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Dividend Investor
Safe Income and Dividend Growth
Issues
The Fed has raised the Fed Funds rate six times this year to combat inflation and the last four times at a 0.75% clip. The current 4% rate is the highest in well over a decade. But inflation hasn’t budged even after the rate hikes, a shrinking GDP, and a bear market.

At the November meeting, the Fed Chairmen stated that the previous 4.5% to 5.0% Fed Funds goal no longer applies. It will have to go higher. The U.S. economy is resilient, but it will eventually give way to the forces aligned against it. It is almost certain that there will be a recession in 2023.

Meanwhile, for the first time since forever, you can get investment-grade, fixed-rate investments that pay 5% or even 6%, for now. But recessions put downward pressure on longer interest rates as loan demand dries up.

In this issue, I highlight a rare opportunity to lock in a high fixed rate while it lasts and add balance and diversification to the portfolio. Let’s not miss it.
In an otherwise miserable year of nonstop inflation, recession, the Fed, and a bear market, an opportunity is emerging for opportunistic investors. Attractive rates on conservative fixed-rate investments have reemerged. There is a chance to lock in rates not seen since the decade before last.

In this issue, I highlight an investment grade rated fixed income security that currently yields nearly 6%, and the income offers tax advantages to boot.
It’s been a rough year for stocks. And things may get worse before they get better. Meanwhile, money markets pay barely anything, and you never know when the market will turn.
Dividends are a great answer for a market like this.


They provide an income and lower volatility in turbulent markets and make it easier to stay invested ahead of the next bull market. Dividends account for most of the market returns during flat and down markets and excel during times of inflation.


In this issue, I highlight a company in one of the most defensive and recession-resistant industries on the market that currently pays a massive 8% yield. The stock is already cheap and likely near the trough of its own bear market with far more upside than downside over time to complement the high dividend.


We are likely in a recession. Meanwhile, inflation continues to rage on. That means stocks will have to navigate an environment of both recession and inflation, at least for the rest of the year.
That’s tricky because few companies perform well with both. Commodity-based companies thrive in inflation but struggle in recession. Many defensive companies that shine in recession don’t like inflation.


In this month’s issue, I highlight a stock in one of the rare sectors that can successfully navigate both recession and rising prices at the same time – midstream energy. Strong operational performance, a low valuation, and a high and safe yield are perfect for the current situation.


It’s a bear market. And there is a good chance that stocks make new lows in the weeks and months ahead.
Bear markets create fantastic opportunities for longer-term investors. History shows that bear markets create ideal entry points ahead of the next bull market. Let’s not just weather the storm. Let’s take full advantage of the very possible further downside from here in the market.


In this issue, I highlight one of the very best stocks on the market with a targeted low, low price that may be reached in the panic selling of a market bottom. Specifically, we target a highly desirable stock at a dirt-cheap price with a good ‘til cancel (GTC) at the designated price.

It’s a raging bear market in technology.
But technology has been by far the best performing sector for well over a decade for good reasons. We are in fact in a technological revolution. Technological advances are accelerating. It feeds on itself and is transforming the world. Technology is where there is massive growth and excitement for the future.


Sure, the market might get cranky in the near term. Inflation and higher rates might be all the rage right now. But technology isn’t going away. It’s likely to grow even bigger in the future. The time to buy such stocks is when they are cheap and out of favor.


In this issue, I highlight three existing portfolio positions in the technology sector ready for purchase. All of these stocks sell at compelling valuations with strong growth likely ahead. They are victims of indiscriminate selling in the sector. At some point, hopefully sooner, investors will realize the value that has been created by this year’s market turmoil.


It might not be too early to bargain hunt very selectively. Companies that are likely to continue to grow earnings and the dividend are likely to recover. There is one such opportunity in the cannabis sector.


The sector has been decimated in this market. The ETFMG Alternative Harvest ETF (MJ), the largest cannabis ETF, has fallen almost 50%, and 70% from the 2021 high. The selloff has taken the most reliable money maker in the sector down with it, despite continuing success and earnings growth.


In this issue, I highlight this reliable and high-growth stock. It pays a better than 5% yield and the payout is likely to grow, as earnings are expected to grow 37% this year.


The market situation is changing. Amidst persistent high inflation and concerns about future economic and earnings growth, investors are adjusting. Energy is up nearly 40% YTD as that sector benefits from inflation. Utilities and Consumer Staples are also thriving as investors focus on value, defense, and income in the market uncertainty.
Many stocks in the CDI portfolio have performed well and are likely to continue doing so. But because of the high prices they are rated a HOLD. However, there are two standout positions. In this month’s issue, I highlight two stocks that have what it takes in this market. They both benefit in the current environment, sell at reasonable valuations, and pay sky-high yields.


The market situation is changing for the worse overall. But there are still great opportunities if you know where to look.



