Don’t Buy These Stocks, But Watch the Story Unfold

I have a lot of short conversations about dividend stocks. They go something like this:

“Oh, your specialty is dividend stocks? What do you think about XYZ?”

It’s almost always a stock that yields 2% or less. If I know a little about the company, I’ll start by saying something positive before I say, “Ah, well, I don’t really cover that one because I believe we deserve at least 3.5% dividend yield.”

I have a lot of great dividend ideas I’m more than happy to share with others, but the conversation usually ends there.

Today, I want to talk about three of those dividend-paying stocks that I frequently get asked about. None of them have a high enough yield for me to mark them a buy. But all are household names that I’m watching right now for an entirely different reason.

Consumer Spending Trickles Through

By now, you’ve probably heard the buzz phrase the “K-shaped economy” or “K-shaped recovery.”

The idea first appeared on Twitter back in 2020 and was popularized by economist Peter Atwater. Now it’s used in every article talking about the current state of the economy.

Although the term is probably overused, it paints an accurate picture of our current economic condition: two distinct groups moving in two completely different directions.

Wealthier Americans and capital-intensive businesses are the upper arm of the K and moving upwards… while lower-income households and traditional businesses are the lower arm and struggling.

According to Moody’s Analytics, the top10% of earners account for 49.2% of all consumer spending. This statistic is quite eerie. In the run-up to the internet bubble, the richest 20% of Americans made up 50% of spending.

As someone wildly interested in economic theory and following the numbers, I am concerned about what this means for the economy. And I’m really curious about how such divergent spending patterns will affect corporate profits and potentially put the squeeze on dividend payments, especially for consumer discretionary companies.

Maximize Profit or Alienate Consumers

There are a couple ways this could play out.

Companies could simply focus on the more affluent consumer and price the lower- and middle-income spenders out of their product completely. We know that’s the strategy of luxury and status goods.

There’s also the option of product differentiation for both ends of the market at drastically different price points. Or maybe this is where dynamic pricing comes into play.

Here are three companies I’ve been watching to see if consumers will in fact change their preferences due to price sensitivity.

Delta Air Lines, Inc. (DAL)

The company is in the headlines for exactly that. It recently rolled out three new “basic” fares in the premium cabins: First Basic, Delta Premium Select, and Basic Business.

You’ll get to sit in those cabins and experience all the in-flight benefits. The trade-off is seat assignment after check-in, fewer reward miles, reduced bag allowance, and not eligible for upgrades.

Time will tell if there is a market for these stripped-down versions of the “luxury” experience. I don’t fly Delta, but I talked to a friend that almost accidentally booked this class ticket through his company travel platform. His response: “absolutely not.”

CEO Ed Bastian also made headlines by saying that even if energy prices drop, fares will not. He admits that low-cost carriers are unable to compete, so Delta won’t worry about competing with those prices.

Last week, the company reported record quarterly revenue of $17.7 billion. This was up 14% and at the high end of management expectations. I’ll definitely be circling back in three months to hear management comments on the success of these new fares.

Delta shares are up 25% year to date, but its $0.215 quarterly dividend equals a yield of just 1%.

Starbucks Corp. (SBUX)

On a recent WSJ podcast, CEO Brian Niccol described going to Starbucks as a $9 premium experience. He said that whether the customer sees that as a splurge or affordable, the company must meet customer expectations. This was in response to the interviewer specifically asking about the K-shaped economy.

It’s clear that Niccol is sticking with his “Back to Starbucks” strategy in this economy. Some key changes are bringing back self-serve condiments, handwritten cup notes, and reducing wait times to four minutes or less.

He’s leaning into the “premium experience” to justify the price and it’s been working. Last quarter beat Wall Street expectations with global same store sales rising 6.2% year over year and consolidated revenue up 9%.

SBUX is also reportedly developing in-house software that uses AI to reduce the $400 million a year it currently pays to vendors for various software. Shares of the company are up 27% year to date, but its quarterly dividend of $0.62 is an annual yield of just 2.3%.

The Walt Disney Company (DIS)

This one is a little different due to product variations.

Approximately 46% of DIS revenue is experiences: parks, resorts, cruises, and consumer products. Yes, consumer products seem the opposite of experiences, but this includes all the items sold in its parks, resorts, and branded stores.

As a share of revenue, direct-to consumer streaming like Disney+ and Hulu is 41% and traditional cable and broadcast networks are 12%. The rest is content sales like theatrical film releases and licensing. I’ve been specifically looking at the experiences segment.

A day at Disney World will quickly reveal the strategy: offer different experiences to consumers. Those with the means will opt for Premier passes or VIP experiences to skip the lines. Those on a budget will suffer through triple-digit wait times for popular rides. I’m talking 105 or even 120 minutes stuck in the queue!

Last quarter, experiences revenue was up 7%, and total operating income modestly exceeded management’s guidance. Shares, however, are down 14% year to date as analysts worry about the headwinds faced by both the theme parks and direct-to-consumer streaming.

Even with the drop in shares, DIS semiannual payment of $0.75 equals a yield of just 1.5%.

I would not add any of these companies to my portfolio right now. But I will keep watching them as a way to follow the consumer dollar as the economy keeps traveling in two separate directions.

For more income, now and in the future,

Kelly Green