The 12-year cycle of the growth of the US economy is going on. This is the longest period to be without a crisis. There have been corrections of stock indices but the investors bought the falling stocks back and kept incrementing long positions.
The beginning of 2020 keeps cheering investors up, the stocks keep renewing all-time highs. The ones who bought them earlier grow happier.
But what to do if you failed to buy them on time or thought it better to wait? The market seems to be at its highs, and buying at the current prices is uncomfortable. What if there happens a correction or Trump attacks another "terrorist" country?
Of course, the US economy has a potential for growth (I spoke about the reasons in the article "Crisis on Stock Market Postponed Till Next Year"
You can simply buy the stocks of Apple (NASDAQ: AAPL) or Amazon (NASDAQ: AMZN) and, most probably, by the end of the year your profit will be expressed in two-digit percentage. However, there are other ways to choose stocks and insure yourself from market corrections.
The advantage of dividends
I suggest you should turn to the stocks with good dividend profitability and a high potential for the future growth of the dividend payments.
The advantage here is that your high profit from dividends is guaranteed. And if the board of directors decides to increase dividend payments, this will, no doubt, attract other investors who will create demand for the stocks, which will turn out positive for their price. The growth of the stock price, in turn, will increase the profitability of the invested funds.
If the stock indices go down and pull the stocks downwards, part of the losses will be covered up by dividend payments, and after the market calms down, you will be able to add stocks to your portfolio at a lower price and wait for them to grow calmly. Of course, this approach supposes leverage of 1 to 1.
To find stocks with high dividends, you can simply use any stock scanner on the stock market. However, we are interested in the potential for the growth of dividend payments, so we will have to analyze one of the company's financial indices.
Dividends are always paid from free funds. In the report, this is called Free Cash Flow and reflects the financial efficacy of the company; it is calculated as the difference between the operational cash flow and the capital expenses.
To put it simply, Free Cash Flow is the funds that remain for the company to spend after it pays all the expenses. The larger the sum of the Flow, the more it is possible that the board of directors will vote for increasing the dividend payments.
The second option is as follows: the free funds may be allocated to buying the stocks from the market, which will decrease their number at the market and entail the growth of their price. For example, Apple in the third quarter of 2019 spent 18 billion USD for buying their own stocks.
Free Cash Flow will allow to carry out some analysis and find the companies with a high potential for the growth of dividend payments.
Delta Air Lines stocks
As the first company, I picked up Delta Air Lines (NYSE: DAL), which is the largest American company dealing with passenger transportation. I have already recommended buying the stocks of this company in the article "Buffet Increases His Share in Delta Air Lines".
Airlines are expecting the flow of passenger transportation to double in the future, which will, naturally, increase the companies' profitability, and Delta Air Lines, according to the fundamental forecast, is suitable for buying. However, we are also interested in dividend payments.
Currently, the company pays not so high dividends, just 2.77% per annum. Expressed in money, the company pays 1.03 billion USD as dividends annually, but the Free Cash Flow is 9.2 billion USD, which is 9 times more than the company spends on the dividends.
Of course, the company will not spend all the free funds on dividends, but most companies spend over 50% of their free money on this. Thus, it is highly probable that the dividend payments of Delta Air Lines may increase at least 2 times remaining easy to pay for the company.
As for technical analysis, the stocks are traded above the 200-days Moving Average near their all-time highs. Currently, a breakout of the level of 60 USD per stock will allow for the further growth of the stock price.
HP Inc stocks
As the second company, I chose a quite famous one that used to work under the name Hewlett-Packard Company (NYSE: HPQ). The thing is that in 2015, the company split up in two: HP Inc and Hewlett Packard Enterprise.
HP Inc kept working in the segment of PC and printer production. Its stocks kept trading on NYSE under the ticker HPQ.
As for Hewlett Packard Enterprise, it distanced from HP Inc. It produces servers and provides IT services to corporate clients. The company got a new board of directors, formed a new brand HPE and is traded on NYSE under the ticker HPE.
In our article, we pay attention to HP Inc because it has a stabler Free Cash Flow, several times larger than that of Hewlett Packard Enterprise. Well, the annual dividend payments are 3.32% per stock. Free Cash Flow is almost 4 billion USD which allows raising the dividends to 12% per annum. In other numbers, the company pays 0.17 USD per stock, and the Free Cash Flow allows it to increase it to 0.67 USD per stock. This means a very high potential for the growth of the dividend payments.
Tech analysis shows that the stocks are also traded above the 200-days Moving Average which indicates an uptrend. Earlier, the price escaped a correctional descending channel and is now moving in an uptrend.
Morgan Stanley stocks
The third company in your probable portfolio of 2020 might become a financial sector company — the Morgan Stanley (NYSE: MS) bank. Banks are less dependent on fees and the trade war between the US and China.
Choosing a company from the financial sector, we diversify our portfolio. Delta Air Lines deals with air transportation, HP Inc produces computers and Morgan Stanley shuffles finance. A decline in the demand for computers will not affect air transportation and will even less affect the financial situation of Morgan Stanley. These 3 companies do not correlate which makes our portfolio less risky.
As for our initial idea based on the dividends, Morgan Stanley has the highest potential for growth here. Currently, it pays 0.35 USD per share, which is 2.69% per annum. The Free Cash Flow allows it to increase it to 2.85 USD per share, which is 22% per annum. This is 8 times more than it pays now. It is worth noting that since 2014 the bank has been increasing dividend payments.
In 2014, the quarterly dividend was 0.05 USD per stock, while now it is 0.35, so the growth was 700%, while the stock price grew by 65% only. This means that Morgan Stanley's stock price may not grow as much but it is highly probable to receive higher dividends in 2020.
Tech analysis shows that the bank's stocks are in an uptrend and may soon renew the highs of 2018.
2020 is the year of presidential elections in the USA. The markets will remain ambiguous while the investors will be trying to figure out who will be the next president and what policy they will carry out.
Currently, Donald Trump is at the wheel, and he associated the results of his work with the growth of stock indices. This means that during the election campaign he will do everything for the growth to continue.
We should not forget that he influences the trade war between the US and China. I suppose that this year we will from time to time read about new agreements between the countries, and the investors will react by buys of stocks.
What follows after the elections? This we will discuss in December 2020! Stay tuned.