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FRANKFURT/LONDON (Reuters) – Germany’s SAP (SAPG.DE) announced upbeat results in the seasonally tough first quarter, saying it was gaining ground on its main competitors Salesforce (CRM.N) and Oracle (ORCL.N) in the cloud and that its margin recovery was firmly on track.
SAP, Europe’s largest tech company by stock market valuation, also raised its sales and profits guidance for 2018 to take into account the $ 2.4 billion acquisition of U.S. sales software firm Callidus that was announced in January.
“We’re gaining share fast and we’re outpacing our toughest competitors pretty handily,” Chief Executive Bill McDermott told reporters on a conference call, calling the results strong at the top and bottom line.
SAP now expects total non-IFRS revenues at constant currencies this year of 24.8-25.3 billion euros ($ 30.28-$ 30.89 billion), representing growth of 5.5-7.5 percent, up from an earlier expectation of 5-7 percent growth.
Non-IFRS operating profits rose 14 percent in constant currency to 1.235 billion euros, compared to the average forecast of 1.19 billion euros in a Reuters poll of 15 analysts.
Cloud subscription and support revenues, SAP’s growth driver, grew by 18 percent to exceed 1 billion euros for the first time. At constant currencies they rose 31 percent, to which McDermott said: “Wow.”
Cloud growth accelerated outside the United States and grew faster than any of SAP’s major rivals, including Oracle, Salesforce and Workday (WDAY.O), he added SAP has faced currency headwinds due to the strong euro, and both the company and analysts focus on key metrics after adjustment for currency effects to get an underlying picture of performance.
Had SAP reported in U.S. dollars, like its competitors, the growth numbers would have turned out even better, said Chief Financial Officer Luca Mucic. Cloud subscriptions, for example, would have shown year-over-year growth in the first quarter of 37 percent in U.S. dollar terms, he said.
“We grew faster than every ‘best-of-breed’ cloud (competitor) out there,” McDermott said. “Faster than Workday, a lot faster than Salesforce, and a lot faster than Oracle.”
Mucic said that an expansion of 1.1 percentage points in operating margins in the first quarter boded well for SAP after a strong showing in the same quarter a year ago.
($ 1 = 0.8191 euros)
Reporting by Douglas Busvine and Eric Auchard; Editing by Tom Sims
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The race to become the first public U.S. company valued at $ 1 trillion has largely been seen as Apple versus Google, with a recent surge by Amazon putting the e-commerce giant in the conversation as well. But on Monday, analysts at Morgan Stanley made the case that Microsoft has a good chance of reaching the $ 1 trillion mark.
With the company’s shares trading around $ 87 at Friday’s close, Microsoft had a stock market value of $ 680 billion. To reach $ 1 trillion, with some stock buybacks in the mix, its shares would have to hit almost $ 130. That’s plausible within the next three years, Morgan Stanley analysts Keith Weiss and Melissa Franchi wrote on Monday in a detailed report on Microsoft’s various lines of business called “Plotting the Path to $ 1 Trillion.”
“With Public Cloud adoption expected to grow from 21% of workloads today to 44% in the next three years, Microsoft looks poised to maintain a dominant position in a public cloud market we expect to more than double in size to (more than) $ 250 billion dollars,” the analysts wrote.
Microsoft shares jumped 5% to $ 91.90 in midday trading on Monday after the report came out. With a midday market cap of $ 707 billion, Microsoft almost exactly tied Google (goog) and trailed only Apple (aapl) at almost $ 849 billion and Amazon (amzn) at $ 733 billion.
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The software company run by Satya Nadella could impress investors enough to reach a $ 1 trillion value within three years by increasing revenue to $ 136 billion in its fiscal year 2020, up 41% from $ 97 billion last year, and operating income to $ 46 billion, up 58% from $ 29 billion, the Morgan Stanley analysts forecast. Nadella took over for CEO Steve Ballmer in 2014 and immediately prioritized the company’s cloud businesses, while getting out of distracting sidelines like making phones. It has worked so far, with Microsoft’s stock price nearly tripling since Nadella assumed the top job.
The key to reaching the needed level of additional growth would be Microsoft’s booming cloud business, both via its Office 365 subscription software and its Azure cloud platform for businesses, analysts Weiss and Franchi wrote. At the same time, shrinking sales of traditional Windows PCs and servers would need to stabilize.
That could happen as the number of corporate users of Office 365 could almost double from 105 million at the end of 2017 to 204 million at the end of 2020, the analysts said, with revenue from the popular software subscription package increasing from $ 10.7 billion to $ 25.6 billion. Revenue will compound even more quickly at Azure, growing from $ 3.9 billion last year to $ 21.6 billion in 2020. Altogether, total cloud revenue at Microsoft—which includes Office 365, Azure, search ad revenue and a few other items—should grow from $ 22.3 billion last year to $ 58.5 billion in 2020.
The analysts warned that they could also be underestimating Microsoft’s (msft) growth if its Xbox gaming business expands faster than expected, the company’s tax rate drops more than Microsoft forecast, or the company increases purchases of its own stock.
This means that the market has now retraced to its previous low, something I warned was historically likely to happen.
But still investors are understandably worried about the return of such volatility, after 2017’s freakishly calm and bullish year. In fact, according to CNN’s Fear & Greed Index, a meta analysis of seven different market indicators, investors are not just afraid but are petrified right now.
But since the root cause of fear is uncertainty and doubt, let’s take a look at what caused the stock market’s latest freakout. More importantly discover why these fears are likely overblown, and why the you shouldn’t be racing for the exits.
What The Market Is Freaking Out Over Now
On Thursday, President Trump announced that he would be imposing 25% tariffs on $ 50 billion to $ 60 billion worth of Chinese imports covering 1,300 products including: aerospace, information and communication technology, and machinery. This was in retaliation for years of Chinese intellectual property theft against foreign companies, including US firms.
The Chinese responded with calls for America to “cease and desist” and the Chinese embassy said:
“If a trade war were initiated by the US, China would fight to the end to defend its own legitimate interests with all necessary measures.” -Chinese Embassy
Thus far, Chinese retaliation has been modest, just $ 3 billion against 128 US imports including: pork, aluminum pipes, steel and wine. However, according to Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, those $ 3 billion in tariffs appear to be in response to Trump’s earlier steel and aluminum tariffs.
Those only affected $ 29 billion in US imports, before Trump began exempting most US allies.
The Wall Street Journal is reporting that China will now ratchet up its own counter tariffs, specifically against, “U.S. agricultural exports from Farm Belt states.” Specifically, this means tariffs on U.S. exports of soybeans, sorghum and live hogs, most of which come from states that voted for Trump.
Apparently, the Chinese began planning for a potential US trade dispute last month when the Chinese Commerce Ministry met with major Chinese food importers to discuss lining up alternatives sources of major US agricultural products. For example, China is considering switching its soy imports to Brazil, Argentina and Poland.
The concern that many people have is that during the announcement on the Chinese tariffs, which cover just 10% of all US imports from that country, Trump stated that this was just the first in a series of upcoming tariffs against China.
So many are worried that if the President truly believes that “trade wars are good and easy to win”, then he could potentially escalate this trade tiff into a full blown trade war. Something that history shows is never a good thing, and sometimes has disastrous consequences.
How Bad Would A Full Blown US/China Trade War Be?
The White House has stated that it wants to reduce the US/China trade deficit by $ 100 billion a year, or about 20%. Theoretically, that could mean that Trump might impose tariffs on all Chinese goods, in order to make them more expensive and less competitive with either US goods or those from non-tariffed countries.
So what effects would this have on the US? Well, first of all prices will increase initially, since companies like Walmart (WMT) have complex supply chains with contracts for sourcing for its stores. So in the likely case a 25% tariff on $ 50 billion to $ 60 billion in Chinese imports represents a $ 12.5 billion to $ 15 billion increase in US input costs.
Or to put another way Trump’s China tariffs are likely to boost inflation by 0.08%, and drive core PCE from 1.5% to 1.6%. Now that isn’t the total negative affect to the US economy. After all, China has already retaliated in response to steel tariffs, and is likely to now ratchet up its own counter tariffs.
How bad could that be for American exporters? Well, China supplies just 2% of US steel, meaning that the steel tariffs represent a $ 580 million loss of export revenue. In response, they slapped tariffs on US goods (with apparent plans to completely replace them with foreign alternatives) of $ 3 billion. That’s a retaliation tariff ratio of 5.2, meaning for every $ 1 in export revenue threatened by US tariffs, China appears to be willing to cut its US imports by as much as $ 5.20.
However, in 2017, Chinese imports of US goods totaled $ 130 billion, so there is no way this retaliatory ratio could hold. However, theoretically, if the US and China were to get into a full blown trade war, China could cease importing up to $ 130 billion of US products.
That worst case scenario would likely require Trump imposing similar (25%) tariffs on all Chinese imports to the US, which totaled $ 506 billion last year. In the worst case scenario, that could temporarily raise US prices by $ 127 billion.
Worst Case US/China Trade War Costs
Cost To US Economy
% Decrease In Real GDP Growth
Increase In Inflation
Higher US Prices
$ 127 billion
Lost US Exports
$ 130 billion
$ 257 billion
Sources: thebalance.com, CNN, Marketplace, Bureau of Economic Analysis
Nominal US GDP would not fall due to rising prices; in fact, it would increase. However, GDP is reported as inflation adjusted, meaning that price increases would not have an measured affect on economic growth since they are by definition excluded.
