Hello, YieldAlley readers! In this issue:

• Stocks Stabilize After Volatile Week.

• Practical DDRM Case Studies (Part 5 of DDRM Fundamentals).

• Warren Buffett’s Apple stock dump was so big.

• The best way to track and monitor the highest cash rates.

• And more!

NEWS

Standout Stories

🏃‍♂️ How Olympic athletes make money (CNBC)

📉 How to Avoid Another Recession (NYT)

🍎 Warren Buffett’s Apple stock dump was so big (Fortune)

🏠 What Should You Do With Your 401(k) When You Retire? (WSJ)

📊 Market Turmoil Revives Age-Old Question: Should You Buy the Dip? (WSJ)

MARKET THOUGHTS

Stocks Stabilize After Volatile Week, Investors Eye Inflation Data and Fed Rate Cut Prospects

• U.S. stocks ended a volatile week with slight gains, but market sentiment remains fragile.

  • The S&P 500 experienced its largest single-day drop since September 2022 on Monday.

  • This was followed by the best session since November 2022 on Thursday as recession fears eased.

  • Overall, markets narrowed their losses for the week to end mostly unchanged.

• Investors are focused on upcoming economic data to reassess growth and inflation outlook.

  • Retail sales are expected to increase 0.5% monthly for the headline figure.

  • July CPI data is anticipated to show core inflation ticking down to 3.2% from 3.3% in June.

  • The decline in jobless claims has helped ease some recession concerns.

• The Federal Reserve's monetary policy stance is evolving.

  • Markets are pricing in a more aggressive Fed easing cycle.

  • The 10-year Treasury yield fell below 4%.

  • Analysts now expect the Fed to cut rates two or possibly three times this year, up from the single cut projected in June.

• Corporate earnings will provide insights into consumer health.

  • Several retailers, including Walmart, are scheduled to report earnings next week.

  • These reports will offer a glimpse into the state of consumer spending.

• Despite recent market volatility, the fundamental economic backdrop remains favorable.

  • Inflation is moving closer to the Fed's target.

  • The economy continues to expand, albeit at a slowing pace.

  • Productivity is on the upswing, and corporate earnings are rising.

  • Analysts recommend using market pullbacks as opportunities to rebalance and diversify portfolios.

INCOME BUILDING

Practical DDRM Case Studies (Part 5 of DDRM Fundamentals)

Welcome to the fifth and final installment of our Dividend Drill Return Model (DDRM) Fundamentals series. In this article, we'll apply the DDRM to analyze four real-world dividend stocks from different sectors and dividend growth categories. These case studies will demonstrate how to use the DDRM in your dividend investment process.

Case Study 1: Johnson & Johnson (JNJ) - Healthcare, Dividend Aristocrat

Johnson & Johnson is a diversified healthcare company with a strong history of dividend growth. As a Dividend Aristocrat, it has increased its dividend for 61 consecutive years as of 2023.

DDRM Inputs (as of December 29, 2023):

• Stock Price: $156.74

• Dividend Rate: $4.76 annually

• EPS (TTM): $6.65

• Core Growth Rate: 6%

• ROE: 25.5%

DDRM Outputs:

• Cost of Growth/Share = (6% / 25.5%) * $6.65 = $1.57

• Funding Gap = $6.65 - $4.76 - $1.57 = $0.32

• Share Change = $0.32 / $156.74 = 0.2%

• Dividend Growth = 6% + 0.2% = 6.2%

• Total Return Estimate = (4.76 / 156.74) + 6.2% = 9.2%

The 6.2% projected dividend growth aligns with JNJ's 6% historical 5-year growth rate. The 9.2% total return estimate seems reasonable for a stable healthcare leader.

Case Study 2: Realty Income (O) - REIT, Monthly Dividend Company

Realty Income is a retail REIT known for its monthly dividend payments. Its REIT structure provides a strong incentive for consistent dividend growth.

DDRM Inputs (as of December 29, 2023):

• Stock Price: $62.09

• Dividend Rate: $3.06 annually

• AFFO/Share: $3.95

• Core Growth Rate: 4%

• ROE: 5.5%

DDRM Outputs:

• Cost of Growth/Share = (4% / 5.5%) * $3.95 = $2.87

• Funding Gap = $3.95 - $3.06 - $2.87 = -$1.98

• Share Change = -$1.98 / $62.09 = -3.2%

• Dividend Growth = 4% - 3.2% = 0.8%

• Total Return Estimate = (3.06 / 62.09) + 0.8% = 5.7%

The negative funding gap and share change reflect Realty Income's high payout ratio and capital-intensive business model. However, its REIT structure still supports modest 0.8% projected dividend growth. The 5.7% total return estimate is primarily from the 4.9% starting yield.

