Dumping Guns, Coffee And Insurance Adjusters, Keeping Ketchup And Meat In A Dividend Portfolio

Stocks continued to slip last week, with big retailers like Target

TGT
and Walmart

WMT
hammered more than 20% lower on lackluster quarterly results. Consumer stocks of all stripes were thrashed as a growing chorus of economists envision recession on the horizon. Whether or not we get a real recession, which is determined by the National Bureau of Economic Research, the market certainly sees a major slowdown in the months ahead as high prices deter consumption and the Federal Reserve tightens the screws on monetary policy.

Dropping 8.1%, consumer staples was worst performing sector last week. These normally defensive stocks of companies that sell basis like soup, soap, toilet paper and toothpaste were shredded on fears of a falloff in consumption and the impact of inflation on profit margins. Brutalized nearly as badly were consumer discretionary stocks in the XLY

XLY
tumbling 7.8%. Energy, utilities, and health care were the only sectors not swimming in red ink.

Geographically, international stocks showed strength, with both the iShares MSCI Emerging Markets (EEM

EEM
+1.7%) and iShares MSCI EAFE (EFA

EFA
+1.2%) developed market index gaining ground while their domestic counterparts continued to languish.

Equity Income Universe: Just as international stocks sparkled in the broader market, the pattern of overseas outperformance also fits the world of yield. Except for a small weekly gain for the Alerian MLP (AMLP

AMLP
+0.85%%) ETF, the only funds among those we track that produced positive weekly returns were international: PowerShares International Dividend Achievers (PID +1.9%); SPDR S&P Global Dividend (WDIV

WDIV
+1.2%); and Vanguard International Dividend Appreciation (VIG

VIG


VIGI
I +0.59%).

Dividend growth funds like NOBL

NOBL
, VIG, and DGRW

DGRW
continue to be laggards in the equity income universe, while high-yield funds are outperforming. One exception is the VanEck BDC Income (BIZD

BIZD
-4.4%) ETF, which yields 8.9%, and turned in the week’s worst performance. BIZD’s portfolio of business development companies make equity and debt investments in private or lightly capitalized businesses. As short-term rates started screaming higher, BIZD has dropped since April 20 to a new 52-week low.

FDI Portfolio Action: Last week’s Forbes Dividend Investor 25-stock portfolio demonstrated some defensive mettle, dropping 0.47%. Although negative, it was tops for the week among all diversified domestic equity income funds that we track, which excludes the AMLP.

It was another week of extremes, with winners nearly offsetting the losers. The week’s biggest winner was Dallas-based chemical outfit Kronos Worldwide

KRO
(KRO +12.4%), which broke above its May 2021 peak on Wednesday and finished the week at its highest price since August 2018. Coming up is a June 3 ex-dividend date for a $0.19 per share payout.

Among stocks gaining more than 3% on the week was Pennsylvania insurance company Donegal Group (DGICA +4%), which has now surged 19% in the past month.

A handful of stocks violated 10% trailing stop loss levels this week, and three of them have earned outright ejection from the portfolio: Keurig Dr Pepper (KDP -7.1%), Crawford & Co. (CRD.B -0.85%), and Sturm Ruger & Co. (RGR -2.5%). 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, consider selling it.

Insurance services firm Crawford & Co. has been a bum from the start of our engagement and took us for almost 11%. KDP at least rewarded us with a 28% total return with dividends reinvested since June 2020, but I’m happy to get rid of it, too. Even after the first dividend increase in four years last quarter to $0.188 per share, KDP has a puny yield of 2.17%. Crawford & Co. yields 3.45% but is still a laggard: Fellow stocks in the FDI portfolio yield 4.7% on average.

Gun maker Sturm Ruger is expecting sales to decline 16% from last year’s pandemic-stoked totals, and recession fears have exacerbated the outlook for new pieces finding their way into home collections. RGR pays dividends based on business performance, so it’s trailing 12-month yield of 5.5% is exaggerated unless Rugers start flying off the shelves at gun shows and Gander Mountain. Annualizing the most recent quarterly payout of $0.68 on May 13 produces a 4.3% dividend yield.

Don’t Stop Thinking About Dividends

In a bear market, holding fundamentally sound stocks with high yields keeps you well-paid while you wait for the market to take a more favorable view on price. Dividends can also be paid as additional shares of stock through dividend-reinvestment plans (DRIPs). If you do this during a period when the stock price is depressed, you’re automatically acquiring more stock to capitalize on the eventual rebound.