However, they do represent a true cost to the economy, since it means consumer pay more and have less money to spend on other things. The effect on GDP would potentially be seen via China’s replacement of potentially $ 130 billion in US exports with those from other nations. That would knock off 0.7% from US economic growth. Currently, the Federal Reserve is projecting 2.7% growth in 2018, so in our worst case scenario that would fall to 2.0%.
Meanwhile, the higher US prices would represent about 0.7% increase in inflation, pushing the core, (ex-food & fuel), personal consumption expenditure index to 2.2%. Core PCE is the Fed’s preferred inflation metric because it’s a survey of what people actually buy, taking into account rising prices, (switching to cheaper alternatives).
The bottom line is that a full blown US/China trade war has the potential to do significant damage to America. It could potentially lower economic growth 25% over a year, and raise inflation by nearly 50%. But just above the Fed’s stated 2.0% target. Fortunately, this worst case scenario is unlikely to actually happen.
Trade Wars Are Terrible But This “Tariff” Isn’t Likely To Become One
First understand these tariffs are not immediate. US Trade Representative Robert Lighthizer’s office will have 15 days to publish a list of the goods, which will be followed by a 30-day comment period before they go into effect. Tariffs and retaliatory tariffs are not a light switch, but a slow moving regulatory process.
This means that it will likely be six weeks (early May) before any US tariffs on Chinese imports begin. Chinese retaliation in terms of decreased exports would likely start by late June/early July at the earliest. Or to put another way, half of the impact of the worst case scenario would be eliminated by timing.
And time is our friend here because most trade disputes, even threatened tariffs, are merely negotiating tactics. Most of the time tariffs get called off relatively quickly as both sides seek some kind of resolution.
After all, China potentially could take a 3.8% hit to GDP if it lost its US export market, cutting its economic growth in half. That’s something it has no interest in. Meanwhile, the sharp hit to Trump’s constituency (states that helped elect him), plus slower US economic growth, would certainly not help the President’s re-election efforts in 2020.
We’ve already seen that the President’s threatened tariffs can get walked back. For example, the steel and aluminum tariffs that freaked out the market a few weeks ago. Trump has since “temporarily” exempted: The European Union, Canada, Mexico, Brazil, Australia, New Zealand and South Korea. These countries actually are responsible for 2/3 of all US steel imports while China represents just 2%.
In early March, China’s Supreme Court vowed to strengthen China’s protection of intellectual property rights, something that Chinese tech firms have been calling for. This means that the trigger for these tariffs might already be fading. It also means that both China and the US have a relatively easy way out, in which no one loses face, because each side can claim some kind of victory.
What The Fed Did To Potentially Spook The Markets
The other potential partial factor for this week’s sharp drop is the Federal Reserve’s March meeting in which it hiked the Federal Funds rate by 25 basis points to 1.5% to 1.75%. This was already priced in by the bond market and was a surprise to no one. The Fed said that, “The economic outlook has strengthened in recent months” and boosted its economic growth forecasts:
- 2018: 2.7% (from 2.5%)
- 2019: 2.4% (from 2.1%)
- 2020: 2.0% (from 1.8%)
- Long-Term: 1.8% – unchanged
The Fed also updated its core PCE projections:
- 2018: 1.9%
- 2019: 2.1%
- 2020: 2.1%
Meanwhile the Fed’s new unemployment forecast is:
- 2018: 3.8%
- 2019: 3.6%
- 2020: 3.6%
Now none of these upgraded projections are significant, since they basically mean the Fed is just more bullish on the economy. But what potentially concerned the market is the Fed’s slightly more hawkish stance on interest rates.
(Source: CME Group)
Basically, this revised plan from the Fed calls for:
- 2018: two more hikes (same as before)
- 2019: three hikes (same as before)
- 2020: two hikes (one more than before)
The Fed basically expects to raise its Fed Fund rate, which is the overnight interbank lending rate, to 3.5% by the end of 2020. Of course, that’s assuming the US economy keeps growing as quickly as predicted.
3.5% is still far below the historical norm (4% to 6%), so why should that have concerned investors? Simply put because it indicates that the Fed might end up triggering a recession.
Yes You Should Fear An Inverted Yield Curve…
While the Fed Funds rate has no direct link to the bond markets that actually control US corporate borrowing costs, most US banks do benchmark their prime rate off it. The prime rate is how much they charge their most creditworthy and favored clients.
The prime rate has now been raised to 4.75%. The prime lending rate is what most non mortgage consumer loans are benchmarked off. So this means that US consumer borrowing costs are rising, and could rise another 1.75% by the end of 2020. That could certainly slow the pace of consumer borrowing, and potentially increase the US savings rate. While a good thing in the long term, it would potentially cause consumer spending to slow. Since 65% to 70% of US GDP is driven by consumer spending that might in turn slow US economic growth and, more importantly to Wall Street, corporate profit growth.
But here is the real reason that investors should worry about the Fed Funds rate potentially rising another 1.75%. Because under current economic conditions, it would almost certainly cause a recession. That’s based on the single best recession predictor we have, the yield curve. This is the difference between short-term and long-term treasury rates.
The yield curve is 5/5 in predicting the last five recessions. If the curve gets inverted, meaning short-term rates rise above long-term rates, a recession follows relatively soon (usually within one to two years).
Why is this? Two reasons. First, if short-term rates are equal to or above long-term rates, the bond market is signaling that it expects little economic growth and inflation ahead.
More fundamentally, it’s because financial institutions borrow short term to lend long term, at a higher interest. This net margin spread is what creates lending profits and is why loans get made in the first place. So if short-term borrowing rates rise higher than long-term rates, it can decrease the profitability of lending, and result in fewer loans. Thus, consumer spending can fall, businesses invest less, and the economy slides into a recession.
And while the Fed Funds Rate has no direct link to the interest rates that companies care about (long-term rates that benchmark corporate bond rates), studies show that the short-term treasury bonds track closely with the Fed Funds Rate. But long-term rates, such as the 10-year Treasury yield, do not, as they are set by the bond market based mostly on long-term inflation expectations.
This is why the market freaked out over January’s labor report that showed wages rising 2.9%. The fear is that if the labor market is too hot, then rising wages trigger faster inflation which forces the Fed to hike rates high enough to trigger a yield curve inversion. This is what occurred before the last three recessions.
Basically, this means that if the Fed were to proceed with its revised rate hike schedule, then short-term rates would likely rise by 1.75% or so. Long-term rates, on the other hand, are set by inflation expectations and the 10-year yield of 2.83% is currently pricing in 2.1% inflation.
(Source: Bureau Of Economic Analysis)
However, inflation has been stuck at 1.5% for the last four months, and so far shows no signs of rising to those long-term expectations. Which means that 10-year yields are not likely to rise 1.75% by 2020, in line with rising short-term rates.
That in effect indicates that seven rate hikes would almost certainly invert the yield curve, heralding the next recession. The good news? The Fed isn’t likely to keep hiking if inflation remains low and threatens to invert the yield curve.
…But The Fed Isn’t Likely To Invert The Curve
So if the Fed’s current forecast calls for low inflation, but enough rate hikes to likely trigger a yield curve inversion and possible recession, why am I not freaking out? Two main reasons. First, Jerome Powell, the new Fed Chairman, is not an economist, but a veteran of Wall Street. Over his career, he’s been:
- Managing director for Bankers Trust – a US bank
- Partner at The Carlyle Group – a private equity firm
- Founded Severn Capital – a private equity fund specializing in industrial investments
- Managing partner for the Global Environment Fund – a private equity fund specializing in renewable power
Here is why this matters. Economists are big fans of economic models, such as the Phillips Curve. This says that as unemployment falls below a certain, (full employment), wages and thus inflation, must rise.
Powell has indicated that he’s willing to go where the data takes him, and not just assume the models are correct. In other words, Powell doesn’t buy into the fears of the Fed’s more hawkish members.
In fact, take a look at what he said during the last Fed post meeting press conference:
“There is no sense in the data that we are on the cusp of an acceleration of inflation. We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that… The theory would be if you get below the sustainable rate of unemployment for a sustained period, you would see an acceleration of inflation. We are very alert to it. But it’s not something we observe at the present… We will know that the labor market is getting tight when we see a more meaningful upward move in wages… Wages should reflect inflation plus productivity increases … so these low wage increases do make sense in a certain sense… That is a sign of improvement (rising labor participation rate), given that the aging of our population is putting downward pressure on the participation rate… It’s true that yield curves have tended to predict recessions … a lot of that was when inflation was allowed to get out of control.” -Jerome Powell
What we see in these quotes is a man who understands finance and understands that the world is more complex than simplified models would indicate. He seems to realize that we are NOT at full employment. So until wages start rising there is no reason to assume we are and that inflation is about to accelerate to dangerous levels.
Powell has also indicated that he expects tax cuts to fuel more investment, boosting productivity, which would allow wages to rise without triggering higher inflation. This is something that I expect as well and the key reason that I’m personally so bullish on the economy, and expect the current expansion to continue for many years.
The bottom line is that Powell seems to be a man who will, for the sake of expectations, make a forecast. But he seems more than willing to ultimately alter monetary policy as the economic data indicates is necessary, not raising rates just because the Phillips Curve says to.
And as a former Wall Street banker who is well aware of the yield curve and its importance, I don’t consider it likely that he’ll blindly keep hiking rates based on a plan from a few years ago. When the facts change, Jerome Powell changes his mind.
