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“Welcome to the investing insights podcast from morningstar comm every day at invesco they bring bring together ideas with technology data with inspiration and investors with solutions find out more invesco comm slash together invesco distributors inc. In this week s podcast equity. Analyst david sports highlights three high yield stocks with stable dividends in the consumer sector. Christine benz invites judith ward from tiro price to discuss cash.
Cushions equity. Analyst aaron lash picks a wide mode stock from the packaged food aisle alec lucas shares a few great pics from vanguards large cap offerings and equity. Analyst. John barrett.
Discusses. Why investors should wait before purchasing to noted payroll processors. Let s get started. Equity.
Analyst. David sports. Highlights three high yield stocks with stable dividends in the consumer sector department store stocks macy s kohl s and nordstrom are high yielding dividend stocks and we think each of them has currently stable dividends with growth potential moreover we view all of them as undervalued at current levels department stores have struggled with weak store traffic and a competitive apparel market in 2019. We acknowledge these challenges and expect that competitive pressures will continue yet macy s kohl s and nordstrom are among the largest us retailers both in store and online.
None of them are in financial. Distress macy s pays an annual dividend of 100 51 per share giving it a dividend yield of nearly 10 percent. We rate. Macy s as a no mo company and her fair value estimate is 27 per share management has stated it will not cut its dividend.
But given the very high yield. This must be viewed as a possibility macy s raised its dividend consistently until 2017. But has kept it at the dollar. Fifty one level cents as it has prioritized debt reduction.
We forecast macy s will pay about 52 percent of 2019 earnings as dividends and expect a 45 percent dividend. Payout ratio. In the long term. We project macy s will hold this dividend constant through 2022 as it continues to pay down debt.
And then begin to increase its dividend again in 2023. We forecast. It will generate more than enough free cash flow to cover its dividend for the foreseeable future all so macy s own significant real estate. Which could be sold providing an extra level of safety nordstrom pays an annual dividend of 1 48 per share giving it a dividend yield of just under 5.
We rate nordstrom as an arrow mode company and our fair value estimate is 55 nordstrom raised its annual dividend consistently until 2015. But it has held it at 1 48. Per share since then due to investments in large capital projects. Most of which are near completion.
We forecast nordstrom will pay about 45 of its 2019 earnings as dividends and in the long term. We forecast a dividend payout ratio of 40. We expect nordstrom to begin to increase its dividend again in 2022. And think it ll generate more than enough free.
Cash flow to cover its dividends kohl s will pay a dividend of 2. And 68 cents per share in 2019 it dividend yield of more than 5. We rate. Kohl s as a no moat company and a fair value estimate is 75.
Kohl s began paying dividends in 2011. And has raised its dividend in every year since. We forecast. Kohl s will continue to increase its dividends over at least the next ten years and pay about 55 of its earnings as dividends.
We think it will produce more than enough free cash flow to cover its dividend. Now. Christine benz. Invites.
Judith board from tiro price to discuss cash cushions for pre retirees and retirees hi. I m christine benz for morningstar having an emergency fund as financial planning 101. But do you need a cash cushion in retirement. Joining me to discuss that topic as judith ward.
She s a senior financial planner for t. Rowe price. Judy thank you so much for being here thanks. It s great to be here.
Judy you and the team at t. Rowe. Price recently looked at contingency funds cash cushions in retirement before we get into that let s discuss how working folks should approach this people pre retirement. Do you think that standard sort of three to six months worth of living expenses is a safe emergency fund is that about what i should be remark.
I think that s the general rule of thumb and you know we at t. Rowe price agree with that for the most part. I think. If there is a single breadwinner you know or why or your income might be sporadic or something you might want to have economy.
Work or something you might have a little more and the purpose of the emergency fund and i always hear people talk about oh. It s the big expense. It s oh you need the new roof and to me that s so cliche. There s so there s a lot of things you can plan for but it i really see it as if one of you were to lose your job.
How would you make it through that period of uncertainty. I think that s the key reason for an emergency fund. It can also help with some of these larger unexpected expenses. But it s you know you don t want to have to raise your retirement savings or put you know you don t want to put a mortgage on a credit card for goodness sake.
So how are you going to tide over during these periods of uncertainty. So we think three to six months of expenses is reasonable like i said maybe a little more if there s a single earner that is for the household or your income is you know disjointed how about if i have a high income or some really specialized career path. Should. I be a little more cautious there to maybe set aside a larger cushion you could.
