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Dividend Investor
Safe Income and Dividend Growth

August 16, 2023

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Great Bargains in a Floundering Market

The rally is floundering in August.

A pullback of sorts isn’t unusual or unexpected, especially in the waning days of summer. Many investors are focused on squeezing in more summer before it slips away and they aren’t paying attention to the market.

Negative headlines tend to have a stronger-than-normal impact amid low volume and a lack of buying enthusiasm. News of a sluggish China economy reeled the markets on Tuesday. Usually, markets tend to do what they were doing before investors stopped paying attention at the tail end of the summer. In the absence of important news, the sideways-to-down-slightly action is likely to persist until Labor Day.

The rubber usually hits the road once sobered-up investors refocus after Labor Day. Historically, cranky post-summer investors have made September the worst performing month in the market. It’s not that there is negative news visible on the horizon, it’s that the news may not be good enough to prompt the market to add to the already 30% rally from the low.

Stocks have already priced in a soft landing, falling inflation, and an end to Fed rate hikes. It’s very possible that the resilient economy will not slow significantly in the quarters ahead. But there still isn’t much economic news to get excited about.

Anything is possible, but there may be little market upside over the rest of the year. It could be more of a stock picker’s markets where only well selected stocks deliver impressive returns.

There are certain portfolio stocks that look like bargains now, despite the high market. The utility stocks including Brookfield Infrastructure Partners (BIP), NextEra Energy (NEE), and Xcel Energy (XEL) have had a rotten year. They are all selling at or near the 52-week lows. Yet, these stocks have historically been very strong performers. And the operational performance of the companies has been fine.

The current high interest rates are playing a big role in the underperformance. The companies have heavy debt loads, and the relative value of the dividends diminishes when fixed rate alternatives pay high rates. But the Fed is about done hiking rates and the economy is likely to slow. Meanwhile, the stocks are dirt cheap in an expensive market.

Sure, these stocks could languish for longer. But it’s a great bet that six months or a year from now the prices will be a lot higher.

The market reinvents itself and changes personality all the time. This year it invented a market that doesn’t like utilities. But these stocks are dirt cheap and among the best stocks to own if the economy does turn south in the quarters ahead. With a longer-term outlook, it’s a great time to buy these stocks if you don’t own them already

Recent Activity

August 9
Purchased Tractor Supply Company (TSCO) - $224.16

Current Allocation

Fixed Income20%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.5%) – The midstream energy partnership has pulled back a little after making a new 52-week high in late July. But it is still in an uptrend that began in May. Energy stocks have made a strong comeback after a dismal first five months of the year as oil prices has have been rising for more than six straight weeks. EPD should continue to have the right stuff going forward as earnings should be resilient in almost any economy. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.8%) – The midstream energy company reported earnings last week that beat on EPS and missed on revenue. ONEOK also raised earnings guidance for the year. The stock had good upside after the report after pulling back for two weeks prior as the overall market weakened. We’ll see if OKE can salvage the upside rally from here. Longer term, the stock looks solid as the company is expected to grow revenue by an average of 10% per year over the next three years. HOLD

Realty Income (O – yield 5.2%) – This legendary monthly income stock reported earnings that slightly beat estimates. It also revealed a stellar 99% occupancy rate for its properties and an additional $3.1 billion invested in the quarter in 710 properties. The REIT has been solid, but this market is not rewarding solid at this point. O currently sells well below the pre-pandemic high, despite having higher earnings. But income and safety will come back into vogue eventually. BUY

The Williams Companies, Inc. (WMB – yield 5.1%) – The midstream energy company reported earnings that surpassed estimates and the stock got a further boost on the news. Volumes of throughput were solidly higher, and earnings grew 8%. That’s a far cry from the 30%-plus earnings growth of last quarter, but this lull in acquisitions coming online was expected. It’s solid growth under the circumstances. In addition, recent expansion and acquisition activity bodes well for growth in 2023 and 2024 beyond what was expected. The stock is now up over 20% since the end of May and is within 2% of the 52-week high. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – ABBV has been in an uptrend for the last month, although it has leveled off more recently. The company reported earnings that beat on both EPS and revenue and raised guidance for the year. Humira sales were down less than expected and AbbVie’s replacement immunology drugs did better than expected. The report emboldens the notion that the revenue drop from the Humira patent expiration will be very temporary and AbbVie will turn the corner sooner than expected. BUY