Which brings me to the biggest reason to shake off and ignore this last terrible week in the stock market.
US Economic Fundamentals Remain Strong And That’s All That Matters
The stock market may be a forward looking instrument, but it’s also prone to fits of violent pessimism whenever anything bad happens. The market often takes a worst case scenario like “sell first, ask questions later” approach.
Trump announces tariffs? It MUST mean we’re headed for a full blown global trade war that will trigger massive inflation, a shrinking economy, and a bear market! Sell everything!
The truth is that while sometimes the worst case scenario happens (such as the Financial Crisis), 99% of the time negative effects of anything are not as bad as people fear. Or to put another way very seldom is it true that “this time is different.”
So let’s take a page of out Jerome Powell’s playbook and look at the data. I’ve already covered why the last jobs report was darn near perfect.
Meanwhile, the risk of a recession is the lowest I’ve seen since I discovered Jeff Miller’s excellent weekly economic report 18 months ago.
(Source: Jeff Miller)
Specifically, according to a collection of meta analyses of leading indicators and economic reports, the four- and nine-month recession risk is 0.39% and 15%, respectively. Of course, these can and do change over time as new data comes in. But the point is that based on the most recent evidence there is no reason to fear a recession.
Finally, the New York Fed’s Nowcast (real time GDP growth estimator) is saying that Q1 and Q2 GDP growth is likely to come in at 2.9%, and 3.0%, respectively.
Now that also changes with economic reports as they come in, but if true then this is how US economic growth is trending:
- 2016: 1.5%
- 2017: 2.3%
- Q1 2018: 2.9%
- Q2 2018: 3.0%
Does this portend doom and gloom for the economy, labor market, or corporate earnings growth? No it does not.
I’m not saying stick your head in the sand and ignore all risks. But rather than freak out over POTENTIAL worst case scenarios to the economy we focus on the facts as best we know them. Right now those facts are:
- low and stable inflation
- strong job market but not at full employment (otherwise wages would be rising)
- accelerating economic growth
- strong and accelerating corporate profits
- stock market trading sideways = valuation multiples falling = less risk of a bubble and crash
Bottom Line: Markets Are Driven By Short-Term Emotions, Your Portfolio Decisions Shouldn’t Be
Don’t get me wrong a full blown trade war with China would be a terrible thing. It would undoubtedly significantly increase inflation, slow the economy, and potentially force the Fed to raise rates to dangerous levels. These are things that could certainly trigger a bear market or even a recession.
However while all those risks are real, the probability of such a worst case scenario remains remote and speculative. What we do know for sure is what the economic data shows. Which is that the fundamentals underpinning the current economic expansion and bull market remain strong. More importantly, in an economy this large, it would take a large and protracted negative shock to derail those fundamentals and trigger the kind of market crash that many now fear is imminent.
That doesn’t mean that you shouldn’t protect yourself. I myself am continuing to de-risk my high-yield retirement portfolio with a strong focus on quality, undervalued, low volatility, and defensive stocks. But my point is that I’ve been doing that for several months now, back when the market was still roaring higher, and before fears of a trade war surfaced. That’s because I believe in building a bunker while the sun is shining so you never have to fear any market storm.
My recommendation to investors remains the same. Stay calm, focus on your long-term strategy, and don’t let the market’s knee-jerk reactions to likely overblown speculative fears cause you to make costly short-term mistakes.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
HONG KONG (Reuters) – China’s Tencent Holdings Ltd (0700.HK) saw its shares down 4.51 percent at the midday trading break on Friday after the internet firm’s largest shareholder, Naspers Ltd (NPNJn.J), said it would lower its stake for the first time in 17 years.
The Hong Kong-listed stock opened 7.8 percent lower at HK$ 405, its lowest opening price since Feb. 9, before regaining ground to HK$ 419.6 by noon. The benchmark Hang Seng Index .HSI was down 2.81 percent.
A day earlier, the stock fell 5 percent following Tencent’s late Wednesday report showing quarterly revenue missed estimates as well as expectations of margin pressure, although profit beat forecasts.
Friday’s decline wiped $ 24 billion (17 billion pounds) off Tencent’s market value, though at $ 508 billion, it is still Asia’s most valuable listed company and fifth globally behind Apple Inc (AAPL.O), Alphabet Inc (GOOGL.O), Amazon.com Inc (AMZN.O) and Microsoft Corp (MSFT.O).
South African media and e-commerce group Naspers said on Thursday it planned to sell up to 190 million Tencent shares, or 2 percent of its holding, in a sale that could earn Naspers up to $ 11 billion. It also said it had no plans to further reduce its holding for the next three years.
“The funds will reinforce Naspers’ balance sheet and be invested in classifieds, online food delivery and fintech globally,” said CICC analyst Natalie Wu. “We think it is a good opportunity to buy into dips given Tencent’s solid fundamentals.”
Jefferies analyst Karen Chan said, “Given Naspers’ largest single shareholding and board representation in Tencent, we believe its stake sale is unlikely to be a reaction to Tencent’s quarterly results. Instead of a timed profit-taking move, we believe this is more to improve Naspers’ own free cash flow and allow it higher flexibility in pursuing investment opportunities.”
A Tencent spokeswoman said it was informed and supportive of Naspers’ decision, and that Naspers’ intention to keep its remaining stake for the next three years demonstrated its confidence in Tencent.
Reporting by Sijia Jiang and Donny Kwok; Editing by Paul Tait and Christopher Cushing
There’s always a story. There’s always at least two sides to every story, depending upon whom you ask. Here’s mine.
My 2017 Story And What I Learned
While others fretted in the beginning of 2017 that the market had peaked and was ripe for a deeper correction, I maintained my focus. Leaving the market in the beginning of 2017 would have cost an investor 20% of gains in that year and about 8 percent in the New Year before the recent correction.
Corrections market-wide and company specific continued to bring opportunities for income investors to enhance their income with higher dividend yields.
Since I’m an income investor, I’m always on the look-out for these types of opportunities. Though I strongly adhere to the notion that time in the market is crucial and necessary to see the fruits of a compounding dividend investment strategy blossom, I also adhere to the large benefits that can accrue to the income investor if a dollop of timing the market is layered on top.
Developing And Refining An Income Investing Strategy
My laser-focused strategy of buying temporarily depressed stock prices on investor panic has served me and my subscribers to “Retire 1 Dividend At A Time” well the past two years. Since the bottom of the financial crisis, which occurred on March 9, 2009, I have honed and refined the strategies I use to build, grow and protect income for retirement.
An important refinement to the strategy has been to rinse and repeat it as often as possible and as often as accumulated dividends become available for reinvestment. Though I think employing a DRIP strategy can be quite effective for less active investors, or those that don’t want to monitor their portfolios on an ongoing basis, I believe that accumulating dividends as they hit the brokerage account lets us take advantage, in a much more effective manner. This is especially true when panicked investors wish to dump perfectly good stock and sell it to us at undervalued prices, which happened two weeks ago when the market experienced a 10% correction.
Whenever this occurs, prices fall and yields will rise. It works the same way in the bond market. It is this simple mathematical relationship that gives rise to the extraordinarily higher yield and dividend dollar totals we are able to put up on the board.
Accumulation Of Dry Powder
Some detractors would criticize this approach to dividend accumulation. It is their contention that money should be put to work at all times so it can always generate income for us. They’ll throw all sheets to the wind and reinvest dividends no matter how high a price they pay.
It is my considered belief that holding some amount of accumulated dividends in cash allows us the choice to decide when to invest it, when it can get us the biggest bang for the buck. In this sense, we have often experienced that patience pays.
Staying 10% to 20% in cash most times allows for the deployment of cash when it can get us that biggest bang for the buck.
Dealing With Risk In The Market
In an effort to assuage the fears of readers, followers and subscribers, I counsel them to keep approximately three years of cash or cash equivalents in reserve. This allows the investor to realize that even if a large correction or crash occurs, just at the time they might want to begin drawing down funds for retirement spending, no stocks need to be sold to accomplish this goal. At such times, the cash hoard can be relied upon to pay the bills. This strategy will allow plenty of time for stock prices on high quality companies to rebound and reinvigorate the investor’s courage. The average large correction lasts about eighteen months.
Average length of Corrections
So, keeping a cash cushion that will last twice as long can only bring more comfort and keep the investor from selling in a panic, depriving themselves of the income that that stock created in the first place.
A decent cash pile can go a long way towards holding the investor’s hand and walk them calmly through any correction, even one as big as the one we experienced as recently as the Great Recession and financial crisis of 2008-2009.
Preparing For 2018
Preparation for 2018 revolves around the theme that interest rates are most certain to continue to rise in an increasingly strong economy, one that is gathering steam and will get an extra boost from a large tax cut for corporations. Buying those companies bound to benefit more from a huge tax cut will give greater certainty to the overall outcome of an investment in the year to come.
Companies with large net operating loss carry forwards will benefit less than companies who don’t have them. Citigroup (C), for instance, currently has $ 16 to $ 20 billion of these NLCs. With the corporate tax rate reduced from 35% to just 21%, Citigroup will save that much less on their tax bill and operating income will suffer.
Here’s an example to help illustrate:
A $ 10,000.00 loss at a 35% tax rate can save $ 3500 on a company’s tax bill. But at 21%, a $ 10,000 loss will be worth just $ 2100 in tax savings. This will necessarily negatively impact a company’s bottom line.
