We’re 11 days into September, and if you’re like many folks, you’re probably just a little on edge—expecting the bottom to fall out of stocks any minute.
The truth is, there’s very good reason to be nervous.
After all, according to Bespoke Investment Group, September is the worst month for stocks, with the S&P 500 averaging a 1.05% drop since 1928.
That may not sound like much, but remember that it’s just the average. Some Septembers have been far worse. For example, let me take you back to September 2011, when the market tanked 6.4% in just 21 trading days.
That’s enough to bleed $6,400 off every $100k invested in very short order.
The signs this September are already worrying, with trade-war fears piling up and interest rates ratcheting higher.
The potential backbreaker? This market is pricey, with stocks at a nosebleed 24.5 times earnings.
So it’s time to run for the hills, right?
Well, not so fast.
A September Pullback Would Be an Amazing Opportunity
If you dig deeper—as Bespoke did—you’ll find that what happens in the run-up to September matters a lot. For example, when the S&P 500 is up year-to-date through August (as it is this year), September has actually eked out a 0.2% gain.
Better still, the market has gone on to post a 3.4% rise through to the end of the year in that scenario.
But what about that sky-high P/E ratio?
As my colleague Michael Foster pointed out in “3 Ways to Cash in on Trump’s Trade Wars (and grab dividends up to 10%),” that 24.5 figure looks backwards. When we look at the forward P/E, which uses earnings estimates for the coming year, we see that booming S&P 500 profits are making stocks cheaper by the day!
So what’s the bottom line? It’s still a great time to buy—particularly stocks that hike their dividends like crazy. And if we do get a September pullback, it’s time to buy hand over fist.
Here are 3 ignored stocks that should top your list. All 3 are solid buys … and they’re primed for even bigger upside by the New Year if a September storm hits.
September Buy No. 1: Put History (and Massive Payout Growth) on Your Side
It’s no secret that when you’re hunting for dividend stocks, you need to pay attention to their track record. And few boast a better history than Eaton Corp.
- It’s 107 years old, getting its start making truck axles in 1911.
- It’s been paying dividends for 32 years—and is one of the few industrials that didn’t cut its payout during the financial crisis.
- It gives you the best of both worlds: an attractive dividend yield of 3.2% and dividend growth—including a fat 10% hike last February.
And before you ask, Eaton’s no old-school relic. It’s grown into a modern, diversified maker of electrical, hydraulic and other systems that help buyers boost their efficiency—a need that will always be there, no matter what the economy does.
Before we go further, I want to talk a bit more about dividend growth, because it’s exactly what will power this stock into 2019.
As I wrote in “10 Dividend Doublers Ready to Soar,” a rising dividend is the most important driver of share prices, something that’s blindingly obvious with Eaton. Check out how its payout has forced its share price higher since it started raising its dividend after the financial crisis!
See how the price goes up—almost pound for pound—with the dividend, then a slight gap opens up early in 2018? That’s our chance to buy, before the price closes the gap with the company’s dividend growth.
Then you can sit back as that dividend keeps pacing the stock higher. Because this February, Eaton looks set to drop another big hike on investors, thanks to its healthy $1.9 billion in free cash flow (FCF) in the last 12 months and reasonable dividend-payout ratio of 57% of FCF.
The company is also firing on all cylinders operationally: management just boosted its earnings guidance by $0.10 a share, to between $5.20 and $5.40—the midpoint of which is up 14% from 2017.
The kicker? You can snap this one up at just 14.3 times forward earnings, a nice discount to the S&P 500 and other industrial players like Ingersoll Rand, at 16.6, and Illinois Tool Works, at 17.1.
September Buy No. 2: Class of the Hotel REITs Goes on Sale
Summit Hotel Properties boasts a portfolio that’s the envy of the hotel business keeps the home-sharing players, like Airbnb, at arm’s length.
As I write, the Texas-based hotel operator sports 77 hotels, all under instantly recognizable names like Marriott, Hilton, Hyatt and InterContinental Hotels.
It also yanks travelers in with ultra-modern amenities, starting with some of the newest buildings in the space: consider that, on average, its hotels have only seen 3.3 years pass since initial construction or the last big reno.
Finally, you get exposure to some of the hottest US travel markets, like Atlanta, Miami and San Francisco, without too much focus on a single one.
Here’s something else I love about this management team: they’re always on the hunt for new acquisitions and ready to pounce when an attractive property comes on the market. Summit has sold 55 of the 65 hotels it owned prior to its 2011 IPO and is averaging 1.5 transactions a month.
Next, the dividend. After a long period of stagnation, INN’s dividend sprung to life in 2016 and has surged 60% in the last 5 years. And as we saw with Eaton, that rising payout has pumped the share price higher—again at almost exactly the same rate.
And you can expect that payout to keep rising as management continues to retool the portfolio, Meantime, you’ll enjoy the current payout, which yields a gaudy 5.2% and is one of the safest in the REIT business, eating up just 51.4% of funds from operations (FFO, the REIT equivalent of earnings per share).
And yes, this one is also a screaming bargain, trading at just 10.1 times the midpoint of management’s forecast FFO range ($1.30 to $1.36 a share) for 2018.
September Buy No. 3: Buy Now and Pay 2017 Prices
UDR, Inc. isn’t as cheap as it was when I recommended it in May, but your shot at buying this top-flight residential landlord—with its 3.2% dividend and 37% payout growth in the last 5 years—is still there.
In fact, at around $40 a share, UDR is right where it was on December 15, before overhyped rate fears hit REITs like UDR while the rest of the market soared 8.5%.
That makes now a great time to pivot to this company, because FFO is on the rise: management just upped its guidance to between $1.91 and $1.95 a share for all of 2018, which amounts to a nice 6.6% gain over last year at the high end of the range.
Combine that with an easily manageable (for a REIT) payout ratio of 66.6% of FFO, and you get the ingredients for a nice payout hike in March, when UDR typically rolls out raises.
But what is UDR, exactly?
It’s not a company you hear about often, but if you’re a dividend investor, it should be on your radar: it owns 49,464 apartments, has been around for 46 years and has paid dividends for 33 of those.
Its strategy is simple: build or buy in popular neighborhoods where companies are starved for workers and housing is tight: think coastal cities like San Francisco, Boston and LA.
The trust’s coastal strongholds also give it a base from which to expand into other parts of the country, including Dallas, the third-fastest-growing city in the US, according to Forbes’ latest list, where UDR has one building under construction and one that’s 94% leased, in addition to three parcels of land.
It’s only a matter of time before UDR’s growth potential and stellar dividend history grab the herd’s attention. Your next move? Take advantage of this rare second chance to buy at a great price, while it’s still available.