ADP - 10 A-Rated Dividend Aristocrats For The Ultimate High-Yield SWAN Portfolio

2023-05-24 07:20:00 ET

Summary

• The debt ceiling crisis is coming down to the wire. We're possibly already out of time to prevent default and just don't know it.
• UBS estimates a short default could create a 20% bear market and a one-month default could lead to a 44% crash.
• Even without a debt default, we're likely facing a 1.5% to 4% GDP recession later this year that the market is not at all prepared for.
• These 10 A-rated dividend aristocrats have the strongest balance sheets of any aristocrat, an A+ stable rating with 0.52% 30-year bankruptcy risk. They have a 40-year dividend growth streak and risk management in the top 25% of all global companies.
• Combined with two hedging ETFs, they create a 4% yielding Ultra Sleep-Well-At-Night, or SWAN, aristocrat portfolio that historically delivers market-like returns but with 75% smaller peak declines in bear markets. The average bear market decline is 8%, falling just 18% in the Great Recession.

This article was published on Dividend Kings on Monday, May 22nd.

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In my last article, we saw how the debt ceiling negotiations were possibly a long way from finding a deal.

• All Dividend Aristocrats Ranked By Bankruptcy Risk And Credit Rating .

The newest information is that the Republican demand for spending cuts has potentially changed from 2% cuts for 2024 to 8% by Saturday.

• Or so Bloomberg and Reuters are reporting.
• it's backroom negotiations and hard to pin down who is offering what.

That's the difference between $130 billion in 2024 spending cuts and $500 billion.

Democrats are offering flat spending growth.

No headway has been made on the other key sticking points.

• defense vs. non-defense spending
• work requirements for Medicaid and food stamps
• energy project regulatory approval.

It seems the only thing both sides were able to agree on is clawing back $30 billion in COVID funds that haven't been used.

UBS just put out a note estimating that a one-week default, which they estimate is a 25% probability, would send stocks down 20%.

In that case — one of four outlined by the bank — the country could shed at least 265,000 jobs and take a 0.3 percentage point hit to gross domestic product. The S&P 500 would stay suppressed before slightly rebounding to end 2023 near 3,700...

The worst-case scenario outlined by UBS would be marked by a prolonged, one-month delay in all US payments. That would lower GDP by an additional 0.8 percentage points, add 700,000 job losses and cause a 30% “immediate” drop in stocks — though they stressed — this scenario is “very unlikely.” - Bloomberg .

Moody's estimates a 2-month default sends the stock market down 33% from here, while UBS estimates a one-month default results in a 30% decline on top of a 20% decline.

• a 44% decline from here.

The Joint Economic Committee estimates a 3-month default results in a 45% stock market decline from here.

Bloomberg Economics doesn't have a market forecast for a three or four-month default but does estimate that GDP would contract by 8%.

That would be the 3rd worst economic collapse of the last 100 years behind the Pandemic's 9% recession and the Great Depression's 25%.

• in the 1800s, the U.S. averaged a 22% GDP depression every three years
• the "Great Depression" wasn't "great" because of its severity, just its duration.

In part one of this series, we ranked all 133 dividend aristocrats by credit rating.

But what if you want to build the ultimate fortress SWAN (sleep-well-at-night) portfolio for these uncertain times?

Buying aristocrats purely based on credit rating isn't the best way to create a fortress Ultra SWAN portfolio that can withstand even a worst-case debt ceiling economic crash.

How To Find The Best A-Rated Dividend Aristocrats For These Troubled Times...In 2 Minutes

Let me show you how to screen the Dividend Kings Zen Research Terminal, which runs off the DK 500 Master List, to find the best A-rated aristocrats for this recession.

• whether it's a mild recession or an 8% GDP collapse.

The Dividend Kings 500 Master List includes some of the world's best companies, including:

• Every dividend champion (25+ year dividend growth streaks, including foreign aristocrats)
• Every dividend aristocrat
• Every dividend king (50+ year dividend growth streaks)
• Every Ultra SWAN (as close to perfect quality companies as exist)
• The 20% highest quality REITs, according to iREIT
• 40 of the world's best-growth blue chips.

The key with any screen is to remember that whatever metric you're targeting is never enough on its own.

Valuation always matters, and even some A-rated aristocrats like IBM are speculative due to their turnarounds.

This screen eliminates overvalued aristocrats, as well as speculative ones. There are 26 remaining A-rated aristocrats.

