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Cabot Dividend Investor Weekly Update

Earnings have been sensational. Reported earnings for S&P 500 companies have grown an average of 2% in the fourth quarter, compared to an expected -11%.

Clear

A Staggering Role Reversal
Despite the S&P 500 still trading near the all-time high, the market is dramatically changing. It may look like the same old market when you glance at the indexes, but a look under the hood reveals a role reversal of winners and losers.

The market recovery from last March until the end of last year was completely dominated by technology and growth stocks. People relied on technology more than ever during the lockdowns. And technology companies thrived. The tech-heavy Nasdaq index was up over 40% in 2020.

At the same time, the undisputed dogs of the market were the energy and financial sectors. These real or Main Street economy stocks took it on the chin as demand crashed during the lockdowns. But things changed after the vaccine announcements and the promise of a full recovery later this year.

Since the fall, the SPDR S&P Bank ETF (KBE) has rallied over 80% and the Energy Select Sector SPDR Fund (XLE) has soared 65%. Energy and financial stocks have been by far the best performing market sectors for the past three-month, year-to-date, and one-month periods. The outperformance has been even more pronounced lately.

In just the month of February so far, the KBE is up 23% and XLE is 22% higher. Meanwhile, the technology sector is in negative territory for the past month. Now, energy and financial stocks are driving the market higher while technology is holding it back.

The market has been spooked over the past couple of weeks on fears of inflation and rising interest rates. But energy stocks love inflation, and banks love rising rates. The year is shaping up to be an ideal environment for these previously downtrodden sectors.

The outperformance could have staying power. Despite recent performance, energy stocks are still well below pre-pandemic levels. And bank stocks had a lousy recovery last time after the financial crisis. Growth stocks have dramatically outperformed value stocks over the past five years. And such aberrations rarely last.

The new paradigm is great news for several of the stocks in our portfolio. And it’s likely to be a far more favorable environment for dividend stocks in general going forward.

High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 3.8%) – After the market fretted that the offer to buy Canadian midstream energy company Inter Pipeline would be raised, Brookfield reiterated the original bid in a hostile offer of C16.50 per share ($5.6 billion) in shares and cash. BIP has since rallied back. Midstream energy companies are still dirt cheap after the recession, and these assets could give a big boost to earnings in a short time. We’ll see how it develops. Brookfield is well set up otherwise with $2.5 billion in acquisitions last year to boost this year’s bottom line, a rebound in transportation and energy assets with a full recovery, and an emphasis on infrastructure by the new administration in Washington. BUY

Enterprise Product Partners (EPD – yield 8.3%) – The midstream energy partnership hasn’t participated in the energy rally nearly as much as other stocks in the sector. There’s a reason for that. Business isn’t rebounding as quickly. Of course, profits didn’t take anywhere near the hit of most energy companies during the recession either. But there are still oversupply issues in the industry that are hampering the full earnings rebound. Things are going in the right direction though. And that huge yield is safe. BUY

Rating change “HOLD” to “BUY”
STAG Industrial (STAG – 4.4%) – Many REITs have struggled through the pandemic, but STAG’s industrial and e-commerce properties have performed very well. Yet the price has been influenced by the troubles of many of its peers. That makes this monthly-paying industrial REIT a compelling value. It pays a great dividend and offers value in an expensive market. Eventually that should be rewarded. BUY

Verizon Communications (VZ – 4.4%) – This wireless innovator that has morphed into a utility-like stock trades on its own schedule. It’s been bouncing around the same range since the summer of 2019. The good news is that not only is it still at the low end of this range, but it has started moving higher. Recent trading patterns indicate VZ should rise over 60 per share on this latest run (currently 57). It’s a solid down market performer and it could break out of this range to the upside as 5G becomes a bigger story in the post-pandemic market. HOLD

Dividend Growth Tier
AbbVie (ABBV – yield 4.9%) – This biopharmaceutical stock still sells at a dirt cheap valuation of less than 8 times forward earnings, despite the fact that it isn’t that far from the 52-week high. The stock seems to be forming a base at the high point of the recent range and appears poised to rally higher in the weeks and months ahead. If it continues to hang tough at this level I will upgrade it to a BUY. HOLD

Altria (MO – yield 7.8%) – This tobacco company stock is actually looking good of late. It just made a new post-pandemic high and could be breaking out to a higher level. The stock was over 50 per share before the pandemic and there is no good reason why it shouldn’t at least rise back to that level in the months ahead (currently 44.66). It’s a good income stock for now and could be more if things break right. BUY

Broadcom Inc. (AVGO – yield 2.9%) – The stock is showing a lot of technical strength ahead of what should be a great year for 5G stocks. It pulled back a little this past week along with the rest of the technology sector, but the uptrend is still solidly intact. Broadcom doesn’t announce earnings until March, but other company results are indicating a strong semiconductor market. BUY

