We’ve long appreciated the stand-out dividend strength characteristics of Cracker Barrel (CBRL) among the full-service restaurant space, and we see an opportunity to add the company to the Dividend Growth Newsletter portfolio today (see page 5). We’ve outlined our case for Cracker Barrel in the past, “Free Cash Flow Feeds Cracker Barrel’s Dividend Growth,” and while we haven’t quite gotten our price just yet, we’re going to inch forward a bit with a small 1.5% position in the Dividend Growth Newsletter portfolio at this time. The company yields a very nice ~3.4%, and its Dividend Cushion is solid for that high of a payout.
One of the areas we’re expecting Cracker Barrel to surprise to the upside is the positive impact from vacationers taking to the roads thanks to plummeting gas prices. Not only are falling prices at the pump a stimulant for road trips, but we think Cracker Barrel may be most to benefit from this trend, given that its restaurants can often be found very close to exits off the interstate or next to lodging and accommodations. The company truly has a differentiated concept, in our view, and it generates as much as 20% of revenue from its retail store business. The cash keeps coming in even as would-be diners wait for a seat. It has an excellent business model, and Cracker Barrel makes it work well. We’re adding 18 shares at $133.50 each.
We’re also taking a stab at the lowest cost exposure to the REIT industry in the form of the Vanguard REIT ETF (VNQ). The Bank of Japan’s decision to pursue negative interest rates has put pressure on government bond yields in the US, with many are now speculating that the Fed will pause with respect to contractionary monetary policy. We’ve been mighty pleased with the addition of Realty Income (O) to the Dividend Growth Newsletter portfolio and even embattled HCP (HCP) has managed to bounce back toward cost. With the energy MLP space (AMLP) in shambles, we think high-yield seekers may be more prone to accepting REIT-related risk in an interest rate environment that no longer looks decidedly upward for the foreseeable future. We’re adding 32 shares of the Vanguard REIT ETF at $77.07 each to capture such a view.
The Vanguard REIT ETF’s top holdings include Simon Property Group (SPG), Public Storage (PSA), Equity Residential (EQR), AvalonBay Communities (AVB), and Welltower (HCN). Annualizing the Vanguard REIT ETF’s latest quarterly distribution of $1.10 per share translates into a ~5.7% dividend yield at current prices. Our ETF work on the real estate industry can be found at the following link, and we’ve highlighted the Vanguard offering as one of our favorites:
Methodologically speaking, the US equity markets have punished stocks almost indiscriminately. At times, we may stretch the Valuentum Buying Index criteria (which has started to pick up the market’s weakening technicals) to gain incremental exposure to preferred sectors/industries, as that with respect to the REITs in this instance. We generally remain quite firm with respect to the Dividend Cushion ratio, however. The higher the Dividend Cushion ratio, the more resilient the payout, and negative Dividend Cushion ratios should be cause for concern in a tightening credit market.