Net Deferred Tax Assets
Companies with net deferred tax assets – those with significant net operating loss carry forwards (NOLs) or those with substantial deductions taken for tax before book (e.g., litigation expenses, loan loss accruals, etc.) – will see the value of those net deferred tax assets decline. Very simply, a $ 1,000 NOL is worth $ 350 under the current tax law’s 35% corporate rate, but would only be worth $ 210 with the new corporate rate cut to 21%.
As discussed earlier, Citigroup has said that such a change would cost it $ 16-17 billion. As a consequence, some corporations were exploring how they might accelerate earnings more quickly into 2017 so as to apply those NOLs under the current higher tax regime while they are worth more. Using these NOLs would lower a company’s taxable income for 2017 and, by reducing current tax due, increase its cash.
In contrast, firms with a net deferred tax liability stand to benefit from the new lower 21% rate.
The banking theme offers opportunity in two distinct areas. The first is represented by the hunt for financial firms that have low NOL carry forwards and stand to benefit more than their high NOL carry forward competitors.
Additional Opportunity in 2018
Additional opportunity comes with the realization that with a Fed rate rise already promulgated at the December, 2017 FOMC meeting, and two or three additional hikes coming down the pike in 2018, the financials stand to gain from a widening of the spread. They’ll be able to still borrow at competitively low rates if their balance sheets are strong while at the same time being able to charge more for the loans they make and the auto loans, home equity loans and credit card fees they charge to consumers.
The sweet spot will be finding those banks that stand to gain from both phenomenon. The regional banks, like Regions Financial (RF), or BB&T Corporation (BBT) doing all their business domestically, would appear to represent a good starting place to explore these possibilities.
Best Ideas For 2018: What’s The Story?
I recently wrote, “Shopping At Tanger Outlets Bought Us A Bargain” to emphasize the benefits of contrarian investing. Along with other REITs and mall REITs in particular, this company lost around 40% of its market value as millions of investors decided, wrongly I think, that brick and mortar was dying. I strongly believe that news of the death of brick and mortar has been greatly exaggerated, and Tanger Outlets (SKT) serves a high-end niche market that will do well.
It is well for investors to realize that, though online retailing continues to grow by leaps and bounds, it still accounts for only about 15% of all shopping. It’s also wise to remember that consumer spending accounts for 70% of U.S. GDP.
Just a few weeks ago, we recommended purchase of SKT to our subscribers at $ 22.67. As I write this, it is changing hands at $ 25.26. This 11.4% gain in so short a time illustrates the capital appreciation that can be captured by going against the grain and executing on a solid idea with a high-quality company.
We obtained a high yield of 6.04% for our subscribers. Today’s buyer must settle for a much lower 5.4%. Because there’s always a sale somewhere in the market, this type of market timing can be employed multiple times throughout the year in any number of names.
After the suits are finished litigating the lawsuit with the Department of Justice, if AT&T prevails, they’ll be able to handle the additional debt to do the deal. If the DOJ prevails, AT&T will simply move on to another friendly target that will aid in its adaptation to the future. Investors worried about the debt load will breathe easier and have new justification to buy the stock again, pushing its price ever higher. Author Michael Wolff wrote a best-selling book about the goings-on at the White House. He contends that numerous high-level White House advisors and staffers have said, “No way, this deal is not going to be approved”. Take that for what it’s worth.
In the meantime, we recommended AT&T to subscribers and followers in recent posts, at $ 32.60 per share. We guided readers and subscribers to a solid 6.01% yield on a stalwart that normally yields closer to 5.00%.
As I write this, AT&T is currently trading for $ 39.19, just weeks after our purchase. Today’s income investor will have to settle for a dividend yield of just 5.10% as it reverts to that 5% mean just discussed. Again, this compares to the hefty yield we received of 6.01%. Once T raised its annual dividend to $ 2.00 a few weeks later, our yield on cost rose to 6.13%.
For those capital gainers out there, we’ve also scored capital appreciation of 20.2% on this new position.
Time In The Market Vs. Timing The Market
Income investors often say that “time in the market is more beneficial than timing the market”. Because I’m a long-term investor, I subscribe to the first part of that statement. Because I’m also an opportunistic investor, I can also enhance my dividend stream by adhering to the second part as well. There is always a sale in the stock market, somewhere. You just need to know where to look for it.
Got A Pension?
Today, only 24% of workers are covered by traditional, defined benefit pensions at work. The rest of us must fend for ourselves. Big corporations who used to provide pensions now save enormous sums by no longer offering them. Instead, the other 76% have been encouraged to find ways to fill the gap between the meager amounts we’ll receive from Social Security and the actual spending needs we’ll all have in retirement. This was the genesis of the Fill-The-Gap Portfolio.
The Fill-The-Gap Portfolio
The FTG Portfolio contains a good helping of dividend growth stocks, like AT&T. It was built with the express purpose of benefiting from this and other strategies.
Three years ago, I began writing a series of articles on December 24, 2014, to demonstrate the real-life construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near-retirees face today between their Social Security benefit and retirement expenses.
The beginning article was entitled, “This Is Not Your Father’s Retirement Plan.” This project began with $ 411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 22 companies, including AT&T Inc (T)., Altria Group, Inc. (MO), Consolidated Edison, Inc. (ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (MAIN), Ares Capital (ARCC), British American Tobacco (BTI), Vector Group Ltd. (VGR), EPR Properties (EPR), Realty Income Corporation (O), Sun Communities, Inc. (SUI), Omega Healthcare Investors (OHI), W.P. Carey, Inc. (WPC), Government Properties Income Trust (GOV), The GEO Group (GEO), The RMR Group (RMR), Southern Company (SO), Chatham Lodging Trust (CLDT), DineEquity (DIN), and Iron Mountain, Inc. (IRM) and Kimco Realty Corp (KIM).
Because we bought most of these equities at cheaper prices since the inception of the portfolio and because most of our stocks have increased their dividends regularly, the yield on cost that we have achieved is 7.67% since launch on December 24, 2014. Current portfolio income, including recent dividend raises by AT&T and Realty Income, and our newest addition of AT&T shares, now totals $ 33,323.86, which is $ 2142.00 more annual income than the previous month. This represents a 6.5% annual income increase for the portfolio.
When added to the average couple’s Social Security benefit of $ 32,848.08, this $ 33,323.86 of additional supplemental income brings this couple annual income of $ 66,171.94. We note that the dividend income on this portfolio has now surpassed the amount coming from the Social Security benefit. This far surpasses the original goal set to achieve a total of $ 50,000.00, which is accepted as a fairly comfortable retirement income in many parts of the country. That being said, this average couple now has the means to splurge now and then on vacation travel, dinners out, travel to see the kids and grandkids and whatever else they deem interesting.
Taken all together, this is how the FTG Portfolio generates its annual income.
FTG Annual Dividend Income
Insert FTG 2018 Annual Dividend Income pic, here:
Chart source: the author
As discussed in “Even A Cloudy Crystal Ball Comes Into Focus Twice A Year”, paying too much attention to the everyday price swings, even with stodgy stalwarts like AT&T can drive investors to drink. But for those investors willing to be more proactive in their investing, there is a lot to be said for putting favored stocks on a watch list and exercising the patience to wait, and then pounce when others have thrown the stock out with the bathwater.
My aim was to demonstrate that great capital gains and enormous growth of portfolio income can be accomplished if an investor is willing to spice up his portfolio with a dash of market timing, now and then. AT&T’s yield, shooting up from its usual 5% range to 6.01% was something we could not ignore. We could not stand by passively and look that gift horse in the mouth. We acted, for ourselves, our readers who follow me, and subscribers.
With the ten-year Treasury rate convincingly smashing through a 2.2%-2.5% range that has held for quite some time, now is a good time for investors to sharpen their pencils and get their orders set up. Rising yields, as evidenced by the ten year Treasury bond ticking up to 2.95% last week, are already bringing down the prices of favored REIT investments for retirees who seek income. With each tick down in price, yields rise. It’ll be time soon to enter limit orders to grab some accidentally high yield once again and buttress our portfolios with additional income.
We all have mistakes we’ve made that we can learn from. The key is having the courage to look back upon them, learn from them, and then act upon the information learned.
In regard to our recent successful AT&T trade, we have been reminded, once again, “If AT&T trades down to a point where it yields 6%, I will buy it, I can buy it, and I did buy it”.
I continue to learn lessons, have tried to apply them and I try to share them with you.
Your Engagement Is Appreciated
As always, I look forward to your comments, discussion, and questions. Do you use DRIP investing? Have you occasionally employed market timing? What has been your experience and have you found it worthwhile towards your ultimate goal of growing income for retirement? Please let me know in the comment section how you approach these situations in your own portfolio and how you arrive at your decisions.
Author’s note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
If you’d like to receive immediate notification as soon as I write new content, simply click the orange “follow” button at the top of this article next to my picture or at the bottom of the article, then click “Real time alerts.”
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Thanks for reading. Interested in more dividend strategies and ideas?
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Disclosure: I am/we are long ALL FILL-THE-GAP PORTFOLIO STOCKS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
BEIJING/SHANGHAI (Reuters) – Apple Inc will accept Chinese mobile payment app Alipay in its local stores, boosting its ties with giant e-commerce firm Alibaba Group Holding Ltd amid a push by the iPhone maker to revive growth in the world’s No.2 economy.
The tie-up will make Alipay, run by Alibaba affiliate Ant Financial, the first third-party mobile payment system to be accepted at any physical Apple store worldwide, Ant Financial said in a statement on Wednesday. Apple’s own payment system has had a lukewarm reception in China.