We want the ten highest credit ratings from those.

10 A-Rated Dividend Aristocrats For The Ultimate Fortress Portfolio

I've linked to articles about each company for further research.

Here they are in order of strongest credit rating and lowest 30-year bankruptcy risk.

1. Johnson & Johnson ( JNJ )
2. Automatic Data Processing ( ADP )
3. Roche ( RHHBY )
4. Chevron ( CVX )
5. Exxon ( XOM )
6. Novartis ( NVS )
7. Abbott Labs ( ABT )
8. W.W. Grainger ( GWW )
9. Caterpillar ( CAT )
10. Chubb ( CB ).

Tax Implications

Chubb is a Swiss Company, BUT U.S. investors have zero tax withholdings IF your broker files the appropriate paperwork with the Swiss government.

• IRS Forms W-8 or W-9.

Roche is a Swiss Company with a 15% dividend tax withholding for U.S. investors IF your broker field the appropriate paperwork.

Otherwise, a 35% tax withholding.

Novartis is also Swiss—the same tax implications as Roche.

The U.S. tax credit eliminates the remaining tax withholding if you own it in taxable accounts.

Fundamental Summary

• quality: 94% low risk 13/13 Ultra SWAN aristocrat
• yield 2.6%
• safety: 96% very safe (1.2% severe recession cut risk)
• dividend growth streak: 40 years
• S&P long-term risk management: 75th percentile = good, low risk
• credit rating: A+ stable (0.52% 30-year bankruptcy risk)
• discount to fair value: 11% (potentially good buy)
• growth: 8.8% consensus
• total return potential: 11.4% vs. 10.2% S&P 500
• 5-year consensus return potential: 11.4% + 2.4% valuation boost = 13.8% = 91% total return potential = 2X S&P 500 consensus.

FAST Graphs

Johnson & Johnson 2025 Consensus Total Return Potential

Automatic Data Processing 2025 Consensus Total Return Potential

Roche 2025 Consensus Total Return Potential

Chevron 2025 Consensus Total Return Potential

Exxon 2025 Consensus Total Return Potential

Novartis 2025 Consensus Total Return Potential

Abbott 2025 Consensus Total Return Potential

W.W. Grainger 2025 Consensus Total Return Potential

Caterpillar 2025 Consensus Total Return Potential

Chubb 2025 Consensus Total Return Potential

Historical Total Returns Since 2003

Historical returns of 12.6% are similar to the 11.4% analysts expect in the future, with lower volatility than the S&P and a 34% small speaker decline during the Great Recession.

Consistent market outperformance across every time frame.

13.6% Annual Income Growth For 20 Years

How To Create A ZEUS A-Rated Aristocrat Portfolio

Do you know why Warren Buffett never worries about 30%, 40%, or even 50% market crashes? Because Berkshire Hathaway Inc. (BRK.A) generates $25 billion per year in free cash flow and he's sitting on $130 billion in cash.

Buffett owns the world's best companies... and always has money to buy more in bear markets.

You probably don't own insurance companies, and thus might think that you need cash set aside for bear market blue-chip buying.

Actually, you need non-correlated blue-chip assets that zig when the market zags.

Consider the DK ZEUS strategy: Zen Extraordinary Ultra Sleep-Well-At-Night

Consider adding a 16.67% allocation to long-duration bonds like Vanguard Extended Duration Treasury Index Fund ETF Shares ( EDV ).

• 6 High-Yield ETFs For Up To 60% Gains In The Coming Recession .

And a 16.67% allocation to managed futures like KFA Mount Lucas Index Strategy ETF ( KMLM ).

• 4 High-Yield ETFs That Could Boost Your Retirement Income 33% .

Take a look at what this balanced Zen Extraordinary Ultra Sleep Well At Night or ZEUS Wide Moat aristocrat portfolio does.

• 16.66% EDV
• 16.66% KMLM
• 6.66% each of the 10 A-rated aristocrats.

ZEUS A-Rated Aristocrat Vs. 60/40

(Source: DK Research Terminal, FactSet.)

ZEUS A-Rated Aristocrat Vs. 60/40

(Source: DK Research Terminal, FactSet.)

How would you like yields more than twice that of the market, much higher than a 60/40, with market-like returns that runs circles around 60/40?

All in an A-rated wide-moat aristocrat package that's also defensive and relatively recession-resistant?

How about being able to rebalance into stocks, effectively minting free money to buy blue-chip bargains in a bear market?

