Max Wasserman manages a portfolio of 30 dividend-paying stocks. He adds positions he expects will be good bets for the next three to seven years. He bets on companies he believes are also well-priced. Inflation cooled in July from a year ago. And while the consumer price index is a far cry from last year’s peak above 9%, it remains elevated.
In July, core CPI, which excludes volatile food and energy prices and looks at housing, household goods and services, and transportation, sat at 4.7%.
“It’s much easier to take an economy from 8% inflation to 4%, but it’s very hard to go from 4% to 2%,” said Max Wasserman, the founder and senior portfolio manager at Miramar Capital LLC, an investment management firm based in Northbrook, Illinois.
Current inflation levels are “more sticky,” he added, which means the Fed has more to do to bring prices under control. He’s expecting another 25-basis-point rate hike — but what the economy needs is an overall 50 bps hike before the cycle ends, he said.
More hikes could be an issue for stock-market investors because only a few mega-cap tech stocks have accounted for much of this year’s gains, including AI beneficiaries. Any hiccup in the economy that could trickle in from higher-for-longer rates could impact the market, he said. For example, if interest rates continue to rise, you could see the Nasdaq pull back by at least 10% or as much as 15%, he added.
“We think people jumping on the AI bandwagons and paying these exorbitant prices that are discounting two, three, four, five, six years out in earnings. It’s getting a little ahead of itself,” said Wasserman, who began his journey as a portfolio manager in 1993.
On a more positive note, the general market outside the tech-heavy Nasdaq has reflected a slowdown of the economy, and stocks are much more reasonably priced, he added.
A dividend strategy Wasserman believes that investors’ biggest mistake is that they just don’t understand what they own. They see a company making headlines and buy whatever is working at that moment. What goes up, they buy, and what goes down, they sell, he said. They should be doing the opposite while understanding their risk tolerance and how much volatility they can handle, he added.
His sweet spot is a portfolio with 25 to 30 well-priced, dividend-paying stocks with a history of increasing payouts. These names span the financials, defense, healthcare, and industrial sectors. And while he still likes technology stocks, they’re overvalued, in hsi view. His managed portfolio still holds technology, but he has trimmed some positions including Broadcom (AVGO) and Microsoft (MSFT).
“We’re looking at those areas that have already discounted or are discounting slower, and they’re trading at market multiples that are less,” Wasserman said. “So we’d like companies at 15, 16, 17 times earnings that are paying us around 2% to 4% in dividends.”
He doesn’t shuffle stocks around too much. About three or four stocks a year could be sold off, or just trimmed if their positions become larger than around 5% of the overall basket of holdings. When he adds a new position, it’s usually because he is convinced that it will be a good bet for the next three to seven years.
One of his favorite sectors right now sits far from the hype of tech: the aging car market. Between inflation and expensive debt, car financing costs are up. More people are choosing to hold onto their vehicles longer, he said. That’s great news for the automotive aftermarket because the estimated annual repair cost of a car can be as much as $1,000, he added.
For this reason, he likes Genuine Parts Company (GPC), a brand that owns the NAPA Auto Parts centers throughout the US and is also growing internationally. The company currently pays an annual dividend yield of 2.48%.
On the flip side of that trade, he dropped a similar company called Advanced Auto Parts (AAP) after it ran into too much cost pressure from its West Coast expansion and had to cut its dividend amount from $1.50 to $0.25.
In pharmaceuticals, he moved out of Johnson & Johnson (JNJ) as the company faces talcum-powder lawsuits that could cost it billions.
In exchange, he moved his exposure to medical device companies such as Medtronic (MDT). This firm provides devices for diabetes management, transcatheters, and balloons for cardiovascular procedures. He said that in a post-COVID economy, people are returning to get medical procedures done. This is lifting demand for medical devices. There’s also an aging population that will increasingly need these products, he added. Medtronic is a large-cap company and it’s paying a 3.39% dividend yield.
Similar companies within the healthcare sector in his portfolio include Abbott Laboratories (ABT), which pays out a 1.95% dividend yield. AbbVie (ABBV) is at 4.03%, and Merck & Co (MRK) is at 2.67%.
In the defense sector, he likes General Dynamics (GD), a company that trades at roughly 15 times earnings, he said. Additionally, it offers a 2.35% dividend yield. The company has historically increased its dividends anywhere from 7 to 10% a year, he added.
Within the defense sector, he also likes Lockheed Martin (LMT), which pays a dividend yield of 2.64%.
In financials, he likes the derivatives exchange company CME Group (CME). They benefit from charging on transactions. As more people increase their hedges on portfolios, this firm will benefit from transaction fees. It pays out a 2.19% dividend yield plus a profit and losses payout at the end of the year. He noted that its stock was trading at about $250 in March of 2022, but a pullback brought it down to around $200 as of Thursday, making it well-priced.
He likes PepsiCo (PEP) in consumer staples, a stock he has held long term. It has a 2.85% dividend yield and has increased its payout by about 8 to 10% a year, he said. It is a two-part company that has a beverage and snack business. He added that the snack side has pricing power because it can reduce the content in a bag of chips and charge consumers more for less.
Additional companies in his portfolio are listed in the table below.