Chevron Corp. (CVX – yield 5.2%) –It looks like this energy giant was added to the portfolio on the cusp of a breakout. The stock is less volatile on the downside and the upside than most energy stocks, but it’s been on fire. CVX is up 20% in just the month of February so far. It also still has a ways to go to get back to the pre-pandemic levels of around 120 per share. And the post-pandemic environment could be considerably better.BUY

Digital Realty Trust (DLR – yield 3.3%) – This data center REIT has had weak performance since the vaccine announcements last November as investors focused on more cyclical stocks and away from pandemic beneficiaries. But the main story remains intact. Date centers are a growth business and they are likely to continue to grow as needs continue to increase and new technologies proliferate. This stock has a history of bouncing around and, historically, when it goes below the 50-week moving average, where it is now, it bounces back strongly. BUY

Eli Lilly and Company (LLY – yield 1.7%) – This big pharmaceutical company took off to the tune of more than 70% in two months on a plethora of good news. It had two great earnings reports, hiked the dividend 10%, and there has been very encouraging news about drugs in the pipeline, including a potential blockbuster Alzheimer’s drug. The stock is taking a breather since the surge, which is to be expected. It’s still priced a little on the high side now, but for good reason. I love the stock for the longer term, but we’ll see about the near term. HOLD

Innovative Industrial Properties (IIPR – yield 2.3%) –Marijuana stocks are hot as the regulatory environment gets more promising. This farm REIT is hovering near the all-time high and up big today. The stock is in nosebleed territory after a 200% gain in the position in a little over a year. The portfolio already took profits on two thirds of the position. But the stock could still have another big up move left. And it really isn’t showing any technical weakness.HOLD

Qualcomm Inc. (QCOM – yield 1.9%) – After making huge gains, QCOM pulled back after the earnings announcement revealed industry-wide smartphone constraints that will last through the first half of the year. It’s just a delay and not a change in the basic story. It then got hit with the selloff in the technology sector. We already took profits on one third of the position. But if it shows further weakness in the weeks ahead, we will likely sell at least another third of the position in order to protect profits. HOLD

Realty Income (O – yield 4.5%) – This legendary income REIT announced earnings this past week, and the stock moved slightly higher. Adjusted funds from operations per share were 2.1% higher in 2020 than in 2019. It’s not much growth but consider the circumstances. The stock is down over 30% from pre-pandemic levels because of concern about retail properties in this pandemic. But Realty actually grew earnings this year despite the lockdowns. That’s amazing resilience. And things should improve in 2021. BUY

U.S. Bancorp (USB – yield 3.5%) – Bank stocks are loving the current environment. The post-vaccine rally has reignited since late January. The specter of inflation and rising interest rates may spook the overall market, but such things are great for banks. A booming economy increases loan demand and higher rates increase spreads and profits. USB has moved up more than 20% in the past month. But it is still well below pre-pandemic levels. USB should have a very good year. BUY

Rating change “BUY” to “HOLD”
Valero Energy Corp. (VLO – yield 6.1%) – This refiner and high leverage play on a full recovery has been the crown jewel of hot stocks in this portfolio. The rally in energy stocks reignited this month and VLO has soared more than 38% in February so far. That’s a good month. Refining profits can turn around quickly and VLO can move quickly. The full recovery that the market is already pricing in must include strong demand for oil and gas. And VLO is still well below pre-pandemic levels.

That said, it is not a ideal entry point to BUY this stock after a massive move in a short time. There is a high chance that the stock consolidates somewhat from here before moving higher again. I have therefore reduced the rating to “HOLD” for now. HOLD

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.1%) – This short-term bond fund is a safe port. While the market is promising for the rest of the year, there are still a lot of uncertainties out there. It’s nice to have something in the portfolio that you don’t have to worry about. Plus, considering the 10-year treasury still yields at 1.38%, the yield isn’t bad for safe money by today’s standards.BUY

Invesco Preferred ETF (PGX – yield 5.0%) –This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as preferred stock performance is historically not correlated to the stock and bond markets. It’s a great place to generate a solid yield while rounding out your portfolio.HOLD

Rating change “HOLD” to “BUY
NextEra Energy (NEE – yield 2.1%) – This combination regulated and alternative energy utility giant has just had a rare stumble. NEE has fallen 15% from the all-time high in late January to the current 74.71. There is no fundamental reason for the slide. It’s because the market has been bingeing on cyclical stocks in anticipation of a full recovery. But the stock has fallen when the market is frothy and it offers great down-market performance. NEE is also lower ahead of a massive alternative energy push by the new administration. This stock is a longer-term juggernaut and I’ve been waiting for an opportunity like this to get in. BUY

Xcel Energy (XEL – yield 3.0%) – The same thing I said about NEE is true of this smaller alternative energy utility, except the stock has fallen further and longer from the high. It also has more upside potential in a short amount of time when things turn around. The company also just raised the dividend by 6.4%. BUY

CDI Portfolio