The Cupertino-based firm will accept Alipay payment across its 41 brick-and-mortar retail stores in China, said Ant Financial, which was valued at $ 60 billion in 2016.
Apple, whose China website, iTunes store and App Store have been accepting Alipay for more than a year, did not immediately respond to requests for comment.
The deal comes as Apple is doubling down on the market and looking to strengthen ties with local Chinese partners and government bodies. The firm’s CEO Tim Cook has made regular recent visits to the country.
Apple is also shifting user data to China-based servers later this month to meet local rules and last year removed dozens of local and foreign VPN apps from its Chinese app store.
Alipay is China’s top mobile payment platform, but faces stiff competition from rival internet giant Tencent Holdings Ltd’s payment system that is embedded within its hugely-popular chat app WeChat.
China’s official Xinhua news agency said late on Tuesday that Apple would build its second data center in China in Inner Mongolia Autonomous Region after it set up a data center in the southern province of Guizhou last year.
Reporting by Pei Li in BEIJNG and Adam Jourdan in SHANGHAI; Editing by Himani Sarkar
Source: AZ quotes
First, let me be very clear that this is my personal portfolio tailored to my specific financial situation, risk profile, time horizon, and personality traits. I am not recommending anyone mirror this portfolio, which is merely designed to show my unique, rule-based, methodical approach to value-focused, long-term, dividend growth investing.
My situation is unique, as, though only 31, I’m already retired (medical retirement from the Army), thus making this portfolio an income-focused retirement portfolio (though in a taxable account). I’m also working full time (self-employed) and thus have an external source of income to continually add to this portfolio. I do not plan to actually tap the portfolio’s income stream for 20-25 years, when I plan to move my family (and help support my parents) to the promised land of my people: Sarasota, Florida.
What this portfolio can be used for is investing ideas; however, this portfolio includes high-, low-, as well as medium-risk stocks, so it’s up to each individual to do their own individual research and decide which, if any, of my holdings are right for you.
For a detailed explanation of my methodology, please read my introductory article to the EDDGE 3.0 portfolio.
What Happened This Week
It’s been one heck of a year for Wall Street. All three major indexes soaring on strong optimism about tax reform and accelerating economic growth.
Of course, many are now worried that the market is in a bubble, and that’s understandable. After all, based on the S&P 500’s trailing 12-month earnings, stocks are trading at some of their loftiest valuations in history.
S&P 500 Trailing 12 Month PE
And looking at the popular (though far less useful than most people think) Shiller CAPE, things look even scarier.
S&P 10 Year Cyclically Adjusted PE Ratio (CAPE)
Even more amazing? This year’s strong rally has occurred with record low volatility. In fact, the biggest drawdown for the S&P this year was an astonishingly low 3%! You have to go back to 1994 to find a year with better returns with volatility this low.
This kind of freakishly high risk-adjusted total returns is likely why there is a bubble in people calling market bubbles. And since it’s natural to crave certainty in a deeply uncertain world, analysts and various “experts” are quick to offer predictions about the next year. But there’s a major problem with this: they are basically guesses plucked from thin air.
100% Guaranteed That The Market Will Rise In 2018… Or Fall… Or Stay Flat
Whether it’s economists predicting interest rates, or analysts predicting where the market will go next year, the track record is so bad as to make all predictions essentially useless.
For example, since Bloomberg began tabulating analyst consensus guesses for the next year’s market performance (in 2000), Wall Street’s very well paid best and brightest have predicted the market would rise every single year. This means that they completely missed the four negative years we’ve had in the last 17 years (when factoring in dividends).
This is due to two main factors. First, the stock market generally rises over time. In fact, on an annual basis, the S&P 500 rises about 80% of the time. And that trend has been especially strong recently. For example, in the past 31 years, the market’s total return has only been negative five times: in 1990, 2000, 2001, 2002, and 2008.
In other words, with the market rising 84% of the time in the past three decades, the safest bet for any analyst is to predict the market will go up next year.
This is likely why Mike Wilson, the chief US equity strategist at Morgan Stanley (MS), who offered the most bullish 2017 prediction in late 2016, is now predicting “just” a 2.6% rise (to 2,750) in the S&P 500 in 2018.
That’s despite predictions that: interest rates, increased volatility, and poorer than expected credit and economic data, will all roil the markets next year.
Even John Hussman, the famous permabear who is predicting a 65% market crash, is hedging his bets and saying that the market could continue rising for the foreseeable future.
In other words, every analyst making any kind of short- to medium-term prediction is basically pulling numbers out of thin air while making sure to cover their buts in case they are wrong.
This is why I don’t bother ever predicting what the market, or any given stock, will do over the next year.
“…in the short run, the market is like a voting machine – tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine – assessing the substance of a company.” – Benjamin Graham
As Ben Graham, the father of modern value investing (and Buffett’s professor at Columbia University), explains, short-term prices are totally unpredictable. They are governed by “animal spirits” as millions of investors experience often inexplicable, and volatile, swings in emotions.
However, the fact is that this precise return of volatility and negative returns that everyone is worried about doesn’t matter. In fact, if you play your cards right, you can turn it to your advantage and use it to achieve the kind of financial independence that most people only dream of.
Markets Always Climb A Wall Of Worry
Source: A Few Dollars More
The US stock market, and the global economy that ultimately drives it, is incredibly complex. There are always some collection of threats and risks that could cause stocks to drop in the short term. This has always been the case, and will continue as long as there is a stock market.
This can lead to large crashes, and long bear markets, in which stocks stagnate or decline for years on end. However, this is where true opportunities lie. In fact, market crashes are where the biggest fortunes are made.
After all, Warren Buffett has made his fortune by being a value focused contrarian. Which is why I too have adopted this strategy for my own portfolio.
Of course, “being greedy when others are fearful” and being a buy and hold investor is easier said than done. That’s because, while great fortunes are made over decades, we live in a short-term world. One in where the media is constantly bombarding us with speculative, but plausible sounding reasons to churn our portfolios.
This is why the average investor does so terribly when actively managing his/her investments. In fact, between 1996 and 2015, JPMorgan (JPM) found that retail investors underperformed every single asset class, and even inflation.
This also explains the rise of passive investing, aka index funds. Warren Buffett, Mark Cuban, John Bogle (founder of Vanguard), and numerous other successful investors have called a low cost market ETF the best default option for almost everyone.
In other words, what all the historical market data (the examples of the top investors in history) shows, is that time in the market is what matters. That’s opposed to timing the market, in hopes of avoiding the big crashes.
This is why I personally love Steven Bavaria’s “income factory” theory of investing. Basically, Mr. Bavaria thinks of his high-yield retirement portfolio like a cash flow based business.
Each holding is a money minting machine that sits in his income factory. The market prices of those holdings, and the portfolio in general, are the market’s current valuation of his factory.
However, rather than concern himself with the short-term swings of the factory’s value, he only cares about growing the income over time. After all, dividends are what pay the bills, and as long as they rise over time, the factory’s valuation is irrelevant.
In fact, if prices crash, this high-yield investing strategy works even better. That’s because the income it generates can then be invested into even more income producing machines, and lock in a higher yield on each one.
Eventually, a diversified collection of quality income producing assets will naturally appreciate in value, and you will get your capital gains. This is born out by market studies that show that over the long term, the total return of a dividend portfolio follows the formula: yield + long-term dividend growth.
This makes intuitive sense, because current dividends require strong and consistent cash flow from which to pay them. Meanwhile, dividend growth is a good proxy for cash flow growth, since over the long term, payouts must track with earnings and cash flow per share increases. And since a stock’s ultimate value is based on its per share cash flow, rising dividends generally mean rising share prices over time.
All of which means that you don’t need to choose between high income and total returns. Because if you build a quality portfolio that, say yields 5%, and has long-term dividend growth of 5%, then over time, you’ll get about 10% total returns. That’s compared to the market’s historical 9.1% total return since 1871.
Basically, this is why I love dividend investing, because it is literally the easiest and highest probability way for regular people to build an exponentially growing stream of passive income. Not only does this allow you to retire early, and live life on your terms, but it also is the most likely way to beat the market over time. It’s also the best option for potentially become rich enough to do anything you want (such as become a philanthropist which is my ultimate end game).
Basically, by turning your portfolio into a cash flow based business, you can counteract all the dangerous, short-term speculative emotions that cause so many investors to do poorly over time.
Dip Buy List
This list represents quality blue chip dividend stocks that are worth owning, but whose yields are just a tad (15% or less) under my target yield. However, a combination of company specific dip plus a dividend increase could cause them to reach my target yield which would mean that I would snatch them up (get in while the getting’s good).
- Bank Of Nova Scotia (BNS) – low risk, 4% target yield, current yield 3.9%
- NextEra Energy (NEE)- low risk, target yield 3.0%, current yield 2.5%
- NextEra Energy Partners (NEP):- low risk, target yield 4.0%, current yield 3.8%
- Altria (MO) – low risk, target yield 4.0%, current yield 3.6%
- Pfizer (PFE) – low risk, target yield 4.0%, current yield 3.7%
- Crown Castle (CCI): – low risk, target yield 4.0%, current yield 3.8%
- Genuine Parts Company (GPC): – low risk (dividend king), 3% target yield, current yield 2.8%
Correction Buy List (in order of priority)
The correction list is the top five quality dividend stocks I want to own, that are between 15% and 20% away from their target yields. This means that it would likely require a broader correction before I can buy them.