But you have to think about you know what are the expenses that you re going to still have to pay you know if you re out of work and how long might it take you to find another job. So that s really i think the considerations for how much should be in your emergency fund and you don t need to fund everything you know if you re in a you know there are ways that you can cut expenses. But it s like you know the mortgage payment. The important payments that you want to make sure keep going so again.
You don t have to take money out of your retirement account. So this is money that should be set up outside of your retirement accounts because you really want to try to keep your retirement goals on track even during this period of uncertainty. Okay so let s turn and talk about retirees. And how much of a cash cushion.
They could think about or should think about you have been looking at that topic and let s talk about why they may want to run with an even larger. I cash cushion or contingency fund than the right who are still bringing paycheck right so you know now that you re in retirement. You don t have the paycheck anymore you can get to your retirement account. So it s really the purpose.
I think has changed a little bit from when you were working it the whole reason is we didn t want to you d have to take money out of your retirement account or use credit cards now in retirement. It s more around. I call it a safety net a contingency. A friend of mine calls it his sleep at night money.
It s kind of to protect you when maybe markets go down. When you do have maybe a large unexpected expense that you have this contingency reserve. I like it especially in in case of market volatility it gives you an alternative to pull money rather than your portfolio. Where in case.
It s all down at the same time not that we ve seen that that often. But it s just this contingency reserve. You know we think one to two years of expenses. Might be a good amount.
And the reason we came to that was we looked at you know again probably a worst case scenario. But in 2008. How long did it take a portfolio to recover and a 60 40 portfolio using just broad based indices. It took about two years you know up to two years to recover.
So you might have to draw on that for a year or two. While you let your portfolio to recover. So we think that s a reasonable amount for retirees to consider okay so when you take when you say one to two years worth of expenses. Am.
I thinking just in terms of like my portfolio withdrawals. Because my expenses are going to be covered in part by social security. Maybe a pension. Yeah yeah.
That is a great point so it is more of what you might be drawing from your portfolio. Okay not necessarily all expenses if you if social security is is covering a lot of your expenses you re still going to have your social security payments. If you have it defined benefit pension. You know that might be covering some expenses.
So it s really to help with an alternative to drawing from your portfolio. Okay so you can overdo it though you said that two years is probably the high end that you d want to think about because. There is an opportunity cost to having too much in cash right that yeah. It will tend to under earn right your long term port right.
Yeah and when we re talking about this cash contingency. We re talking you know money market bank. Account. Maybe cds.
Maybe ultra short or short term bond. You know so you there is an opportunity cost therefore the for growth potential and we think you know in retirement you could be in retirement for twenty to thirty years or longer. So you still need that growth potential that stocks provides you know maybe a more balanced approach. So yeah.
The more money you have in cash is more money you have not working for you so you have to you have to consider that as well okay so in terms of where to hold it if i m retired. I guess i should locate my cash wherever. I m pulling my withdrawals from currently. So if i m subject to rm ds.
It goes in my ira is that how i would think about yeah. I would you know our mds are going to have to come out anyway right no you it s you want to approach it as to again where the money is coming from you know with our mds you can t help but pull from there if you don t have if you re not at our md age. Yet perhaps you do want to have it kind of outside of your retirement accounts and that s something you can work towards prior to retiring it s may be building that up so yeah you would have to look to where you re naturally kind of pulling that money okay. Judy.
You know i m a believer. In the bucket strategy. Yes. All right this fits with it really well.
Thank you so. Much for being here thanks for having me thanks for. Watching i m christine benz for morningstarcom watch all the morningstar content you love from your living room. Download.
The morningstar roku channel. And get up to date independent insights on today s markets be comfortable be informed next equity. Analyst aaron lash picks a wide moat stock from the packaged food aisle music we ve long held the merits of kellogg s move away from direct store distribution in favor of warehouse delivery in 2017 would prove advantageous. But the market has been more skeptical with shares edging up less than 3 between january and july 2019 first when t percent appreciation in the consumer staples index over the same period from our vantage point.
This divergence reflects kellogg s failure to boast an improving top line as of yet unlike peers however with its revised strategic playbook. We think kellogg is poised to crack the code on profitable and sustainable sales growth for one. Although. It s us cereal business.
Which accounts for one fifth of sales in aggregate. Has been fighting at nob hill battle we believe the market fails to appreciate the attractive dynamics of its vast snacking mix which accounts for 50 of sales further changes to its pack formats to include more on the go offerings should allow for increased penetration in alternative outlets. We also think recent acquisitions including smaller niche startups like our x bar. Afford the opportunity to grease the wheels of its own innovation cycle to more nimbly respond to ever changing consumer trends.