Value is back.
After nearly a decade of extreme underperformance versus growth stocks, overdue value stocks are flipping the script.


The dominance of growth stocks over the last eight years has been about as lopsided as the relative performance has been over the last 100 years.


But things are changing. Inflation is back. And rising interest rates are sure to follow. This economic recovery is shaping up to a lot different that the last one. This recovery is shaping up to be much better for value stocks. In fact, the role reversal is already underway. Value stocks are already outperforming growth stocks by about 15% so far this year. And it is likely just the beginning.


In this issue, I highlight one of the most dominant technology companies in the world. It is one that has stumbled lately and given way to the competition. But the stock is cheap, wallowing near the four-year low, with limited downside. It is also poised ahead of a likely renewed growth phase. The timing could be just right.


Interest rates are heading higher.

In normal and efficient markets, a strong economy and steeply rising prices would drive interest rates much higher. But rates have been held down and distorted by the Fed’s hyper-aggressive accommodation.



The Fed dismissed inflation in the early stages as “transitory” and now realizes it missed the boat and inflation is getting out of hand. Behind the curve and embarrassed, the Central Bankers will have to make up for lost time by reversing course, ending its bond buying program and raising the Fed Funds rate.



The main force preventing economic growth and rising prices from pushing interest rates higher is about to be removed, and perhaps quickly. Under the circumstances, it is quite reasonable to expect interest rates to move higher.



In this issue, I highlight an investment in the financial sector. Many companies in the sector benefit from higher rates as they earn higher spreads and profits. This company stands to benefit not only from higher interest rates but a change in consumer behavior as well.

The pandemic induced profound changes in the short term and will permanently alter things to at least some degree for a long time. Such change can create great investments.





One industry that is benefitting from the altered world is shipping. Seaborne shipping stocks have had their best year in well over a decade. Shipping rates have soared amidst the rapid recovery and pent-up consumer demand as well as supply chain disruptions that have limited the number of ships available.





These changes should be long lasting for one industry subsector, container shipping. The torrid rise of e-commerce and technological efficiency should permanently increase demand for container shipping at a time when supply is limited and will remain so for a while.





In this issue I highlight a container shipping company that is growing earnings at better than a 100% annual clip, sells at a still cheap valuation, and currently yield 6.7% with a dividend that should continue to rise in the years ahead. The stock could have a lot further to rise in the year ahead.

Good news was able to outrun the problems in 2021. But the problems are catching up. The economy ran so hot because if was picking up the slack from the pandemic and making up for lost time. But that slack will soon run out.

We are likely heading towards a more normal environment on the other side of the pandemic recovery. It is highly unlikely that market returns going forward are as high as they have been. That pace can’t be sustained. We are likely headed for choppier waters and a more sideways market where stock picking should be more crucial.



Inflation and rising interest rates may not be great for the overall market, but certain sectors can thrive in such an environment. In this issue, I highlight one such stock. The stock should shine on the other side of the pandemic recovery that lies ahead in the new year.

Updates
The recent market rally has leveled off and is wavering. The next few days may determine whether the market rally continues, or the indexes retreat once again.

The latest upturn has been stoked by optimism over retreating inflation and a softer, gentler Fed. The Central Bank is widely expected to raise the Fed Funds rate at a slower 0.50% pace, versus the last four hikes of 0.75%, at the December meeting in two weeks. But Chairman Powell is giving a speech today. Any indication of a higher-than-expected hike will undo the major reason for the recent rally.
I’m an optimist. That quality has served investors well for decades. There are many stocks at cheap prices that will likely be a lot higher in a year or two as a new bull market will emerge. But I don’t believe that the market is on its way to the Promise Land just yet.
What a difference a few weeks can make. The S&P 500 has moved up 15% from the low of October. Have we turned the corner on this bear market?

The main catalyst is a slower-than-expected inflation report. While still unacceptably high, inflation showed real signs of slowing in October. That means the Fed could be done hiking rates sooner. The chief cause of this bear market, rising inflation and a hawkish Fed, show signs of abatement.
It’s all about the Fed right now. The recent rally in stocks may continue or abruptly end based on what the Central Bankers say today.

Today is the Fed’s November meeting where the way-late-to-the-party inflation tamers are widely expected to raise the Fed Funds rate another 0.75% for the fourth time this year. That’s baked into the cake. The main event today will be what the Chairman says about the future course of rate hikes.
The market has been a lot better over the past week. The reason is earnings.


So far, earnings have been better than expected this quarter, although it’s still early. The hope is that a soft landing is still possible, at least as far as corporate profits are concerned. The early better-than-feared results are prompting hope that corporate profits can weather this recession with less damage than has already been priced into stocks.
The brief earnings rally is already petering as positive surprises from some high-profile companies are being offset by others. The hope of a corporate earnings soft landing is getting some cold water thrown on it.