Case Study 3: Texas Instruments (TXN) - Technology, Dividend Grower

Texas Instruments is a semiconductor company that has consistently grown its dividend, though it lacks the lengthy growth streak of a Dividend Aristocrat.

DDRM Inputs (as of December 29, 2023):

• Stock Price: $176.41

• Dividend Rate: $5.12 annually

• EPS (TTM): $8.74

• Core Growth Rate: 8%

• ROE: 57.8%

DDRM Outputs:

• Cost of Growth/Share = (8% / 57.8%) * $8.74 = $1.21

• Funding Gap = $8.74 - $5.12 - $1.21 = $2.41

• Share Change = $2.41 / $176.41 = 1.4%

• Dividend Growth = 8% + 1.4% = 9.4%

• Total Return Estimate = (5.12 / 176.41) + 9.4% = 12.3%

TXN's high ROE allows it to fund brisk growth while still having excess earnings to buy back shares. This supports strong 9.4% projected dividend growth. The 12.3% total return estimate reflects TXN's combination of a decent 2.9% starting yield and attractive dividend growth prospects.

Case Study 4: AT&T (T) - Telecommunications, Turnaround Situation

AT&T is a telecommunications giant that has faced challenges in recent years. It cut its dividend in 2022 following the spin-off of Warner Media.

DDRM Inputs (as of December 29, 2023):

• Stock Price: $16.50

• Dividend Rate: $1.11 annually

• EPS (TTM, adjusted): $2.57

• Core Growth Rate: 1%

• ROE: 10.3%

DDRM Outputs:

• Cost of Growth/Share = (1% / 10.3%) * $2.57 = $0.25

• Funding Gap = $2.57 - $1.11 - $0.25 = $1.21

• Share Change = $1.21 / $16.50 = 7.3% (assuming buybacks, but more likely used for deleveraging)

• Dividend Growth = 1% + 0% (assuming no buybacks) = 1%

• Total Return Estimate = (1.11 / 16.50) + 1% = 7.7%

AT&T's low core growth estimate and ROE reflect its mature, capital-intensive business. The 1% dividend growth projection assumes the funding gap is used for debt reduction rather than buybacks. The 7.7% total return estimate is mostly from the high 6.7% starting yield, as dividend growth is expected to just keep pace with inflation. This example shows how the DDRM can flag potential dividend growth challenges.

Key Takeaways

• The DDRM provides a structured framework to analyze a stock's dividend growth potential and estimate total returns. However, it's important to interpret the results in the context of the company's business model, industry dynamics, and dividend policy.

• Stocks with long dividend growth streaks (like JNJ) tend to have more reliable dividend growth projections, as management is incentivized to maintain the streak.

• REITs and other pass-through entities (like O) often have high yields but lower growth prospects due to their mandatory high payout ratios and capital-intensive businesses.

• Companies with high ROEs (like TXN) can often support strong dividend growth while still reinvesting for growth and repurchasing shares.

• The DDRM can also identify potential dividend growth challenges, such as AT&T's high payout ratio, low growth prospects, and competing capital allocation priorities.

• Always consider multiple scenarios with conservative and optimistic inputs to stress-test your dividend growth projections.

We hope this DDRM Fundamentals series has equipped you with a powerful tool to analyze dividend stocks and make more informed investment decisions. Keep an eye out for future dividend investing content!

INCOME BUILDING

Cash Rates

Government Money Market Funds (7-Day Yields)

• SNVXX (Schwab Government Money Fund - Investor Shares): 5.02%

• SPAXX (Fidelity Government Money Market Fund): 4.98%

• TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 5.19%

• VMFXX (Federal Money Market Fund): 5.26%

Brokered CD Rates (6-Month Rate)

• Charles Schwab: 4.70%

• E*Trade: —

• Fidelity: 4.65%

• Merrill Edge and Merrill Lynch: —

• Vanguard: 4.80%

ETFs

• SGOV (iShares 0-3 Month Treasury Bond ETF): 5.25%

• BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 5.19%

• USFR (WisdomTree Floating Rate Treasury Fund): 5.32%

• TFLO (iShares Treasury Floating Rate Bond ETF): 5.32%

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