Special Offer: Click here for access to the complete Forbes Dividend Investor portfolio of stocks with an average yield of 4.75%.

Get Paid For A Pledge To Sell

Two additional stocks violated 10% trailing stops, but the proximity of their ex-dividend dates makes it difficult to part ways curtly, so I propose writing covered calls on Tyson Foods

TSN
and Kraft Heinz. These wounded consumer staples stocks both have upcoming dividends and very liquid options contracts that offer attractive levels of premium to be earned from writing call options that expire in the next several weeks.

Selling call options on a stock that you own gives you cash today in exchange for agreeing to sell the stock at the strike price any time until the option expires. This options premium earned from selling slightly out-of-the-money calls that expire in the next two to six weeks typically ranges between 3%-7% of the stock price.

It’s important to observe that writing covered calls is not a truly defensive strategy. The cash you earn insulates you but does not immunize you from declines in the stock price. If you sell calls on a stock that goes to zero, the value of your stock will indeed be zero, but premium you collected means that you’ll have money for Burger King and bus fare home.

– Kraft Heinz (KHC -13.4%) yields a meaty 4.1% following last week’s takedown. The stock trades ex-dividend on Thursday, May 19, so if you own it through the close on May 18, you earn the $0.40 dividend.

The parent company of Miracle Whip and Oscar Mayer isn’t exactly struggling to make payments. Free cash flow over the past 12 months of $3.36 per share is more than double Kraft’s annual dividends of $1.60. It’s a bit discouraging to see top people dumping stock the way that CEO Miguel Patricio unloaded $11.5 worth of KHC last Monday. It may be worth noting that Mr. Patricio sold his shares at $44.28, 15% higher than Friday’s close of $38.37, suggesting that a good chunk of the pain he hoped to avoid may have already been inflicted on the stock.

KHC calls to consider writing: For every 100 shares of KHC, sell to open one contract of $39 July 1 calls for $1.05 or higher.

If you do not currently own KHC, you could consider the simultaneous purchase of stock and sale of call options, called a “buy write.” Your net cost for the stock in this case is $1.05 cheaper than buying it outright, although you agree to sell at the strike $39 strike price anytime until the close of trading on July 1.

Last Tuesday in Forbes Premium Income Report, we did a buy write on Kraft Heinz that involved selling July 1 calls. For details, please see: “Kraft Heinz Buy Write Squeezes Premium And Dividend From Ketchup Bottler.”

– Tyson Foods (TSN -5.2%), like Kraft, has been a very nice inflation hedge, but it’s slipped 13% from its $98.40 closing high on April 20. Tyson has a $0.46 per share dividend coming up, with a May 31 ex-dividend date. With a 2.2% yield, Tyson’s a little lean, but it’s a dividend growth hero, jacking up the quarterly payout by a 28% compound annual rate since 2012.

There’s reason to believe Tyson could launch at least an ephemeral rally after the beating it’s taken in the past month. Last week Tyson broke below its 50-day moving average, but on a positive note, finished the week at the stock’s 200-day MA, frequently a level of support for a stock in decline. Also encouraging is TSN’s oversold RSI level, which over the past year preceded powerful rallies in March 2022 and August 2021.

There is a bit of nose-holding required. Insiders are not rushing to buy stock. In fact, similar to Kraft insiders, those in the know at Tyson have shown a recent preference for cash over company stock. General counsel Amy Tu unloaded $302,000 at $90.30 per share on May 11. Far more bearishly emphatic than Ms. Tu’s modest sale was the big $1.97 million dump two months ago at $87.19 per share by Tyson board member Noel White.

TSN calls to consider writing: For every 100 shares of TSN, sell to open one contract of $87.50 July 15 calls for $2.90 or higher.

Writing covered calls limits your upside in a stock to the strike price of the calls, but you are compensated for this by the premium you earn when you sell the options. In the case of TSN, earning $2.90 for agreeing to sell at $87.50 means that you would really be selling at $90.40 ($87.50 + $2.90).

Earning premium from writing calls also reduces your cost basis, insulating you from $2.90 worth of declines in stock price in this situation, but it provides cold comfort in the case of more catastrophic declines.

I will be sending a subscriber hotline to update the above options prices on May 23 as trading gets underway for the week.

To earn additional income from dividend-paying stocks, try Forbes Premium Income Report risk-free for 90 days with two new options-selling trades every Tuesday and Thursday afternoon.