Better-than-expected big bank earnings along with other earnings beats from notable companies like Netflix (NFLX), United Airlines Holdings (UAL) and Johnson & Johnson (JNJ) are being smothered by overall results. So far, overall results are below average for the quarter.
After an awful September and third quarter, the market roared back earlier this week on bad economic news.

A bad manufacturing and employment report indicative of a declining economy sent Treasury yields lower and stocks higher. The reason is that the sooner the economy rolls over the sooner the Fed will be done hiking and the sooner the market will recover. If we can just get on with a recession, this high inflation and aggressive Fed misery will end, and a new bull market can begin.
The market hit a new bear market low. That means that the summer rally was indeed just a bear market rally. And stocks may go lower.

Two things spooked investors, persistent inflation and a consequentially persistent Fed. After four Fed rate hikes, a bear market, and two straight quarters of negative GDP growth, inflation remains sky high and barely budging. The Fed will have to remain hawkish for longer.

The Fed insinuated that it is willing to drive the economy into recession, or deeper recession, to tame inflation. That makes it increasingly likely that only a hard landing can bring prices down. The economy is likely to weaken in the months ahead, dragging corporate earnings down with it.
It’s all about the Fed today. The woefully behind-the-curve Central Bank will announce another Fed Funds rate hike today. The increase is widely expected to be another 0.75%. But some worry it could be 1.00%.

The market’s hopes were dashed when August inflation was worse than expected. That means the Fed will have to continue to be hawkish and for a while longer. Plus, after four rate hikes so far, two straight quarters of GDP contraction, and a bear market; inflation isn’t budging yet.
The market has closed lower for three straight weeks and declined about 9% from the August high as we head into September. Where do we go from here?

The market is having trouble deciding. It’s still unclear what the primary threat or driver will be. Is the main problem inflation or recession? It remains to be seen if inflation has indeed peaked and if it’s headed lower. The state of the economy is also unclear. Is this a recession after two consecutive quarters of GDP contraction? It is also an open question if the economy remains buoyant or is declining from here.
The strong 17% market rally is over. The S&P 500 is down 7.4% in the second half of August. And here comes Labor Day.

Sobered-up investors start paying attention again after Labor Day. And they can be cranky. That’s why September is historically the worst-performing month. Refocused investors probably won’t like what they see this year.

The optimism of the two months after the June low has faded.
The torrid 17% rally from the June low is sputtering. That makes this market dangerous.
After bleeding all year because of persistent high inflation and a hawkish Fed, the market rallied on newfound optimism. The market anticipates six to nine months down the road and investors envisioned a Fed that is all done hiking rates by then amid falling inflation. But that’s optimistic. And the optimism has been waning.

Alerts
Special Bulletin - Audio
Early Tuesday morning Biopharmaceutical giant AbbVie (ABBV) announced plans to acquire Ireland-based Allergan plc (AGN) for $63 billion. The market hates the deal and AbbVie stock plummeted over 16% on the day. Let’s take a look at the deal and see what’s going on.
As you noticed, yesterday’s issue of Cabot Dividend Investor was jointly edited by Chloe Lutts Jensen, for whom it was the final issue, and Tom Hutchinson, for whom it was the first.
One of our positions reported middling third-quarter results this morning, and the stock opened 6% lower, although it’s already making up some of those losses. As a result, we’re moving it to Hold.
Yesterday brought widespread carnage to the markets, which has carried on to today, but some tech stocks have found support. For now we are going to be watching and waiting, but I want to comment on three current holdings.
One of our positions fell nearly 7% after reporting earnings Friday, and the stock started today with further losses. With the lack of support, it means more downside is the most likely near-term scenario here and it’s time to sell.
Markets pulled back yesterday and the Dow, S&P 500 and Nasdaq all closed lower. A couple of our holdings were hit particularly hard, so I wanted to send a quick update on two of our positions even though I’m not recommending any action.
One of our stocks reported EPS that missed estimates and lowered its guidance range this morning, and the stock opened 4% lower. We’ll look for an opportunity to unload the rest of our shares over the coming few days.
Given the shakiness of the broad market, we want to be reducing our exposure to weak stocks today. As noted in yesterday’s update, we’re going to reduce risk today by taking partial profits in one of our positions.
Markets ended last week on a sour note as the U.S. and China imposed tit-for-tat tariffs and Facebook continued to drag tech stocks lower. The major indexes all declined more than 5% for the week, their worst weekly performance in over two years. I’m moving two of our most affected stocks to Hold today.
After a half-hearted mid-week bounce, the stock market had another rough day yesterday. The S&P 500 fell almost 4%, and is now 10% off its all-time high. That means we’re now officially in a correction, although we didn’t really need yesterday to tell us that.
Our latest recommendation, pulled back sharply after reporting earnings Friday morning.