Particularly as it relates to health and wellness and taste by abandoning direct store distribution kellogg stands to elevate brand spend rather than expending resources on its distribution footprint to support its entrenched retail relationships. Which we view as key in the intensely competitive landscape in which it plays and we expect efficiencies will remain a pillar to fuel these investments while also aiding profits with a 4 dividend yield and trading at a 20 discount or 78 fair value estimate investors should consider buying shares in this wide moat. Name. A rare bargain in the packaged food aisle.
Today every day at invesco. They bring together ideas with technology data with inspiration and investors with solutions find out more at invesco comm slash together invesco distributors pink. Now. Alec.
Lucas shares. A few great pics from vanguards. Large cap offerings. Well known for indexing.
The. Vanguard group. Also has an underappreciated active management business. Especially in large cap equities.
The bulk of vanguards more than 300 billion dollars in equity assets are outsourced to external sub advisors who run 15 separate strategies ranging from domestic large growth value and blend funds to an emerging markets. Offering. And even a recently launched esg fund. Morningstar rates.
Twelve of the strategies and assigns of morningstar analysts rating of bronze or higher to eleven of them. Including for gold rated. And three silver rated strategies. The three vanguard strategies.
Run by pasadena california. Based prime cap management company standout. All three are rated. Gold.
And while close to new investors. Reopening at some point isn t out of the question investors on the outside looking in must be ready to act quick. Though vanguard capital opportunity one of prime caps funds reopened to new investors in april 2013. Only to close again in december of that year.
The other gold rated strategy vanguard. Dividend. Growth run by wellington management s donald killbride. Had been closed to new investors since july 2016.
But reopened on august 1st of this year its reopening prevents investors with a chance to buy into a resilient mega cap oriented strategy that has proven its ability to grow wealth over time vanguards three silver rated strategies are all open to new investors wallington management s michael reckmeyer runs about two thirds of the assets of vanguard equity income with vanguard zone in house quantitative equity group overseeing the remaining third the scottish investment management firm bale gifford sub advises half of the assets of each of the two silver rated strategies bailey gifford is paired with marathon asset management on vanguard global equity and bailey gifford is paired with schroder investment management on vanguard international growth all of vanguards actively managed strategies come at a very cheap price those low fees allied with sub advisors like prime cap wellington. And bailey gifford give vanguards. Actively managed. Large cap equity line up considerable appeal.
So too does vanguards portfolio review department. Which provides oversight for each of the 15 strategies making sub advisor. Changes. When necessary expand your investing horizons and look to the long.
Term. With morning. Stars new podcast. The long view.
Joint hosts. Christine benz and jeff patek. As they talk to influential leaders. In investing.
Advice and personal finance. Search for and subscribe to the long view today and lastly equity. Analyst. John barrett.
Discusses. Why investors should wait before purchasing noted payroll processors last month. We initiated coverage of narrow mo payroll processors. Pacom and paylocity with fair values of 173 dollars and 82 dollars respectively.
We think both companies are modestly overvalued right now but we awarded them a narrow moat due to switching costs. Paycom and paylocity are similar businesses that offer payroll processing and human capital management software to small and medium sized businesses. The target employee count for paycom and paylocity is 100 to. 1000.
Employees both are fast growers with over 20000. Customers and have been taking share from incumbents adp and paychecks the company s native cloud software with unified database architecture providing improved user experience compared to its competitors for this reason roughly half of pacom and paylocity x new customers are conversions from either atp or paychecks unlike. Many of their software peers. Both companies are already profitable and should be able to attain some additional operating leverage as they continue to double digits.
There are some minor differences in the company s paycom recently started targeting companies with up to 5000. Employees. While paylocity has remained focused on companies with lower headcount additionally. Paylocity utilizes.
A broker network for roughly 25 percent of new business wins. While paycom exclusively uses direct sales force in summary. We think both companies have strong qualitative profiles and that the importance of timely and accurate payroll processing for small businesses helps earn pacom and paylocity narrow moats however we think investors should wait for a pullback before considering investing that does it for this week s investing insights podcast for morningstar comm. We hope you ve enjoyed our program and we welcome your feedback please send your comments and questions to podcast at morningstar comm from everyone here at morningstar thanks for listening music.
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In this week s podcast, equity analyst David Swartz highlights three high-yield stocks with stable dividends in the consumer sector, Christine Benz invites Judith Ward from T. Rowe Price to discuss cash cushions, equity analyst Erin Lash picks a wide-moat stock from the packaged food aisle, Alec Lucas shares a few great picks from Vanguard s large-cap offerings, and equity analyst John Barrett discusses why investors should wait before purchasing two noted payroll processors.
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