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Five dividend stocks to buy because insiders love them

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If the recent stock market volatility made you lose some sleep, that’s a good thing.

You were too complacent about risk, and you got a reminder. There’s also an important investing lesson in this: It pays to have money in “safer” dividend-paying stocks.

This makes sense now more than ever because we are in the longest economic expansion in U.S. history. That could mean a recession is on the way, so more defense is in order.

Of course, no one really knows that a recession is just around the corner. My guess is that we are not heading into a recession soon.

But I might be wrong. And when the next bear market arrives, dividend stocks will help you out because they can be less volatile in times of trouble for several reasons, says Bruce Bittles, the chief investment strategist at Baird.

They tend to be more established. They normally have healthier balance sheets and cash flows. And even in a sideways or down market, they still pay dividends — so at least you’ll be getting something. Don’t shrug this off if you think quarterly dividend payments are small, or the bear market risks are low.

• Since the 1929 stock market crash, dividends have accounted for over 40% of the total return of the S&P 500 SPX, -0.18%, according to Morningstar.

• We’re essentially already in a sideways market, and it may last. From January 2018 through mid-August 2019, the S&P 500 was up 5%, the median S&P 500 stock was basically flat, and median S&P 1500 stock was down nearly 10%, Bittles notes.

An insider twist

While dividend payers can be more stable, no stock is ever “safe.” Any stock can blow up at any time. To help mitigate this risk, I always prefer dividend-paying companies with the right kind of insider buying. It’s a sign the stock is a good value, and developments might soon move it higher.

What is the “right kind” of insider buying? At my stock newsletter, Brush Up on Stocks, I favor purchasing by line officers over directors because directors aren’t as close to the business. I also look for cluster purchases, large buys and good track records, among other things.

Still a thrill

Stodgy dividend payers might not provide the thrills of cutting-edge businesses such as Amazon.com AMZN, -0.64%  or Facebook FB, +1.13%. But dividend stocks certainly don’t have to be boring. I reiterated Crown Castle International CCI, +0.02%  in my stock letter in May and also wrote about it.

Since then, it is up almost 19% (including the dividend) compared with 3% for the S&P 500, 2% for the Dow Jones Industrial Average DJIA, -0.23% and 3.7% for the Nasdaq Composite Index COMP, -0.26%. Crown Castle is up 120% since I first suggested it in my stock letter on Jan. 4, 2015, compared with 58% for the SPDR S&P 500 ETF Trust SPY, -0.22%. That is not “boring” in the least.

Here are five more dividend-paying stocks with the right kind of insider buying, by my system.

J.P. Morgan Chase (3% yield)

The inverted yield curve has investors fleeing banks. Banks borrow at the short end of the curve and lend at the long end, so inverted curves hurt margins. They also signal recessions, which are bad for banks. Loan growth goes away, and bad loans pile up.

But the bullish insider buying at many banks during the recent pullback tells me recession fears are overblown. For example, a director at J.P. Morgan Chase JPM, -1.46%  — the nation’s biggest bank by assets — put $2 million into the stock at $109.91 in early August.

J.P. Morgan is well-diversified across many bank business lines, and it manages risk well. The bank’s brand, reputation and size give it a wide moat, so it is in the “Moat Goat” portfolio in my stock letter.

Lowe’s (2.2% yield)

Lowe’s Cos. LOW, +0.18%  just posted a great quarter. The news drove its stock up 10% to $108. Despite the gains, I’m not telling subscribers to sell, for a simple reason. Lowe’s is still in the early innings of a turnaround under CEO Marvin Ellison, who came on board last year. Ellison bought nearly $1 million worth of stock at $95 in May. Two other insiders recently purchased at $95-$98.70 — a bullish cluster buy. Lowe’s has a wide moat based on its brand power and size.

Carnival (4.4% yield)

Carnival CCL, -0.45%, Royal Caribbean Cruises RCL, -0.43% and Norwegian Cruise Line Holdings NCLH, -0.51%  own 90% of the North American market. The oligopoly means they control pricing and supply. Another source of strength: Ships are expensive to build, and this holds potential competitors at bay.

Carnival’s core demographic, older people, is growing rapidly as baby boomers age. Carnival is also a play on the world’s “emerging middle class,” which is eager to travel. CEO Arnold Donald and a director each put nearly $1 million into this stock at $45-$46.50 over the past two months — a strong signal.

Dow (6.5% yield)

Dow DOW, +0.87%  sells commodity and specialty chemicals. Investors now avoid this stock because weak pricing and sales are dragging down revenue (down 14% in the second quarter from a year earlier). Investors also worry about recession, which really hurts cyclical companies.

But insiders are saying these fears are misplaced. Three directors bought over $1.6 million worth of stock at $46-$46.70 in early August. Value investor George Putnam agrees with insiders that the stock looks attractive at this level. His Turnaround Letter has a good record, so he’s worth listening to. He thinks the company’s cost cutting, debt-reduction efforts and attractive valuation all make Dow a buy now.

Hersha Hospitality Trust (8.1% yield)

This real estate investment trust owns Marriott, Hilton Hyatt and InterContinental hotels in major markets like New York; Washington, D.C.; Boston; Los Angeles; and Florida.

Hersha Hospitality Trust’s HT, -0.44%  revenue growth came in at only 3% in the second quarter, which is not great. But that’s partly because the company has been upgrading properties to attract more luxury travelers, disrupting business. This problem won’t last forever. Meanwhile, customers are coming back to Florida hotels now that damage from Hurricane Irma has been repaired.

The company is also working to bring down its troubling debt levels. This should help attract investors and close Hersha’s valuation discount relative to peers, says Putnam. In early August, the CEO and president bought stock at $14.50-$14.75.

For attractive dividend yields, also consider exchange traded funds in this space, such as the Vanguard High Dividend Yield ETF VYM, -0.24%, the iShares Select Dividend DVY, -0.57%  and SPDR S&P Dividend ETF SDY, -0.40%. What they lack in bullish insider buying, they make up for in broader diversification.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested JPM, LOW, CCL and HT in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.