When is a four percent yield NOT enough? I think we will find out soon enough when three of the Dow Jones 30 Industrials test their downside limits in the next selloff.
Only one of these is what I would call an intended high yielder, Verizon (VZ) , which gives you 4.85% or $2.36 per year. You subtract that amount from the current price of $48.66 and you don't get much protection considering that the stock traded at $42 last July. After this morning's excellent quarter I don't think we will see those levels again.
(See Jim's 15 Sectors to Buy on a U.S./Chinese Trade War (Part I), here.)
But the other two are very compelling when you think about it. Procter & Gamble (PG) yields approximately 4% and gives you $2.84 cents currently - it just raised its dividend by 4% which, importantly, is the 62nd consecutive year of increases. In that sense it is hardly a bond. If you bought P&G here you are basically insuring yourself to $70 which is down an astounding $24 from its high during the Nelson Peltz proxy battle.
But consider this: the stock traded at $68 back in September of 2015 after falling from $93, so there is precedent for a fall of two more points. However, as negative as the analysts may be on this stock, Procter & Gamble did report a 1% organic growth increase - the key metric, whereas the September 2015 low presaged a 1% organic growth DECREASE when the company reported a month later.
So that should cut to a reasonable bottom given the company is marginally better than it was, even as it faces secular headwinds that have picked up in the last two years, including cut-rate on-line items overseas.
That emboldens me to consider that P&G might take aggressive actions like those wanted by Nelson Peltz that might change the cost structure and improve sales growth. You cannot buy this stock unless you believe in that because the current ways aren't working.
How about IBM (IBM) ? This one's so tough. Here you get $6 in dividends which would protect you down to $139 which is where it traded in August of 2017 when the company wasn't doing nearly as well as it is now. And I say that because in the quarter reported last week, its key strategic imperatives initiative amounted to 49% of its business, versus 45% at that August low and IBM actually guided up for the next quarter. I believe that when IBM's much faster growing strategic imperatives - cloud, block chain, security/encryptions among other high growth businesses - pass the 50% line, something I expect to happen next quarter, the story might appear to be a lot more positive. That would mean the $6 cushion makes it worth waiting for, especially if there is any pick-up at all in the slower-growing incumbent business lines.
Of course the one thing wrong with this analysis for Verizon or Procter or IBM is that the ten year is knocking on the 3% door. Who would want to own a stock with a 4% yield versus a bond with a 3%, is the current thinking.
Well, the answer is I would if I knew there were catalysts ahead to make it worth buying. For IBM there's the grind out and not much more. For P&G you have a catalyst in Nelson Peltz who will not stand for the declines he's seeing but I don't know if he, one man, can matter.
No matter what I think that it would seem very difficult for IBM or P&G to get to 5% yield, a percent from here if only because I think they would be way too attractive versus bonds and way too low a price to earnings multiple versus their colleagues.
In that sense if they got there I think you would have to say that the protection the dividend affords from further downside is sufficient to warrant investing.
Bottom line: I think that Procter and IBM deserve a look-see if only because they are close enough to 5% - a very large differential from the ten-year - that if they dip any further I think the dividend will arrest the decline.