was higher. No doubt about it, but you still for savors, you’re able to build something for I don’t know how many years it’s been now. You get absolutely nothing. You get pennies. If you’ve got thousands of dollars in the bank and you will get pennies as interest.

So it’s no surprise people are starving for yield and they have bid up dividend stocks. Now, are they getting expensive?  Well, here’s some numbers that my research team came up with.

If you look at S&P 500 companies that pay a three percent dividend yield or higher and it’s about – let me see – it’s about a little over 100 companies – the average PE ratio for these, it’s about 109 companies I believe it is. So average PE of these S&P 500 companies that pay a 3 percent yield or higher currently is 29. I think that’s around what the S&P 500’s PE was at the height of the dot com boom. I think it was somewhere around there. Obviously the NASDAQ was way, way higher, but the S&P 500 I think was somewhere around here.

If you look at the dividend aristocrats – dividend aristocrats are companies that have raised their dividend every single year for 25 years or more, the overall dividend aristocrats and there are about 50 of them – there are 50 of them, the PE is 23 and the 11 dividend aristocrats that have a 3 percent yield or higher, the PE is 24.

So dividend stocks are getting kind of pricey. Now, what does that mean?  Does that mean that you ignore them?  That you don’t buy them?  No. That’s not what it means, but it does mean that if you’re buying a stock with a 29 PE, doesn’t mean that the stock can’t go up. Doesn’t mean that the earnings can’t go up and that PE will come down, but it does mean that the valuation is getting up there. It’s getting stretched.

In a bear market or a market correction where multiples contract and multiple meaning the PE ratio, if that contracts, the stock’s gonna go down. So let’s say earnings stay flat, but PE ratios come down by 20 percent and you’re paying let’s say a 30 PE, now it’s gonna be a 24 PE, which means that you are gonna lose 20 percent. Now you’re also getting dividends and what have you.

The thing to remember is though with dividends, when you’re investing these dividend stocks and particularly if you’re reinvesting the dividend, you’re investing for the long haul. You’re investing for 10 years, 20 years and you’re reinvesting those dividends. So even if the stock goes down you’re reinvesting at a lower price, which gets you more shares, which kicks out more dividends which gets you more shares, which spins off more dividends and so on and so on.

So if the price does go down while you’re reinvesting those dividends, it doesn’t matter until you’re ready to sell. If the price is down when you’re ready to sell it’s a problem, but if you’re investing for ten years, you buy an expensive stock today, hit a bear market, you’re just getting to accumulate more shares.

That being said, nobody wants to pay top dollar for a stock. So does that mean you sit out the market and you don’t invest in these stocks?  Well, here’s how I handle it. Here’s what I try to do for readers of the Oxford Income Letter.

What I’m typically trying to do is find stocks that don’t have that sky high PE and the problem with that methodology is that in this market where everybody is bidding up these stocks, if a stock doesn’t have a pretty high PE, there’s probably a good reason. It’s probably very out of favor. There are likely problems with the company and you’re taking on some risk there because, again, as I always say, if the dividend yield is high there’s a reason for it. It’s probably because there’s more risk.

So if you’re looking at a stock that has a five percent dividend yield and a low PE that’s because that stock has been beaten up because the market doesn’t think this company is gonna get its act together, isn’t gonna turn around or what have you. So it’s important to keep that in mind.

So what I try to do is I try to find stocks that I believe Wall Street has the story wrong or they’re not giving the company credit for something. So I give this example all the time. Years ago when we first started the Oxford Income Letter I recommended Darden. They are the owners of Olive Garden and a few other restaurant chains.

The market hated Darden. Absolutely hated it. It had a low PE. It had a great yield; about five percent. When I looked at the company I saw that they were still generating plenty of cash flow. More than enough to pay the dividend, but sales were down; traffic was down.

There were some real issues there, but I thought maybe an activist investor could come in, a change in management. Something could get this brand back on track and it took a few years. It probably took a year and a half to two years, but eventually they did. The stock has performed great. In the meantime, we bought the stock low. Got a great dividend yield. So even though the stock is much higher today the people who bought the stock back in 2013 are still getting this great dividend yield. So that’s what I’m trying to do.

So for next month’s Oxford Income Letter, September, I found I think what is a great story. It’s a company that, again, Wall Street hates. It has a PE in the single digits, a forward PE in the single digits, cash flow is expected to grow. They have plenty of cash flow to pay the dividend. The payout ratio is incredibly low and it’s one of those stories where I think Wall Street is completely missing the boat.

Unlike Darden when I recommended it, I didn’t have a plan or management didn’t have the plan in place. I shouldn’t say I didn’t have a plan. I knew what my plan was. I was gonna sit and wait, but  management didn’t have a plan to turn it around, but again, I saw that there was plenty of cash flow there and that gave us the luxury of being able to wait and just collect this dividend until something turned around.

With this other company that I’m recommending next month in Oxford Income Letter, there is a plan and the company’s already implemented it and things are happening. Wall Street is not appreciating it. Wall Street is paying absolutely no attention. They just think this company’s a dinosaur. Like a Smith Corona typewriter company. That’s the attitude that Wall Street has about this company and I think they couldn’t be more wrong.

The company’s diversifying its businesses. It’s expanding into other areas and it’s not even a matter of we have to wait and see if it works. It’s starting to work. It’s early. It’s very early in these other businesses, but the cash flow is there and gives us, again, that luxury of waiting to see and make sure that this other part of the business takes off.

So those are the kinds of things I think you need to look for with dividend stocks. That does increase the risk. Now I’ll admit it. If you’re looking at a turnaround story, it increases the risk, but if your PE is 8 or 12 that helps. If your dividend yield is four percent or five percent that helps as well as long as you know that that dividend as safe.

As long as the cash flow is there and that’s critical ‘cause if the dividend is not safe the stock’s gonna get hurt, but if you’ve got that low PE and you’ve got a high dividend yield, you can sit there and wait. Again, these are supposed to be companies we’re holding for 5, 10, 15, 20 years.

So even if the stock goes down, even if we’re way too early and the company doesn’t turn around in the immediate future and two years from now the stock price is lower, who cares. We’re not selling it. As long as the cash flow is there to pay that dividend, then we just collect our dividend and wait for the stock to go higher. Over the long haul stocks do go up. Even stocks that aren’t great performers. If you’re buying a stock with a low PE and a solid dividend that can continue to pay that dividend over the years, the stock’s gonna be fine. It’s gonna be absolutely fine.

So that’s how I approach dividend payers in this era of stretched valuations. Let me know what you think. Let me know where you’re finding decent yield that are relatively safe and how you’re handling these high PEs. Go to Oxfordclubradio.com. Click on Contact. Love to hear from you.

All right. My thanks to Vita Nelson, Ruth Lyons, Curtis Daniels, Alex Machina, all of you for listening. We’ll be back same time next week. Until then I hope your longs go up and your shorts go down. I’m Marc Lichtenfeld.

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