Your Portfolio Is Missing These 3 Safe Dividend Stocks

| June 27, 2016 | 0 Comments

key“People somehow think you must buy at the bottom and sell at the top. That’s nonsense. The idea is to buy when the probability is greatest that the market is going to advance.”

-Martin Zweig

Zweig presents an attractive idea for the current market, which is overvalued by many measures. As long as some industries still show growth prospects, aggressive buying is still an effective strategy. Perhaps the best long-term investments at present are those that leverage the younger demographics.

While we tend to think of millennials as NEETs who only spend their money on social media toys and other instant dopamine spikes, some traditional industries are also reemerging as a result of the increasing buying power of this stereotypically flippant generation. One such industry might take you by surprise: recreational vehicles (RVs).

In this article, I recommend three stocks in this industry with strong long-term growth prospects:

  1. Drew Industries (NYSE:DW)
  2. Thor Industries (NYSE:THO)
  3. Winnebago Industries (NYSE:WGO)

All of these stocks have performed well over the past five years and appear to be at relative tops. But remember the quote at the beginning of the article. We aren’t looking to “buy-low and sell-high” but to enter a position with a high probability to grow:

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The RV industry is a $50B industry that finds a new catalyst for growth in millennials, a demographic that is changing the face of camping. While older generations are perfectly fine with ditching all forms of technology and pitching a tent in the great outdoors, millennials prefer to bring tech and comfort with them. This preference has led to RV-centric outdoors activity; after all, an RV allows campers to bring their movies, music, Wi-Fi, and smartphone charging stations along for the ride – it also is convenient for bringing outdoors recreation equipment, such as surf boards, mountain bikes, and scuba equipment.

Currently, the demographic most likely to own an RV falls into the 35-to-55 range, but the demographic most likely to purchase an RV is that under the age of 35. RV sales are expected to rise 6% in the coming year; at the same time luxury retail items are to hit 0%. The stereotypes of superficiality we have for this demographic will lead us to the wrong investment conclusion – the money is actually in the RV industry.

This 6% growth is significant because it marks the first real growth in the RV industry. We are about to hit record highs:

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Forward-thinking investors should leverage this trend and consider investing in one or more of the stocks within this industry. Let’s look at them one-by-one.

Drew Industries

Drew IndustriesDW is an RV supply manufacturer and therefore gives investors exposure to the RV industry as a whole without having to select a single brand. DW is experiencing a huge amount of aftermarket revenue growth – 41% year over year. Aftermarket revenue refers to the revenue gained from individual part sales to existing RV owners; it has higher margins than most other areas of the supply business.

DW has diversified its revenue sources to a considerable degree. In the past, 90% of its business was in original equipment manufacturing but now it has expanded to adjacent markets, international RV sales, and aftermarket sales. The company has increased its revenue in these new markets by 500% in the past few years, showing success in its move to diversify.

The company, which once gave sporadic special dividends, is now focusing on a more stable dividend payout. The annual yield is 1.73% at the moment, but investors can reasonably expect that yield to grow, especially considering the revenue growth of the company. Special dividends are still on the table, so a long-term buy-and-hold strategy is the best choice for most investors of DW.

As DW continues to expand globally and make more acquisitions, it positions itself as a diversified RV company that is suitable for all-around exposure in this industry. With a growing RV industry, this stock presents little risk. Perhaps the biggest concern is the cost of raw materials, which affects the bottom line; thus, investors should keep a close watch on the commodities market to find good entry points for adding to their positions.

Thor Industries

Thor IndustriesTHO is another RV manufacturer. THO’s management knows of the growing popularity of RVs among millennials and intends to specifically target this demographic moving forward. While the company has more experience in selling to baby boomers, they are currently developing products that are suited for a younger demographic.

Specifically, THO is creating products with lower prices and with more technological innovations to cater to this demographic. The company has healthy relationships with RV dealers and should be fast in getting millennial-focused products onto the market while this trend is in place. As a nimble company with a history of making profitable acquisitions, THO can take risks with new products.

The stock itself is relatively low risk (though the stock can easily tank during a recession as we will later see). The company has zero debt, strong cash flows, and a stable dividend yield of 1.81%. THO has consistently beat EPS estimates, driving the stock upward with every earnings report.

Winnebago

WGO062416WGO is another RV manufacturer, relatively newer than THO but still holding over five decades of industry experience. For the most part, the business model of WGO is the same as that of THO. However, one aspect that WGO emphasizes over THO is its customer support and dealer sales training, two factors especially important in appealing to the new millennial market.

WGO is acutely aware of the decreasing age of RV buyers. WGO aims to focus on its brand image, an important component in the purchasing process of socially aware millennials. The company knows that the growing demand for RVs will put pressure on its manufacturing process and thus aims to cut down on costs while increasing output.

As the RV market returns to its previous industry peak, WGO will be strongly positioned to gain market share. The fact that WGO has recently changed CEOs makes it both somewhat of a wildcard and the RV company with the largest potential for significant strategic changes to accommodate the new market. I believe WGO has the best risk-reward profile out of the RV manufacturers on the market.

Conclusion

Any investor in this industry should know that RV sales act as a leading indicator for a recession. Thus, your RV stocks will fall before we have clear signs of a recession.

Because of this, a pair trade might be smarter than just holding long positions. In a pair trade, you short one stock in the industry while going long on another. As we know, shorting is dangerous and exposes us to unlimited risk, which is why I always recommend using stock options in a pair trade.

Here is my recommendation for a pair trade in the RV industry. We are going short THO and long WGO. This is not because THO is a good short but because WGO is likely the stronger of the two companies in the coming years:

Long WGO:

WGO’s implied volatility (IV) is currently quite high, making options expensive. Thus, buying call options is generally not ideal at the moment. Instead, we aim to sell puts each month for income. I recommend selling the Jul 22 Puts now and rolling the strategy over every month.

Short THO:

THO’s IV is also on the rise. However, if we were to sell calls here, we would expose ourselves to unlimited risk. Instead, we should hedge costs by buying and selling puts at the same time via a debit spread:

  1. Buy Sept 65 Put
  2. Sell Sept 60 Put

We maximize our gains when THO hits 60. When this happens, sell the debit spread and open another debit spread with five. The max profit is $500 minus the cost of opening the spread.

Using trades like the three above will always be a great way to create long positions in stocks while also earning a steady income. But, it does not replace having high-yield stocks in your portfolio that consistently raise their dividends.

Finding stable companies with high-yields that regularly increase their dividends is a strategy you can use to produce superior results, no matter if the market moves up or down in the shorter term. The combination of a high yield and regular dividend growth can give you the most consistent gains out of any strategy that you have tried over your investing career.

And, there are currently over twenty of these stocks to choose from in my Monthly Paycheck Dividend Calendar, an income system used by thousands of dividend investors enjoying a steady stream of cash.

The Monthly Dividend Paycheck Calendar is set up to make sure you receive a minimum of 5 paychecks per month and in some months 8, 9, even 12 paychecks per month from stable, reliable stocks with high yields.

 

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Category: Dividend Stocks

About the Author ()

Damon Verial is a contributor to Investors Alley. Coupling statistics with fundamental analysis, Damon has the goal of revealing to you the hidden patterns within stocks so that you may do what you wish with that information.

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