VICI - 4 Dividend Aristocrat Ratings: Buy This And Sell That

2024-01-16 09:10:00 ET

Summary

• Dividend Aristocrats are a good way to find stocks with a history of growing dividends, even though I find the "aristocrats" name cringe.
• Investors should not become emotionally attached to stocks and should view them as a means to an end.
• Buying low, selling high, and getting paid to wait can increase both income and capital gains for dividend investors.
• Here is a review of a few aristocrats, buy this one and sell that one.

Written by Sam Kovacs

Introduction

Here's one thing I love about Dividend Aristocrats, and one thing I hate about them:

• What I love about Dividend Aristocrats: it's an extremely easy way to screen for stocks which have demonstrated dedication to their shareholders by paying growing dividends for a long period of time.
• What I hate about Dividend Aristocrats: the name "aristocrats", for some reason it makes me cringe. Same goes for dividend champions, challengers, superheroes and what not.

The second point is somewhat tongue in cheek, but there's a deeper meaning to it: I don't believe that investors should get attached to their stocks, which, if you check any time I've said something is a sell, the responses in the comment section show that they do just that.

I always say: stocks are not sport teams. You can irrationally support the Knicks all you want, but when it comes to stocks, you should view them as a means to an end. Not an end in itself.

Once you embrace that idea, the truism "Buy Low, Sell High" becomes possible.

We, as dividend investors, add an extra twist to it:

"Buy Low, Sell High, Get Paid To Wait"

It's our motto.

We believe it works very well, because another saying we like is "it's a market of stocks, not a stock market".

If that's the case, it means that any point in time, some stocks will be bargains, and others will be overly expensive.

Therefore, if we could filter for quality to ensure that we only owned high quality businesses which make investors wealthy, then we can buy the best stocks when they are cheap, sell them when they are expensive, and put that money back to work in a stock with better potential.

Doing this correctly can increase your income, and your capital gains.

How so you might ask?

If you buy a stock for $100 when it yields 4%. You get paid $4 per year in dividends. The stock doubles, you sell it for $200. You reinvest that money at 4%. You now are getting $8 per year in dividends, or 2x the income you previously were.

That's the straightforward part. The not so straightforward part is it can also increase your capital gains, although this might not always happen immediately or in a linear fashion.

When you sell overvalued stocks, and buy undervalued stocks, you're trading something which is priced at more than its intrinsic value for something that is priced below its intrinsic value.

Buy Low, Sell High, Get Paid to Wait: Past examples

Here is a very clear example which I can give you, and which is based on trades from our High Yield model portfolio (one of 3 model portfolios at our service).

The table below shows the portfolio's trades in Exxon ( XOM ), a dividend aristocrat.

We started buying XOM in January 2021 (at inception of the portfolio), at a cost of $54. We added to the position in March and August 2021 at $57 and $58.

We then sold our position in 4 increments:

• 12% of the position at $80 in March 2022.
• 22% of the position at $99 in June 2022.
• 17% of the position at $110 in November 2022
• 51% of the position at $110 in January 2023

You'll note that just as we slowly accumulated our position, we slowly exited it to enjoy more of the upside.

We exited XOM at an average cost of $105. We missed the highs of $120. Oh well, we don't mind, close enough to the top and bottom is good enough to do well.

Today XOM is at $100, so since we sold part of the position in June 2022 it has made no progress (in 18 months).

At the time XOM would have yielded about 3.5%.

In that same month we sold part of our XOM stake, we bought Simon Property Group ( SPG ) shares at $109.

For most of the period covered, it wasn't clear that SPG was a superior investment, until the fourth quarter of 2023, when REITs finally took off. (we're expecting more of this, you can check out our recent articles, we've beaten the topic to death).

Since June 2022, SPG is up 35% while XOM is flat.

This is a clear example of how selling high improves your odds as a dividend investor.

Sometimes it works well like this. Sometimes we don't exit the whole position before the price comes back below our "sell above price" and that's fine too.

In the same model portfolio, we built up our position in Chevron ( CVX ) in between $85 and $110 in between January 2021 and September 2021.

We sold 1/5th of the position in April 2021 at $164 and another 1/5th in November at $183.

But before we could offload more of our shares, the stock reversed.

Today CVX is a $145 stock.

As a consequence, we've ended up holding 3/5ths of our Chevron position while energy stocks have come back down. This is quite fine though. The dividend payment on our Chevron stock is 17% higher than when we purchased it, and on our cost we are receiving a 6.5% yield.

