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Dividend Investor
Safe Income and Dividend Growth

February 15, 2023

Inflation Hangs Tough

January inflation came out. It wasn’t good. Is this rally doomed?

It has been a good year so far in the market. The S&P 500 is up about 8% and the Nasdaq has rallied more than 13% in just the first six weeks of this year. Stocks have been lifted by optimism of a soft landing.

A soft landing involves inflation coming down and the Fed finishing rate hikes while we move past this tightening cycle without much economic pain. That scenario gained credence from several factors. Inflation had fallen every month since June. The Fed, which is seen as unlikely to raise the Fed Funds rate much past 5%, already hiked the rate to 4.75%. And the economy is still solid.

But today’s inflation numbers may spoil the party. January CPI was 6.4% versus an expected 6.2%. The headline number is still down from December’s 6.5%, but things are uglier under the hood. The Fed cares about core inflation, which strips out volatile food and energy prices. The core reading came in higher than last month’s number and was the highest monthly increase since October.

In other words, inflation did not fall in the first month of the year. It rose again. After the steepest Fed rate hiking cycle in three decades, this inflation is still running hot. That means the Fed will likely have to be more aggressive than the market has been anticipating in order to get it under control. But the recent rally is counting on the Fed wrapping up this cycle sooner rather than later.

The market seems to be taking the news very well so far. The major indexes are flirting with even for the day as of 1 p.m. ET. Perhaps one stray month doesn’t change the story. We might know more later in the week when the more forward-looking Producer Price Index (PPI) for January comes out. We’ll see.

Anything is possible. But I think there is still considerable risk to the market as this inflation won’t go as gently into the night as the market thinks. The inflation battle may be a be a long fight that is far from over.

We’ll see what happens in the weeks ahead. But under the circumstances, this portfolio remains conservatively postured with mostly defensive stocks, a high cash balance, and a strong fixed income position.

Recent Activity

January 25
Medical Properties Trust (MPW) – Rating change “HOLD” to “BUY”
Xcel Energy (XEL) – Rating change “BUY” to “HOLD”

Current Allocation
Stocks 32.5%
Fixed Income 20%
Cash 47.5%

High Yield Tier

Enterprise Product Partners (EPD – yield 7.4%) – The midstream energy partnership is quietly having a good year. EPD is returning a market-beating YTD 11.4% return after delivering a stellar 18.4% return in the 2022 bear market. The stock has also broken out of the recent range and is trading at the highest price since late summer. EPD is also well positioned for a faltering economy this year as it can continue to generate solid profits in recession and/or inflation. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.5%) – This midstream energy company has trended sharply higher from the October low and is not far from the 52-week high, achieved almost a year ago in March of 2022. OKE has returned about 8% YTD. That’s not exciting but the company is also very well positioned for the potential peril awaiting the rest of this year. Earnings should be solid in recession and/or with more inflation. Natural gas demand should remain steady as supply constraints continue to cause problems in Europe and Asia. BUY

Realty Income (O – yield 4.4%) – The legendary income REIT has been trending slowly higher since the middle of October. Interest rates appear to have peaked and the REIT sector is having a much better year so far. O has delivered a positive return over the last year while the overall market is down. O also finally eclipsed the elusive 65 per share level. Realty also reports earnings next week. Hopefully, the report will give the stock a boost and continue the break out. BUY

The Williams Companies, Inc. (WMB – yield 5.4%) – After outperforming the market and its peers in the selloff this fall, WMB has been lagging both in recent months. It has the same things going for it as the other midstream companies in the portfolio. The problem is that it is more leveraged to natural gas prices, which have crashed of late. However, those prices are likely to spring back in the months ahead as the selling has been overdone amidst solid demand. It may outperform the market and its peers in the months ahead. BUY

Medical Properties Trust, Inc. (MPW – yield 9.6%) – This high paying and recession-resistant hospital REIT has pulled back a little over the past couple of weeks after rallying strongly in January. But the stock still remains in a technical uptrend that began in October. The dividend is safe, and the operational performance of the company is solid. The company reports earnings next week that can hopefully give the stock a boost, as earnings grew by better than 30% last quarter and should be good again this quarter. With a defensive business, this should be a good year. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.9%) – ABBV has been moving higher of late after falling in the earlier part of this young year. The choppier market has caused somewhat of a rotation back into defensive plays like healthcare. The near-term fortunes of ABBV will largely depend on how the market reacts to this week’s economic news. Longer term, this stock is a winner. AbbVie has a phenomenal pipeline that can replace the lost Humira revenues is a relatively short time. HOLD

Broadcom Inc. (AVGO – yield 3.2%) – Sure, the technology stocks have performed much better lately. But this software and chip company goliath has been trending sharply higher since October. It’s made a very big move and is up over 40% from the low. Its fortunes are tied to the technology sector, but it has done a lot better than its peers in the tough market. That could be because Broadcom’s business is more resilient than most as it reported a 34% earnings increase in the last quarter. It’s held tough in dark days for technology and should take off when the sector recovers. HOLD

Brookfield Infrastructure Partners (BIP – yield 4.5%) – The infrastructure juggernaut reported 12% funds from operations (FFOs) per share growth in 2022 and 10.9% in the fourth quarter versus last year’s comparable periods. The company is benefiting as recent acquisitions come online, particularly a big acquisition of North American midstream energy company Inter Pipeline. The stock has been weak lately because of rising interest rates as Brookfield has a relatively high level of debt. But those rates should come down in a recession, and earnings will remain resilient. (This security generates a K-1 form at tax time). BUY

Eli Lilly and Company (LLY – yield 1.3%) – – LLY is down over 4% YTD after a stellar 2022 in which it returned 34% in a bear market. Healthcare stocks have lagged. Earnings disappointed. And Lilly failed to get fast-track approval for its Alzheimer’s drug. But those are a lot of negatives for the stock only being down 4%, especially after such a strong year. That’s because beyond the near-term smoke this company is expected to grow earnings by 19% on average over the next five years and it has two potential mega-blockbuster drugs that could be approved in the next year. HOLD

Intel Corporation (INTC – yield 5.2%) – The recent bad news suggests that the stock has already bottomed out. Earnings were terrible and will be again next quarter as PC demand continues to plunge in the slowing global economy. But the stock didn’t really falter after the news. That suggests that the market already priced in a rotten first half. The company is employing a massive cost-cutting program and new products should also help the bottom line in the second half of this year. HOLD

Qualcomm Inc. (QCOM – yield 2.3%) – It’s been a rough market for QCOM. The stock is down over 18% for the last one-year period. But the longer-term prognosis remains bright and the stock is showing signs of having perhaps bottomed out. Qualcomm reported lousy earnings for the last quarter, and it appears that next quarter won’t be much better. Yet the stock remained quite resilient after the report. That suggests that the bad news was already factored into the stock price, and the market is looking towards improvement in the second half of the year. As a result, QCOM is up over 19% YTD and has cracked the 130 per share level for the first time since September. HOLD

Visa Inc. (V – yield 0.8%) – The payments processing company stock has been thriving. After an impressive -3.4% return in last year’s bear market, V is up over 10% YTD. Even if the recent cyclical rally ends, V should continue to hold up relatively well and it is giving a preview of how well it will react when the market finally turns for good. It’s well worth holding through the uncertainty into the next recovery. HOLD

Safe Income Tier

NextEra Energy (NEE – yield 2.3%) – This combination regulated and clean energy utility had been hanging tough in the January rally as other defensive stocks lagged. But the resilient behavior ended suddenly and NEE fell 10% in the last three weeks. Earnings were stellar and there doesn’t appear to be a company-specific reason for the recent selling. It appears that the market just made up for lost time quickly. Now, the stock has stabilized at the lower level. This stock is a great longer-term hold and the recent selloff should be a good opportunity to buy it if you don’t own it already. BUY

Xcel Energy (XEL – yield 2.8%) – This clean energy utility stock fell in the earlier part of the year but has held steady since. XEL is still very well positioned ahead of a slower economy and it appears to be forming a base at the current level. I don’t believe defensive stocks are through yet and stocks like XEL are now cheaper. It’s also true that this clean energy utility is capable of performing very well in a market recovery. HOLD

USB Depository Shares (USB-PS – yield 5.4%) – So far, it has been a great move to lock in this high fixed rate yield when rates were near the high. The price has appreciated, and the position has returned 12% between dividends and appreciation in the past few months. Locking in the high rates may turn out to be a good longer-term move as well. BUY

Invesco Preferred ETF (PGX – yield 5.6%) – Ditto what I said about USB-PS. Longer-term rates are coming down as the economy slows. And most economists are predicting at least a slower economy this year and investors have been flocking toward fixed income. This provides diversification from stocks with a high income ahead of a period when interest rates could fall back. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT – yield 4.1%) – The same interest rate story for the last two positions above applies here. The timing is probably good to lock in higher rates on investment grade bonds ahead of a possible recession later this year. BUY

High Yield Tier

Security (Symbol)Date AddedPrice AddedDiv Freq.Indicated Annual DividendYield On CostPrice on
close 2/13/23
Total ReturnCurrent YieldCDI OpinionPos. Size
Enterprise Product Partners (EPD)2/25/1928Qtr.1.98.30%2627%7.40%BUY1
Medical Properties Trust, Inc. (MPW)9/14/2214Qtr.1.168.40%12-7%9.60%BUY1
ONEOK Inc. (OKE)5/12/2153Qtr.3.746.00%7048%5.50%BUY1
Realty Income (O)11/11/2062Monthly2.984.20%6721%4.40%BUY1
The Williams Companies, Inc. (WMB)8/10/2233Qtr.1.75.30%32-1%5.60%BUY1
Current High Yield Tier Totals:6.40%17.60%6.50%

Dividend Growth Tier

AbbVie (ABBV)1/28/1978Qtr.5.644.80%154141%3.90%HOLD3-Feb
Broadcom Inc. (AVGO)1/14/21455Qtr.16.42.60%60141%3.10%HOLD1
Brookfield Infrastucture Ptrs (BIP)3/26/1924Qtr.1.443.60%3462%4.40%BUY3-Feb
Eli Lily and Company (LLY)8/12/20152Qtr.3.921.30%350139%1.30%HOLD3-Feb
Intel Corporation (INTC)3/9/2248Qtr.1.463.10%2937%5.20%HOLD1
Qualcomm (QCOM)11/26/1985Qtr.31.50%13166%2.30%HOLD3-Jan
Visa Inc. (V)12/8/21209Qtr.1.50.70%22911%0.80%HOLD1
Current Dividend Growth Tier Totals:2.50%40.30%3.00%

Safe Income Tier

NextEra Energy (NEE)11/29/1844Qtr.1.661.70%7687%2.30%BUY2-Jan
U.S. Bancorp Depository Shares (USB-PS)10/12/2219Qtr.1.136.10%2112%5.40%BUY1
Xcel Energy (XEL)10/1/1431Qtr.1.952.80%69190%2.80%HOLD3-Feb
Invesco Preferred ETF (PGX)11/9/2211Monthly0.736.50%1213%5.60%BUY1
Vanguard LT Corp. Bd. Fd. (VCLT)1/11/2380Monthly3.64.50%79-2%4.10%BUY1
Current Safe Income Tier Totals:4.30%60.00%4.00%
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.