- Main Street Capital (MAIN) low risk, target 8% yield, current yield 7.1%
- STAG Industrial (STAG) medium risk (unproven in recession), target 6% yield, current yield 5.2%
- AbbVie (ABBV) – low risk (fast growing dividend aristocrat), target 3.5% yield, current yield 2.9%
- Texas Instruments (TXN) – low risk, 3% target yield, current yield 2.4%
- Royal Bank of Canada (RY) – low risk, 4% target yield, current yield 3.5%
Because corrections usually only last one to three months, I have decided that I will only maintain a list of five correction buy list stocks. Any more would be pointless since I likely won’t have time to buy them before the downturn ends.
Everything that doesn’t make the correction list is thus shifted to the bear market/crash list.
Bear Market/Crash Buy List
Stocks whose yields are all 20+% away from my target yields.
Bear markets (20% to 39.9% declines from all-time highs) and crashes (40+% decline from all time high) usually only occur during recessions and last from one to three years. Thus, they offer longer and stronger chances to load up on Grade A blue chips and dividend aristocrats/kings that are currently at frothy valuations.
My goal during a bull market is to buy stocks yielding only 4% or higher. This might sound counterintuitive, but it’s actually not. That’s because there is always something of quality on sale in some beaten down industry, such as retail REITs, or pipeline MLPs. Only during a market crash will I allow myself to go as low (but no lower) than 3% yield.
That will allow me to pick up some truly high-quality and legendary dividend growth stocks – those in other sectors that are now closed to me due to high market valuations and low yields.
My current crash list, in order of priority, and target yield, is:
- Boeing (BA) – low risk, 3% target yield, current yield 2.3%
- Johnson & Johnson (JNJ) – low risk, 3% target yield, current yield 2.4%
- 3M (MMM) – low risk, 3% target yield, current yield 2.0%
- Home Depot (HD) -low risk, 3% target yield, current yield 1.9%
- Microsoft (MSFT) – low risk, 3% target yield, current yield 2.0%
- Amgen (AMGN) -low risk, 4% target yield, current yield 3.0%
- Apple (AAPL) – low risk, 3% target yield, current yield 1.5%
- Toronto Dominion Bank (TD) – low risk, target yield 4.0%, current yield 3.2%
- Digital Realty Trust (DLR): -low risk, 4% target yield, current yield 3.3%
- Target (TGT) – low risk, target 5% yield, current yield 3.8%
This week I was doing extensive research on some top pharma stocks, and it reminded me that Amgen is one of the few stocks in this complex but defensive industry that I want to own.
Meanwhile, the decision to forgo ETFs entirely due to the variable nature of their payouts means that the PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) has been removed from my crash list.
However, I also realized that I need to ultimately diversify the high-yield REIT portion of my portfolio. This is why I’ll be gradually adding faster growing REITs to my crash list. For this week, I’ve added Digital Realty Trust to the crash list and Crown Castle to the dip buy list.
I’ve also added Genuine Parts Company to the dip list, as it’s one of my favorite fast growing dividend kings (with 10+% total return potential).
Finally, a reader pointed out that I had the current yield on Royal Bank of Canada incorrectly listed as 2.4%, when in fact it’s 3.5%. That means that it’s only about 15% away from my target yield and thus deserves a spot on my correction list. This was made possible by this week’s purchase of, and thus removal from my correction list, of STORE Capital.
Buys And Sells Of The Week
Sold $ 6,200 of iShares Global REIT ETF (REET)
Bought $ 1,000 Algonquin Power & Utilities (AQN)
Bought $ 6,000 of STORE Capital (STOR)
This past week, iShares Global REIT ETF announced its next dividends, and they were way down from Q4 of 2016. While this is normal for an ETF, due to the very large and diversified nature of the portfolio (275 stocks), I’ve decided that ETFs just don’t work for me.
After all, my most sacred rule is that I’m looking for safe, and steadily growing dividends, which means that the variable nature of ETFs, and CEFs, makes them unsuitable for my needs.
The biggest reason I had owned REET was the 1/3 exposure to global blue chips. However, since Interactive Brokers allows me to trade on dozens of foreign exchanges, I can pick and choose the best names. This allows me to avoid paying an expense ratio, while better targeting foreign dividend stocks that best meet my needs.
The capital from the REET sale also presented me an opportunity to buy one of my all time favorite, fast growing SWAN REITs; STORE Capital. Arguably STORE Capital is the highest-quality, (and one of the fastest growing) triple net lease REITs.
And as Brad Thomas just pointed out, it’s currently trading at a fair price and likely to generate strong market beating total returns. So under the Buffett Principle of “better to buy a wonderful company at a fair price, than a fair company at a wonderful price”, I decided to swap my REET (fair investment) for a wonderful company at a reasonable price (STOR).
Meanwhile, the Algonquin purchase I had planned was larger than expected. That was thanks to a very nice surprise Christmas gift (of cash) that allowed me to buy double what I had initially anticipated.
The Tentative Plan Going Forward
In the past week, I came across another awesome Canadian utility with impressive yield, matched by industry leading dividend growth. This would be Emera (OTCPK:EMRAF), which currently yields 4.8% and plans to raise its dividend by 8% annually through 2020.
I love Emera’s huge regulated (and thus highly defensive and predictable) business and diversified asset base (US, Canada, and the Caribbean). The only iffy thing about them is the rather high debt levels they took on to acquire TECO (Tampa Electric Company). However, Moody’s has looked at their current leverage and judged them still worthy of a Baa3 rating (equivalent to S&P BBB-) which is investment grade.
Management plans to deleverage over time, while still aggressively investing in growth. So due to the highly diversified, and low risk business model, I consider it a worthy addition to the utility portion of my portfolio.
This means that in the coming weeks, I will finish trimming 75% of Uniti Group (UNIT) and New Residential Investment Corp. (NRZ) and put the capital to work:
- Paying down $ 2,000 more of margin debt (with another $ 2,000 to be paid off through net dividends through February).
- Finish off my position in Crius Energy Trust (OTC:CRIUF) – about $ 5,100.
- Buy a full position in Brookfield Real Estate Services (OTCPK:BREUF) – about $ 9,200.
- Buy a full position in NorthWest Healthcare Properties REIT (OTC:NWHUF) – about $ 8,000.
- Finish off my AQN position ($ 4,000).
- Buy an 80% position in Canadian Imperial Bank of Commerce (CM) with the remaining $ 4,100.
This tentative two-week plan serves several purposes. First, it completes the right sizing of all my positions by dividend risk. It also continues to “crash proof” my portfolio through deleveraging. Finally, it adds some much needed diversification via:
- my first hospital REIT;
- my first bank;
- more utilities to act as the third pillar of my portfolio (along with REITs and pipeline MLPs); and
- more Canadian companies, the best I can do in terms of international diversification given my need for non-variable dividends
Beyond these next 2 weeks, the plan is to finish off my CM position (which will take 2 weeks). Then get started on Telus (TU), the AT&T of Canada, but with much faster dividend growth.
As for Emera? Well, that is going to be tricky. This is because Interactive Brokers requires that I buy foreign stocks in round lots of 100. With Emera current trading at $ 37.49, that means I need to buy it $ 3,750 at a time.
That means that I would either have to buy it on margin and then pay it back, or wait until the first week of February or March (I receive the majority of my pay at the end of the month).
Since my goal is to crash proof my portfolio (thus paying down $ 36,000 in margin debt in a few months), I’ll have to wait to add Emera. I’ll also likely have to buy it over 2 months. This means that acquiring CM, TU, and EMRAF will basically eat up the first third of 2018.
However, remember that this is a “tentative plan” because my dip list takes priority in case any of those blue chips hits my target yields. Whether or not I’m able to build out a full position is uncertain, so in the future I may end up with several stocks with partial positions. These I’ll add to opportunistically until each position is full.
The Portfolio Today
Dividend Risk Ratings
- Ultra low risk: (Limited to ETFs with proven histories of steadily growing dividends over time); max portfolio size 15% (core holding).
- Low risk: High dividend safety and predictable growth for 5+ years, max portfolio size 10% (core holding).
- Medium risk: Dividend safe and potentially growing for next two to three years, max portfolio size 5%.
- High risk: Dividend safe and predictable for one year, max portfolio size 2.5%.
- Uniti Group
- New Residential Investment Corp.
- Pattern Energy Group (PEGI): Will be upgraded when payout ratio declines under 85%.
- Iron Mountain (IRM): Will be upgraded when dividend is maintained/grown during next recession.
- Macquarie Infrastructure Corp. (MIC)
- Crius Energy Trust: Due to cyclical nature of part of its cash flow.
- CONE Midstream Partners (CNNX): Due to its small size.
- Omega Healthcare Investors: Due to ongoing downturn in SNF industry.
- Enterprise Products Partners (EPD)
- MPLX (MPLX)
- AT&T (T)
- Tanger Factory Outlet Centers (SKT)
- EQT Midstream Partners (EQM)
- Brookfield Property Partners (BPY)
- TransAlta Renewables (OTC:TRSWF)
- Simon Property Group (SPG)
- Enbridge (ENB)
- Realty Income (O)
- EQT GP Holdings (EQGP)
- Brookfield Infrastructure Partners (BIP)
- Dominion Energy (D)
- STORE Capital
The diversification continues to proceed steadily. I wasn’t able to trim UNIT or NRZ this week, as my sell plan involves capturing the full January dividends to help pay down $ 2,000 in margin debt.