And how about a portfolio this attractive with volatility so low it's like rolling over the market's biggest potholes in a Rolls Royce?

Historical Total Returns Since December 2007 (Start Of The Great Recession)

Matching the market across two economic cycles but with 40% lower annual volatility and a peak decline of just 18%.

In a market that was all tech all the time for a decade, this portfolio that is 15% energy (during the worst decade for energy in history) managed to keep up with the market with identical 15-year rolling returns.

Except for a few months in 2014, there hasn't been a five-year period in which ZEUS A-rated aristocrats underperformed the 60/40.

It's fundamentally superior, and fundamentals drive 97% of returns over time.

Peak Bear Market Declines

Great yield, good returns, and 60% smaller peak declines than a 60/40 in bear markets and 75% smaller declines than the S&P.

40% lower annual volatility in any given year, but when it matters most, and the market loses its mind in terror, ZEUS A-rated aristocrat really steps up and becomes the king of Ultra SWAN portfolios.

Bottom Line: 10 A-Rated Dividend Aristocrats For The Ultimate High-Yield Fortress Portfolio

Things could get very scary in the next few days and weeks.

If the Treasury's X-date algorithm is off by a little bit, we could potentially default this week, with just one or two days warning, according to the Treasury Department.

I always thought this would go right down to the wire," Zandi said in a phone interview. "If the rhetoric is dark next week, markets will start to react. We'll see a lot more red on the screen and dark red by the end of the week." Zandi warned that if there is still no deal after Memorial Day weekend, markets could face a 2011-style moment where major indexes lose 3% to 5% in a single day. " That would light a fire under lawmakers," he said." - CNN .

And even if we avoid a debt ceiling disaster, we're still left with a likely recession in 2023 that Bank of America thinks will be 3X worse than most economists expect.

• 16% decline in earnings, according to Bank of America
• 20% decline, according to Morgan Stanley.

Do you know what is currently priced into stocks?

• +2% EPS growth in 2023
• +12% growth in 2024.

That's an earnings gap almost as wide at the negotiating positions of the White House and Congressional Republicans.

But do you know who isn't going to lose a wink of sleep over even the worst-case debt default doomsday scenario? Investors who buy:

1. Johnson & Johnson
2. Automatic Data Processing
3. Roche
4. Chevron
5. Exxon
6. Novartis
7. Abbott Labs
8. W.W. Grainger
9. Caterpillar
10. Chubb.

These are the 10 strongest balance sheets you can safely buy among the aristocrats today.

Fundamental Summary

• quality: 94% low risk 13/13 Ultra SWAN aristocrat
• yield 2.6%
• safety: 96% very safe (1.2% severe recession cut risk)
• dividend growth streak: 40 years
• S&P long-term risk management: 75th percentile = good, low risk
• credit rating: A+ stable (0.52% 30-year bankruptcy risk)
• discount to fair value: 11% (potentially good buy)
• growth: 8.8% consensus
• total return potential: 11.4% vs. 10.2% S&P 500
• 5-year consensus return potential: 11.4% + 2.4% valuation boost = 13.8% = 91% total return potential = 2X S&P 500 consensus.

Companies with fortress balance sheets, battle-tested management, wide moats, and who have been raising their dividends every year since 1983.

• through five recessions
• seven bear markets
• two economic crises
• eight financial crises
• inflation as high as 9.1%
• interest rates as high as 10%.

Bring on the terror, the market panic, and "markets in turmoil" specials on CNBC!

Anyone owning these A-rated aristocrats within a ZEUS high-yield aristocrat portfolio doesn't just laugh at bear markets; they are euphoric at the thought of one!

The more markets crash, the more your hedges go up in value, letting you print free "dry powder" for your Buffett "elephant gun."

Moody's thinks stocks might fall 33%. Excellent.

UBS thinks stocks might fall 44%. Fantastic.

The JEC thinks stocks might crash by 45%. From their lips to God's ears!

When you know how to build world-beater blue-chip portfolios like these, bear markets don't become something to fear but to look forward to and embrace like a lover.

Every market crisis is an opportunity to boost long-term income, and these 10 A-rated aristocrats and two hedging ETFs are exactly how you can do it.

So sleep well, friends; the world's best companies have your back, even if the U.S. government doesn't. ;)

For further details see:

10 A-Rated Dividend Aristocrats For The Ultimate High-Yield SWAN Portfolio