Broadcom Inc. (AVGO – yield 2.2%) – The AI juggernaut is finally showing a little bit of weakness. After a huge surge in May and June AVGO made a new home at the top of the recent range. As the overall market has weakened it has pulled back slightly, but remains entrenched in the higher range. If there is further weakness in the weeks ahead, I will add back that one half position as the longer-term prognosis remains excellent. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.6%) – The tough times for safe stocks continue. Despite strong operational performance in a period of shrinking earnings for most companies, BIP continues to wallow and even flirt with the 52-week low. But these periods of bizarre underperformance never last. Sure, the stock could languish for a while longer, but it is highly likely to be a lot higher a year from now. Brookfield is targeting 10% average earnings growth and 5% to 9% distribution growth over the next several years. It is a safe and currently undervalued holding. (This security generates a K-1 form at tax time). BUY

Digital Realty Trust, Inc. (DLR – yield 4.1%) Digital also reported better-than-expected earnings because of strong data center demand and solid growth. Even more importantly, the company assuaged fears that had driven the stock price down earlier this year by executing capital recycling plans that raised over $2 billion by selling joint venture assets. The move strengthens the balance sheet and secures the dividend. Now the REIT is poised to benefit from accelerating data center demand growth prompted by the AI craze. BUY

Eli Lilly and Company (LLY – yield 0.9%) – After a strong surge higher this spring, LLY has broken new ground to the upside after the company killed it on earnings. Soaring sales from its diabetes drug Mounjaro helped revenue grow 28% and earnings 85% over last year’s quarter and the company significantly raised future guidance. The stock soared over 14% on the day of the report. Mounjaro is also awaiting approval for use as a weight loss drug. The potential market is massive and good news on similar drugs increased optimism for approval. Lilly is also expecting FDA approval for its other potential mega-blockbuster Alzheimer’s drug by the end of the year. HOLD

Hess Corporation (HES – yield 1.2%) – Oil prices have moved higher for the last six weeks and so has HES. The exploration and production company stock moved to within just a few percent of the 52-week high. It did report earnings that beat expectations as higher production offset lower realized oil and gas prices. But energy stocks have been moving higher as oil prices are on the rise because of strong demand and limited supply. Hess’s wide margins give it strong leverage in a rising energy price environment. We’ll see how much further this uptrend can take the stock. BUY

Intel Corporation (INTC – yield 1.4%) – The chip maker reported earnings that beat estimates and the company returned to profitability. The PC market appears to have bottomed out and is poised for a second half recovery as Intel is also increasing its market share. At the same time, Intel has a promising future as it has invested heavily in chips in high-growth areas as well as a rapidly growing foundry business. The road to recovery appears smoother and insiders have been buying heavily into the stock. BUY

Qualcomm Inc. (QCOM – yield 2.8%) – Qualcomm reported earnings results that the market hated, and the stock has fallen more than 15% since the report. Earnings were mixed with revenues missing forecasts and earnings beating. But earnings were down 37% year over year and revenues fell 23%. It’s because of lower smartphone sales as the 5G upgrade cycle ended and economic conditions tightened. Handset chip sales were down 25%. Sales are expected to remain bleak for the rest of 2023.

However, smartphone sales may be close to bottom as they are expected to increase in 2024 and Qualcomm is expected to resume earnings and revenue growth. This slump was expected and that’s why QCOM has underperformed. But it is cheap now at 18 times earnings and this lull in the cycle will certainly end at some point. BUY

Tractor Supply Company (TSCO – yield 1.9) – The farm and ranch company is a serious retail player. The company has a proven ability to consistently grow earnings and deliver on stock performance. Few retailers have grown earnings every year for 31 straight years. Last quarter, the company delivered 8.5% EPS while average S&P 500 earnings were down over 7%, and down for the third straight quarter. TSCO should be solid in just about any environment with a low beta and many products that are considered staples. BUY

UnitedHealth Group Inc. (UNH – yield 1.4%) – UNH has leveled off after catching a little bit of fire. But it isn’t pulling back. UNH floundered after it reported higher costs from more people getting elective surgeries because of pent-up pandemic demand. But the company since reported higher-than-expected earnings and raised guidance, negating the negative catalyst that had driven the stock price down. It’s still in the lagging defense arena but it could have a much better rest of the year. BUY

Visa Inc. (V – yield 0.8%) – V loves the still strong economy and increasing soft landing. Consumer spending remains strong, and the company reported another impressive quarter. The stock has pulled back after soaring to a 52-week high. But that is typical behavior for this stock. The longer-term situation is great as more people move toward cashless transaction and Visa has an unbelievable market share. The better short term is a surprise. Hopefully, the good times last. HOLD