My portfolio began with five stocks, all medium to high risk, in two sectors. Right now I’m up to 23 stocks, mostly low to medium risk, in four sectors. By January 8th, I estimate I’ll be up to 26 stocks in five sectors. The goal for the end of 2018 is 30-35 stocks in six sectors. The Morningstar holding graphic is capable of showing my top 34 holdings.
- Uniti Group: 18.7%
- New Residential Investment Corp: 14.2%
- Omega Healthcare Investors: 6.9%
- Macquarie Infrastructure Corp: 5.8%
- Pattern Energy Group: 5.3%
- CONE Midstream Partners: 4.7%
- TransAlta Renewables: 4.4%
- Enterprise Products Partners: 4.3%
- MPLX: 4.3%
- Iron Mountain: 3.4%
- Everything Else: 34.9%
This week I’ve gone to a new format for dividend income mix. The previous pie chart was from the version of Simply Safe Dividends wasn’t capable of tracking Canadian stocks, of which I own many. Thus, I’ve gone to a manual income mix breakdown, generated from the newest version of the software that includes my foreign holdings.
The portfolio remains dominated by my top two positions, which will be corrected within the next two weeks. After that, about three stocks will still represent over 5% of my annual income (OHI, MIC, and PEGI). The goal is to get that under 5% (and much lower over time). This ensures strong portfolio income diversification and security. I estimate that it will take me until Q2 2018 before my additional savings and acquisitions dilute these three medium risk stocks to their target levels.
The portfolio has become far more diversified by stock style, especially compared to the early days when it was pretty much 100% small cap value. In fact, today almost none of it is small cap value but far more spread out over market cap and style.
Over time, I plan to use Trapping Value, the Canadian high-yield guru, as a source for lots of Canadian high-yield investments. Combined with some quality Canadian banks, I will have plenty of exposure to non-US holdings, whose representation in my portfolio is down from 15% to 14% this week. This is due to the sale of REET, which had one third exposure to international blue chip REITs.
In the coming months, the additions of CRIUF, BREUF, NWHUF, AQN, CM, TU, and likely BNS will raise that my Canadian exposure substantially. As for non-Canadian international stocks? I’m always on the lookout for international dividend stocks, but I likely won’t be finding too many that meet my steady dividend growth needs. That’s because foreign companies (like British Telecom (BT) or Vodafone (NASDAQ:VOD)) generally pay less frequent and variable dividends.
And since I’m no longer owning any ETFs, it’s unlikely that my portfolio will journey out beyond North America. That being said, my portfolio does have exposure to foreign cash flow. That’s because many of the blue chips I’ll be adding are themselves multi-nationals. For example, my 3% Asia exposure is due to BPY’s global portfolio of properties.
While the market is dominated by cyclical companies, my need for steady and growing dividends requires more consistent cash flow. Thus, the large presence of hard assets (REITs and pipelines), high-yield (telecoms), and slow growth (utilities).
Remember that Morningstar classifies some MLPs as energy and some as industrial. In reality, my portfolio is currently about:
- 44% REITs
- 33% Pipeline MLPs
- 18% Utilities
- 5% telecom
In the coming weeks, my utility positions will grow substantially. In addition, REITs, being one of the best sources of low risk, high-yield dividend growth, will likely always remain the largest sector in my portfolio. Pipeline MLPs are the other cornerstone of my portfolio. Utilities, while great, are generally too slow growing for me to add more than the few names I have currently planned. I may be able to find more later, but utilities will likely peak soon.
With no more ETFs, my expense ratio is now zero. More importantly, thanks to my equity now surpassing $ 100K, I will no longer be at risk of Interactive Broker’s monthly maintenance fees.
This is $ 10/month minus any commissions. Once I’m done de-risking the portfolio, my average monthly commissions will likely fall to $ 2 or so, which means that my larger portfolio will avoid about $ 8/month in fees.
Rising interest rates are a major concern of course, with the Fed planning on at least three more hikes in 2018. Goldman Sachs (GS) expects the actual number to be four, with the first coming in March. My margin rate is the Fed Funds rate + 1.5%, so each hike raises my annual interest cost by $ 166.41 at present.
Currently, I anticipate that by the end of 2018, my margin debt will decline to about $ 50,000 which would have a single rate hike sensitivity of $ 125 per year. By the end of 2019 (assuming no correction by then), margin should be down to $ 35,000 or less. This would create rate sensitivity of $ 87.5 per rate hike.
During the next recession, the Fed is likely to take rates back to zero which would lower my margin rate to 1.625%. However, my actual future margin rates will depend on how much I borrow. Margin amounts over $ 100,000 have an interest rate of Fed Fund rate + 1.0%, so as the portfolio grows in the coming years, I’ll get substantial price breaks. However, the plan is to only add margin during corrections/bear markets. During bull markets, I’ll be deleveraging, both with capital gains as well as allowing net dividends to pay down margin debt.
I no longer believe my lower risk approach (avoiding most BDCs, mREITs, refiner and tanker MLPs) will allow me to hit a 7% total portfolio yield. However, I’m confident that 6% is doable, so that’s my new long-term goal.
The current profitability metrics for the portfolio are lower than the market average owing to the highly capital intensive nature of REITs, MLPs, and utilities. As I diversify in the future into higher margin and return on capital industries (pharma and tech especially), these figures will improve. As will the overall growth rate of the portfolio.
Of course, given the high-yield focus I have, there are limits to how high the earnings, cash flow and dividend growth can realistically climb.
Source: Simply Safe Dividends
Note that the longer-term growth figures are incorrect. They don’t take into account that some of my holdings (such as NRZ, UNIT, and MPLX) didn’t exist five or 10 years ago, and thus they make the dividend growth appear much faster than it really is. However, the organic dividend growth of the past year is factual and represents the most recent annual payout hikes provided by my holdings.
The 1-year organic growth rate is down to 9.4% from 10.6% last week. However, this is still a fantastic annual payout growth rate and up substantially from the 4.2% that this portfolio started with.
Of course, going forward, that will likely fall off as I continue to diversify my portfolio. That’s partially because the version of Simply Safe Dividend Portfolio tracking software I’m using isn’t able to track Canadian stocks. A different version is, but it only offers five-year average growth figures. The problem with that is that it doesn’t account for new stocks that went public during that time. However, in the future, I may include those figures as well, because once the portfolio is diversified with more mature blue chips, those figures will become more accurate and thus representative of actual historical (and future) results.
Source: Simply Safe Dividends
Keep in mind that this projection table only indicates how much the current holdings would be paying if I didn’t add any cash to the portfolio or didn’t reinvest the dividends. In other words, it’s a highly static, non-compounding figure – one, however, that still shows the awesome cash-minting power of the business empire I’m building here.
Also note that the above estimate assumes I maintain the current portfolio, with no changes. In reality, I’m still in the process of de-risking the portfolio with planned trimmings of my UNIT and NRZ holdings in early January. Owing to the relatively slow dividend growth rates of those companies (relative to the blue chips I’ll be adding in the future), the dividend growth rate should hold up rather well, or even increase slightly in the future.
Thanks to my high savings rate, I estimate that within 10 years, my portfolio should be generating about $ 130,000 in net inflation adjusted dividends.
That’s because, despite a very broadly diversified portfolio, I estimate the long-term portfolio dividend growth rate will be around 7%. So assuming I can maintain an annual savings rate of about $ 72K (once all my divorce debt is paid off), my 6% yielding portfolio should, within a decade, have an inflation adjusted value of about $ 2.2 million.
In perspective, the S&P 500’s 20-year median annual dividend growth rate has been 6.1%. So the goal is triple the market’s yield, with 1% faster dividend growth. That should result in approximately 13% unlevered total returns compared to an S&P 500 ETF’s historical (since 1871) total net return of 9.0%.
- Holdings: 23
- Portfolio Size: $ 178,101
- Equity: $ 100,160
- Leverage Ratio (portfolio/equity): 1.78 (compared to max of 2.25 in week 5)
- Debt/Equity: 0.66 (compared to a max of 1.25 in week 5)
- Distance to Margin Call (portfolio wide drop): 36.9% (compared to a minimum of 20% in week 5)
- Margin Cost: 2.91%
- Margin Debt: $ 66,572 (compared to max of $ 98,000 in week 5)
- Remaining Buying Power: $ 206,592
- Dividends/Interest: 6.63
- Yield: 7.2%
- Yield On Cost: 7.5%
- Net Yield On Equity: 10.9%
- Total Return Since Inception (through Dec. 28th, 2017): 2.87%
- Total Annualized Unlevered Return Since Inception: 1.82%
- Unrealized Capital Gains (Current Holdings): $ 7,124(+4.6%)
- Cumulative Dividends Received (including accrued dividends):$ 5,235
- Annual Dividends: $ 12,837
- Annual Interest: $ 1,937
- Annual Net Dividends: $ 10,900
- Monthly Average Net Dividends: $ 908
- Daily Average Net Dividends (my business empire never sleeps): $ 29.86
Source: Simply Safe Dividends
- Portfolio Beta (volatility relative to S&P 500): 0.70
- Projected Long-Term Dividend Growth: 7% to 8%
- Projected Unlevered Total Return: 14.5% to 15.5%
- Projected Net Levered Total Return: 23.5% to 25.3%
- Macquarie Infrastructure Corp: -8.0% (cost basis $ 69.85)
- Omega Healthcare Investors: -1.5% (cost basis $ 28.04)
- Crius Energy Trust: -0.6% (cost basis $ 7.19)
- STORE Capital: -0.2% (cost basis $ 26.04)
- Iron Mountain: 0.2% (cost basis $ 37.64)
- Dominion Energy: 0.2% (cost basis $ 80.85)
- Pattern Energy Group: 0.5% (cost basis $ 21.39)
- Algonquin Power & Utilities: 1.0% (cost basis $ 11.08)
- Brookfield Property Partners: 1.4% (cost basis $ 21.73)
- MPLX: 2.2% (cost basis $ 34.60)
The strong rally in high-yield value stocks has helped to turn my previous losers into winners, with only four of my 23 positions being in the red.
- Tanger Factory Outlet Centers: 16.9% (cost basis $ 22.76)
- AT&T: 15.8% (cost basis $ 33.71)
- Simon Property Group: 10.4% (cost basis $ 155.79)
- New Residential Investment Corp: 8.8% (cost basis $ 16.44)
- Brookfield Infrastructure Partners: 8.0% (cost basis $ 41.75)
- Enterprise Products Partners: 7.7% (cost basis $ 24.49)
- EQT GP Holdings: 6.1% (cost basis $ 25.46)
- EQT Midstream Partners: 5.9% (cost basis) $ 68.77
- Enbridge Inc: 4.5% (cost basis $ 37.53)
- Uniti Group: 3.7% (cost basis $ 17.21)
It was a great week for high-yield value stocks. Last week’s post tax reform freakout ended and REITs, MLPs, and high-yield blue chips all rose sharply. Tanger was the biggest winner, popping 6% in the past week.
Undervalued Dividend Stocks On My Radar (And Buy List)
While I may be tapped out of additional buying power, that doesn’t mean I’m not always on the hunt for quality, undervalued dividend growth stocks.
So, here are the ones I recommend you check out. They are all near 52-week lows, and I would buy them (if I had the capital) at this time because I am confident they can generate long-term 10+% (unlevered) total returns.
Note: Buy indicates I believe a stock is a good investment right now, while Strong Buy means I consider the company to be a Grade A industry leader (and a safer company) trading at particularly excellent levels.
I also include the dividend risk ratings for each stock:
- Ultra-low risk: (Limited to ETFs with proven histories of steadily growing dividends over time), max portfolio size 15% (core holding)
- Low risk: High dividend safety and predictable growth for 5+ years, max portfolio size 10% (core holding)
- Medium risk: Dividend safe and potentially growing for next two to three years, max portfolio size 5%
- High risk: Dividend safe and predictable for one year, max portfolio size 2.5%
The stocks are in order of highest to lowest yield:
- Crius Energy Trust: 8.8% yielding, monthly paying Canadian utility with very low payout ratio (53% after its latest acquisition), and a rock solid balance sheet. Medium risk, (due to somewhat volatile cash flow), buy.
- Starwood Property Trust (STWD) – 8.8% yield, Grade A commercial mREIT. High risk, buy.
- Brookfield Real Estate Services (OTCPK:BREUF): 8.2% yield, paid monthly, Canada’s top real estate service provider, managed by one of the top asset managers on earth, Brookfield Asset Management (BAM). Highly undervalued due to imminent demise of premium fees, but even with that payout ratio will be about 75%, meaning a safe, and likely growing dividend. Medium risk(housing market will cool eventually), buy.
- Pattern Energy Group: 7.7% yield, one of America’s top yieldCos (renewable utilities). Solid plan in place to double wind capacity by 2020 which should boost dividend growth from 2% a year to 10% to 11% (post 2020). Medium risk (payout ratio guidance 96% for 2017), buy.
- TransAlta Renewables: 7.0% yield, paid monthly. An excellent Canadian yieldCo with strong balance sheet, low payout ratio, and excellent growth prospects (5% to 6% long-term distribution growth). Low risk, Strong Buy.
- EPR Properties (EPR): 6.1% yield: Badly misunderstood REIT specializing in entertainment properties. Dividend protected by 81% AFFO payout ratio, strong balance sheet, and 6-7% long-term growth. 5-6% long-term dividend growth likely for 11-12% total return. Medium risk, buy.
- Brookfield Property Partners: 5.5% yield, this real estate LP is run by Brookfield Asset Management, the world’s top name in hard assets. Concerns over potentially overpaying for GGP have caused it to fall to 52-week lows. However, with 5% to 8% long-term dividend growth (guidance), today is a great time to take a contrarian approach and pick up this low risk, Grade A Strong Buy.
- American Campus Communities (ACC): 4.1% yield, safe dividend, strong long-term growth prospects of 6-7%. Buy, medium risk
Bottom Line: Don’t Lose Sight Of What Really Matters
2017 was a wild year, in a good way. What will 2018 bring? I have no idea, but I’m reasonably confident that the economy will continue accelerating, as will corporate profits. This means that dividends will keep rising, and income portfolios will likely keep generating exponentially more income for patient, long-term investors.
Which means that there is absolutely no reason to concern yourself with what arbitrary figures the market hits or doesn’t hit in 2018. Just focus on the fundamentals, specifically of building a diversified, high-quality portfolio of dividend stocks that meet your long-term goals.
Best of all? Since there is always some good dividend stock on sale, you can continue to build your portfolio, no matter how crazy overvalued the broader market gets. And when the inevitable correction and or bear market hits? Well, that’s when things really get exciting for value dividend investors. While the media may freak out and Wall Street might be running red with the blood of speculators’ shattered dreams, smart long-term income investors will be sitting pretty in our crash proof bunker portfolios.
Not only will we be counting our generous, safe, and exponentially growing dividends, but we’ll also be able to snap up the best quality dividend growth stocks at fire sale prices.
A very happy New Year to all my readers and followers. May peace, joy and health bless you and yours in 2018, no matter what the market does.
Disclosure: I am/we are long UNIT, NRZ, PEGI, EPD, CNNX, MIC, TRSWF, SKT, MPLX, T, OHI, EQM, BPY, SPG, IRM, ENB, O, STOR, BIP, EQGP, D, CRIUF, AQN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
TOKYO (Reuters) – Japanese online retailer Rakuten Inc plans to join a government auction for wireless spectrum to be held in January, potentially becoming the country’s fourth major wireless carrier, a source briefed on the matter said on Thursday.
The source declined to be identified because the talks are private.
Japan’s mobile carrier market is currently dominated by NTT Docomo Inc, KDDI Corp and SoftBank Group.
The Nikkei business daily, which reported on the plan on Thursday, said Rakuten would raise 600 billion yen ($ 5.3 billion) by 2025 to invest in base stations and other infrastructure.
Rakuten said in a statement that while it was true it is weighing entry into the mobile carrier market, media reports on the matter were not something announced by the company.
Rakuten shares were down 1.7 percent in early trade. The benchmark Nikkei average was flat.
($ 1 = 112.6300 yen)
Reporting by Yoshiyasu Shida and Thomas Wilson; Writing by Makiko Yamazaki; Editing by Stephen Coates
NEW YORK (Reuters) – A Seattle-area startup backed by the venture arms of Boeing Co and JetBlue Airways Corp plans to bring a small hybrid-electric airliner to market by 2022 that can dramatically reduce the travel time and cost of trips under 1,000 miles (1,600 km), it said on Thursday.
The first of several aircraft planned by Zunum Aero would seat up to 12 passengers and be powered by two electric motors.
Electric-vehicle batteries, such as those made by Tesla Inc and Panasonic Corp, would power the motor. A supplemental gas engine and electrical generator would be used to give the plane a range of 700 miles, Matt Knapp, co-founder and chief aeronautic engineer of the Kirkland, Washington-based company, said in an interview.
Zunum has no commitment to Tesla or Panasonic.
A larger plane seating up to 50 passengers would follow at the end of the next decade, and the range of both would increase to about 1,000 miles as battery technology improves, Knapp said.
The planes eventually would fly solely on battery power, and are being designed to fly with one pilot and to eventually be remotely piloted, he added.
Several companies, including Uber Technologies Inc [UBER.UL] and European planemaker Airbus, are working on intra-urban electric-powered self-flying cars.
Zunum does not expect to be the first to certify an electric-powered aircraft with regulators. It is aiming to fill a market for regional travel for airlines, where private jets and commercial jetliners are too costly for many to use.
“Airlines are very keen to know how to fly a shorter distance and make money on it,” Knapp said.
Recent advances in electric-vehicle and autonomous technology, along with lightweight electric motors and carbon composite airframes would reduce the cost of flying Zunum’s aircraft to about 8 cents per seat-mile, about one-fifth that of a small jet or turboprop plane, Knapp said.
“We’re getting airline pricing down on a small plane and doing it for short distances,” Knapp said. “That kind of aircraft doesn’t currently exist.”
Zunum announced plans for electric-hybrid aircraft in April, and revealed that Boeing HorizonX and JetBlue Technology Ventures had invested in its initial round of venture funding. On Thursday it disclosed specifications and a timetable for the vehicle entering service.
Zunum says the plane would cruise at about 340 miles an hour and at altitudes of about 25,000 feet (7,600 meters) – slower and lower than jets.
The plane would cut travel time by allowing passengers to fly from thousands of regional airports, avoiding big hubs used by major airlines and airport security required for larger planes. About 96 percent of U.S. air traffic travels through 1 percent of its airports, Zunum said.
Current battery technology can only power the plane for about 100 miles so a gas-powered engine is used to generate electricity to power the motors for additional range.
Reporting by Alwyn Scott; Editing by Susan Thomas