We're getting paid handsomely to wait.

This is what you need to understand in our framework: as long as we can do a good job at identifying quality dividend stocks that will continue to reward their investors with higher dividends, then we don't need to sell high for the strategy to wait.

But when the opportunity is there. We will capitalize on it as often as we can.

And while our exact outlook on Chevron is beyond the scope of this article, I'll be providing the members of the Dividend Freedom Tribe a clear update soon.

At the current prices, both Exxon and Chevron are holds/watch in our view. If you got to sell at the top, great, if not, there's nothing wrong holding top dividend stocks which are leaders in their sectors.

Sell This Stubborn Dividend Aristocrat

The John Keynes quote is used whenever the market doesn't behave the way we want it to: "the market can remain irrational longer than you can remain solvent".

Walmart ( WMT ) is a dividend aristocrat which has been stubbornly overvalued since the pandemic, and hasn't shown any signs of reversing significantly, yet.

Today WMT trades at $160 and yields 1.4%.

I wrote an article last June in which we effectively said:

• Buy Charles Schwab ( SCHW )
• Buy VICI Properties ( VICI )
• Sell Walmart ( WMT )
• Sell Coca Cola ( KO )

I'm not afraid to look back at the picks and take a hard look at them. What do we see here:

Nexstar outperformed Walmart by 15%, which is satisfactory. Coca Cola and VICI both returned 0.7%, not nearly enough to get excited either.

So if you implemented these trades, from a capital gains perspective, you'd have only gotten out a gain from replacing WMT with SCHW.

But here's another thing to consider here: By selling KO and buying VICI you moved from a 3% yield to a 5% yield, a 66% increase in income.

By moving from WMT to SCHW you would go from a 1.55% yield to a 1.95%, a 25% increase in income.

This shows a clear concept: opportunity cost, is much more important than absolute performance.

You can look back here and say: WMT is up this is a bad call. But SCHW is up more.

What's more VICI and SCHW have more upside than WMT or KO.

At this point Walmart is still very overvalued.

Understand that if you invest $10K in WMT today, you can expect about $139 in dividends in the next 12 months.

If you reinvest dividends every year while the dividend continues to grow at its snail pace of 1.8%, then in year ten you can expect to receive $191 in dividends, or 1.9% of your original investment.

Walmart is a stock. It can serve a purpose to someone maybe. But not to dividend investors.

It's a sell.

Buy This Real Estate Aristocrat

Remember what we said in the introduction.

It's not a stock market, it's a market of stocks. When the likes of WMT are overvalued beyond reason, something is undervalued beyond reason.

Among dividend aristocrats one name really stands out: Realty Income ( O ).

I've said that I believe 2024 will be the year of the REIT. You can read about my views on the REIT topic here .

To better understand the context of this however, I believe it is important to understand my general 2024 market view, and a few caveats about REIT investments.

These articles are some more good recent resources:

• Sam Kovacs' 2024 Market Prediction
• Sell Alert: The Slaughter Of Office REITs Is Just Beginning
• Code Red Alert: 5 Lessons Office REIT Investors Can Learn From Malls

Realty Income currently trades at $58.9, which is just $1 below our buy below price of $60. (I added our target prices for O on the chart below).

I recommended O as one of the top stocks for dividend investors on October 26th when the stock was trading at $49.

It yielded 6% then and was a bargain. It bottomed 4 days later on October 30th.

We again missed the bottom, but it was close enough.

However, at the current price of $59, it is still significantly undervalued as you can get a 5.2% yield which will grow at 3-4% per year for the foreseeable future.

Plus you get a monthly dividend check. Always feels nice to be sent money every month.

I think at the very least we're seeing O go back to $70 this year. And as and when rates get cut, I expect to see O go back up to $80 and maybe even to new highs of $90 within the next two years if the market gets ahead of itself.

Buy!

Conclusion

When it comes to high quality dividend aristocrats, buying them at the right price is the key.

The right price is one which provides an attractive stream of dividends through a combination of both dividend yield and dividend growth.

These two requirements are negatively correlated. Give me more yield I need less growth. Give me less yield I need more growth.

A lot of dividend aristocrats yield too little given their dividend growth profile. Colgate ( CL ) comes to main as the archetypical low yield, low growth stock. Walmart is in this group also.

If you buy low, sell high, and get paid to wait, you will come out on top.

For further details see: