Earnings season is a time of wild price swings that can bring immense joy or major short-term pain.

Even famous dividend legends, such as dividend aristocrats and kings aren’t sparred the occasional carnage. Consider three examples of quality companies that I bought this year alone, on major earnings crashes.

• 3M (MMM) – 11/11 quality Super SWAN dividend king (61-year payout growth streak): 13% earnings crash on April 25th
• Walgreens (WBA)- 8/11 quality dividend aristocrat (43-year payout growth streak, becomes a dividend king in 2026): 13.3% crash on April 2nd
• Lowe’s (LOW) – 11/11 quality Super SWAN dividend king (57-year dividend growth streak): 12% earnings crash on May 22nd, then 10% rally on next earnings report, on August 21st.

Dividend Aristocrats Worst Single Day Crashes 2010 To April 2019

(Source: Ploutos)

In fact, over the past decade, virtually all the aristocrats have fallen 5% or more in a single day, mostly due to earnings-related freakouts.

If the most legendary blue chips on earth can get crushed this badly on earnings misses, then imagine what lesser quality names might be in for?

So let’s take a look at the important implications this earnings season will have for individual stocks and how you can reasonably and prudently manage your risk in what might be an especially volatile earnings season.

What Analysts Expect From This Earnings Season

The good news is that analysts’ estimates on earnings growth have come down so much much that, as of October 17th, of the 15% of S&P 500 companies that have reported earnings, 84% of them beat expectations. On average by a modest 2.6% but that’s the power of low expectations.

This week 126 S&P 500 companies, or about 25%, report earnings, and the consensus is for a third straight quarter of year over year declines, -4.7% specifically.

(Source: FactSet Research)

In total this year analysts expect just 0.7% growth, courtesy of tough comp from 2018’s 20% growth created by tax reform, plus the ongoing trade conflict slowing global growth (by 0.8% this year per the IMF).

(Source: FactSet Research)

Leading the negative growth charge this quarter is energy, and materials, both highly trade sensitive. However, tech, the former darling of Wall Street when it comes to growth rates, is expected to take a big hit, due to being the most trade-sensitive industry of all.

(Source: FactSet Research)

Not surprisingly, the sectors with the least exposure to trade, such as utilities, real estate, and finance, are expected to post strong earnings growth this year, relative to the paltry 0.7% EPS gain for the S&P 500.

(Source: FactSet Research)

So does that mean it’s time to load up on real estate, utilities, and other defensive and relatively trade insensitive names? The answer is not necessarily, but here is what you can do to maximize your probability of success during earnings season, 2019 and well beyond.

What It Means for Your Portfolio

Dividend King’s four portfolios have been making a lot of contrarian investments during August trade war freakout, loading up on top quality energy, industrial and trade-sensitive tech names.

In fact, here’s what our Deep Value portfolio looks like in terms of sector allocation.

                      Dividend Kings’ Deep Value Portfolio 

(Source: Morningstar)

We have plenty of exposure to the most badly beaten down names this year, and here’s why.

          The First Shall Be Last And the Last Shall Be First 

(Source: FactSet Research)

The sectors most hurt in 2019 by the trade conflict and slowing growth are expected to be the first to spring back with strong growth when trade tensions ease and growth accelerates.

Is a trade deal certain to happen next year? Heck no. In fact, most analysts, including Moody’s, Goldman Sachs, and Citigroup, don’t expect one to happen at all through election day 2020.

But guess what? You don’t actually need 15% to 30% growth next year in beaten-down sectors in order to achieve good short-term results. Dividend Kings’ Deep Value portfolio was fearlessly buying quality energy, industrial, and financial stocks in August, exactly when the market was most sure a recession was imminent.

August 15th the bond market even estimated a 48% 12-month recession risk, which has since fallen to 31%.

Dividend Kings Deep Value Portfolio Performance Since Inception

(Source: Morningstar)

That portfolio, which yields a safe 4.8% and has 9% to 10% long-term earnings/cash flow and dividend growth projections, was trading at about 10 times earnings in mid-August when the trade uncertainty fears were at their highest. For context, the S&P 500’s forward PE bottomed at 10.3 on March 9th, 2009, the bottom of the Great Recession bear market. By knowing what companies are worth buying and what they are worth (courtesy of or 235 company and counting Master List) we were able to assemble a portfolio literally at March 2009 broader market low levels.

It’s since surged impressively and is now beating the S&P 500 by over 13% on an annualized basis thanks to plenty of quality industrial and energy names like

• Cummins (CMI): +18% CAGR total return
• Marathon Petroleum (MPC): +60% CAGR total return
• Bank OZK (OZK): 12% CAGR total return
• Skyworks Solutions (SWKS): +23% CAGR total return

Of course, our goal isn’t to achieve strong short-term total returns but maximize long-term income and beat our benchmarks over time via a focus on

• higher safe yield
• higher quality companies
• equal or faster long-term growth rates than our benchmarks
• superior valuation to our benchmarks

We use strong risk management rules to ensure that we have good industry and sector diversification as well. Which is why some of our top performers are defensive names like:

• Bristol-Myers (BMY): +25% CAGR total return
• Philip Morris International (PM): +19% CAGR total return
• Tanger Factory Outlet Centers (SKT): +22% CAGR total return

This fundamental approach to buying above average-quality companies at below-average prices is driven by both historical research, and our motto “quality first, valuation second and proper risk management always.”

We aren’t scared of buying crashing blue chips if their long-term fundamentals are intact because we know that the same one day crashes that freak out investors are what allow massive short-term gains.

12-Month Forward Returns On Dividend Aristocrats Following 10+% Crashes 

(Source: Ploutos) -data through April 2019

Over the past decade, the average and median gains on aristocrats following double-digit single-day declines is 32%. Our other portfolios are designed for investors with different needs, but all are doing very well since inception and beating the S&P 500 (which isn’t even our benchmark on three of them, though we’re beating all our benchmarks by 1% to 6%).

Dividend Kings $1 Million Retirement Portfolio (40% bonds and preferred stock)

(Source: Morningstar)

Our $1 Million Retirement Portfolio is just 60% high-yield blue chips and 40% bonds/preferred stock, with a weighted yield of 4.7%. It’s designed to outperform the standard 60/40 stock/bond portfolio but is not just beating that benchmark so far, but even a 100% S&P 500 portfolio.

                     Dividend Kings’ Fortress Portfolio

(Source: Morningstar)

Our Fortress Portfolio is 100% 11/11 quality Super SWANs, yielding 2.7% and expected to generate 8% to 9% long-term dividend growth (vs 6% to 6.5% for S&P 500 and most dividend growth ETFs). It’s currently beating the market by 2% thanks to strong returns from the likes of LeMaitre Vascular (LMAT), up 30% CAGR, and Home Depot (HD), up 16% CAGR.

          Dividend Kings High-Yield Blue Chip Portfolio 

(Source: Morningstar)

Our High-Yield Blue Chip Portfolio yields a safe 4.8%, expected to generate 6% to 7% long-term dividend growth, diversified across 33 companies in all 11 sectors, and has managed to beat the market by 4%.

That’s courtesy of strong winners like CVS Health (CVS), which has generated 21% CAGR total returns, MPC (21% CAGR total returns) and Brookfield Renewable Partners (BEP), +21% CAGR total returns.

Our secret is that we use earnings season (and trade conflict freakouts) as a source of volatility, and embrace it as a lover. Because as Josh Brown said in 2016 “volatility isn’t risk, it’s the source of future returns.”

Earnings season’s wild swings just mean better buying opportunities for our portfolios as well as my retirement portfolio, which I run with a combined strategy harnessing the power of all four Dividend Kings’ portfolios.

Bottom Line: Earnings Season Is Likely to Be Better Than Expected, Bring Lots of Volatility, And Make Smart Long-Term Investors a Lot Of Money

The only certainties around this earnings season are that there will be plenty of uncertainty and wild volatility for individual stocks.

Industrials may take a beating, OR they might beat very low expectations, re-affirm previous guidance and then rocket higher. The key to long-term success, both in terms of strong total returns and generous, safe and exponentially growing income (what Dividend Kings is focused on), is ignoring the short-term noise in favor of what matters.

• superior safe yield
• derived from higher-quality companies run by competent and trustworthy management
• with average or better long-term growth prospects
• bought at reasonable to attractive valuations

When you buy such companies when the market freaks out over short-term earnings “misses”, use proper risk management for your needs, and then patiently collect your generous, safe and growing income while waiting for competent management to deliver on expected growth over time, that’s how you can achieve your financial goals.

WBA shares were trading at $54.47 per share on Wednesday afternoon, down $0.85 (-1.54%). Year-to-date, WBA has declined -18.38%, versus a 21.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Adam Galas

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...

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