Safe Income Tier

Invesco Preferred ETF (PGX – yield 6.3%) – Longer-term rates have moved near the recent high again as a recession appears less likely in a still-strong economy. The timing for buying PGX is probably good right now as rates appear likely near the peak. BUY

NextEra Energy (NEE – yield 2.7%) – The weakness continues. This combination regulated and clean energy utility stock just hit a new 52-week low. The utility sector remains under pressure even in the broadening market rally as interest rates have risen and growth plays continue to be favored. But the operational performance is solid. The utility grew earnings 8.6% in the second quarter and 11% in the first half versus the same periods last year. It also has predictably solid earnings going forward because of a considerable project backlog. BUY

USB Depository Shares (USB-PS – yield 5.9%) – This preferred issue has bounced around since being added to the portfolio. It took an unjustifiable hit during the banking issues. But it has mostly moved conversely to interest rates. It’s worth noting that the 10-year Treasury is near the high and USB-PS is still at a higher price since being added. We also may be near peak interest rates in this cycle. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 4.5%) – There could be some near-term turbulence with the price on the way to solid longer-term returns and diversification. The fund is holding up well in the recent rising interest rate environment and should benefit if and when rates come back down. BUY

Xcel Energy (XEL – yield 3.5%) – This clean energy utility reported lower-than-expected earnings. The company attributed unusual weather and maintenance issues to the one-off decline and reaffirmed previous earnings guidance for all of 2023. XEL has been trending lower since the beginning of April in a tough market for the utility sector. But things change and XEL is cheap and one of the best utility stocks to own. These are dark days for utilities. But things always change and XEL and NEE are selling at 52-week lows in an expensive market and ahead of a likely slowing economy. BUY

High Yield Tier

Security (Symbol)Date AddedPrice AddedDiv Freq.Indicated Annual DividendYield On CostPrice on Close 8/15/23Total ReturnCurrent YieldCDI OpinionPos. Size
Enterprise Product Partners (EPD)2/25/1928Qtr.1.98.30%2733%7.50%BUY1
ONEOK Inc. (OKE)5/12/2153Qtr.3.747.20%6543%5.80%HOLD1
Realty Income (O)11/11/2062Monthly2.984.20%576%5.23%BUY1
The Williams Companies, Inc. (WMB)8/10/2233Qtr.1.75.30%3511%5.11%BUY1
Current High Yield Tier Totals:6.30%23.30%5.90%

Dividend Growth Tier

AbbVie (ABBV)1/28/1978Qtr.5.644.80%152143%3.89%BUY1
Broadcom Inc. (AVGO)1/14/21455Qtr.16.42.60%843101%2.20%HOLD1/2
Brookfield Infrastucture Ptrs (BIP)3/26/1924Qtr.1.443.60%3255%4.70%BUY2/3
Digital Realty Trust, Inc. (DLR)7/12/23118Qtr.4.884.10%1223%4.00%BUY1
Eli Lily and Company (LLY)8/12/20152Qtr.3.921.30%547275%0.80%HOLD1/2
Hess Corporation (HES)5/10/23135Qtr.1.751.30%15615%1.10%BUY1
Intel Corporation (INTC)3/9/2248Qtr.1.461.00%35-23%1.40%BUY1
Qualcomm (QCOM)11/26/1985Qtr.31.50%11244%2.80%BUY1/3
Tractor Supply Company (TSCO)8/9/23224Qtr.4.121.80%222-1%1.80%BUY1
UnitedHealth Group Inc. (UNH)4/12/23521Qtr.6.61.30%507-2%1.40%BUY1
Visa Inc. (V)12/8/21209Qtr.1.50.70%24016%0.75%HOLD1
Current Dividend Growth Tier Totals:2.20%64.10%2.30%

Safe Income Tier

Invesco Preferred ETF (PGX)11/9/2211Monthly0.736.50%115%6.40%BUY1
NextEra Energy (NEE)11/29/1844Qtr.1.661.70%6769%2.70%BUY1
U.S. Bancorp Depository Shares (USB-PS)10/12/2219Qtr.1.136.10%197%5.90%BUY1
Vanguard LT Corp. Bd. Fd. (VCLT)1/11/2380Monthly3.64.50%74-5%4.60%BUY1
Xcel Energy (XEL)10/1/1431Qtr.1.952.80%58149%3.50%BUY1
Current Safe Income Tier Totals:4.30%45.00%4.60%
Tom Hutchinson is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran with extensive experience in multiple areas of investing and finance.