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.
This Month’s Featured Stock
Two Great Opportunities in the Inflation/Fed Conundrum
Inflation is everything now. Sure, there’s the Russia/Ukraine war. Covid is still floating around too. But inflation is the main event and will be for a while.
Inflation just came in for March. It’s bad. The Consumer Price Index (CPI) soared a staggering 8.5% from last year. That’s the largest increase since 1981. Even when energy and food prices are stripped out, core CPI is still 6.5%, the highest since 1982.
It’s not a flash in the pan either. Inflation has been over 5% every month for about a year now. Higher prices are hanging around and getting baked in with higher wages and price hikes. Inflation can be a huge drag on profit margins as costs soar and interest rates rise. And that’s the other part of the problem - the Fed.
The Fed is a million miles behind the curve. The Central Bank should have started raising rates a year ago and will have to make up for lost time. The Fed Funds rate is at between 0.25% and 0.50% and the 10-year Treasury is at 2.7% while inflation is percolating over 8%.
The market is already adjusting to the fact that the Fed will have to raise rates much more aggressively than in past cycles. Concerns are growing that economic growth will have to slow measurably amidst skyrocketing interest rates. It is likely that we will face near-recessionary growth, or persistent inflation if the Fed can’t muster the will to do what is necessary. Neither scenario is good for stocks.
Investors are making adjustments for inflation and slower growth. Only three of the 11 S&P 500 sectors is in positive territory YTD. Energy is up nearly 40% this year as those stocks actually benefit from inflation. The other sectors in the black are Utilities and Consumer Staples as investors seek value, defense, and income amidst economic and market uncertainty.
Fortunately, this portfolio focuses on stocks with such qualities. That’s why, in a rough year so far, 10 of the 18 stock positions in the portfolio are near or have recently made new 52-week highs. Income and defense are back in vogue and will likely stay that way while the inflation/Fed conundrum persists.
Many positions have done so well that they no longer sell at attractive buy prices. But there are two portfolio stocks in particular that are not only perfectly suited for the new market paradigm, but still sell at reasonable valuations. These stocks also pay enormous yields that are very safe.
The market situation is changing for the worse overall. But there are still great opportunities if you know where to look.
What to Do Now
The market situation is changing. That’s why several portfolio positions have been sold or partially sold over the past couple of months. Most of the remaining positions benefit from this changing market situation. But many have soared so high that they are no longer at attractive buy prices. That’s why so few positions are currently BUY rated.
There are some struggling stocks in the portfolio, namely U.S. Bancorp (USB) and Qualcomm (QCOM), and recently Global Ship Lease (GSL). Economic growth fears are hurting USB. And half of that position was sold last week. The tech sector has been getting hit hard and QCOM has also fallen. But that stock remains a HOLD as two-thirds of the position has already been sold and there is some technical support at this level.
The stocks that have performed well are likely to continue doing so. But because of the high prices they are rated a HOLD. There are two standout positions that should continue to thrive but still sell at reasonable valuations. Those are highlighted below.
SOLD ½ Chevron Corp (CVX) - $158.28 (Total Return 82%)
SOLD ½ Blackrock Enhanced Capital and Income Fund (CII) - $20.61 (Total Return 2.21%)
SOLD ½ U.S. Bancorp (USB) - $52.97 (Total Return 21.2%)
The energy sector is on fire. Oil and gas prices have soared recently and remain at very high levels, with the perceived risk to the upside going forward. These higher prices increase profitability for most energy companies. But this month’s recommended stocks are slightly off target.
Both EPD and OKE are midstream energy companies. They are not highly levered to commodity prices but make money on fees charged for the piping, transport and storage of oil and gas. They don’t benefit directly from higher prices. But they do benefit indirectly.
These stocks tend to move with the overall energy sector, which should continue to move higher as prices are likely to climb. Oil and gas production is also increasing amidst the higher prices as well as a friendlier regulatory stance from the government. And EPD and OKE benefit from increased throughput. Both companies also mostly operate under long-term contracts with inflation adjustments built in.
They should benefit from the current environment while not having historically high valuations and not being as vulnerable to falling prices.
Buy Enterprise Product Partners (EPD)
Enterprise is one of the largest midstream energy companies in the country, with a vast portfolio of service assets connected to the heart of American energy production. It is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities in the Gulf of Mexico as well.
The thing that jumps out about the Master Limited Partnership (MLP) is the distribution. It currently yields 7.2%. And the payout is rock solid. Distributable cash flow covered the distribution by 1.6 and 1.7 times in the two worst quarters of the pandemic. A ratio of 1.2 is considered conservative.
The stock had been a laggard. It did return 23% in 2021 but that underperformed the S&P 500 in a year when energy was the top-performing sector. It tends to take a rally in the energy sector to get it moving higher, which has certainly been the case this year. EPD has returned more than 20% so far this year and is within pennies of the 52-week high.
Despite the very strong recent performance, EPD is still well below the pre-pandemic high and miles below the all-time high, despite having higher earnings. It still sells at just 11 times forward earnings, which is well below the overall market. And things look very promising going forward.
The current energy crisis, with oil prices above $100 per barrel and no relief in sight, should help temper the regulatory environment in favor of drilling more oil and gas. Enterprise should also benefit from being an established player, which makes it easier to get the green light for new projects. In addition, there are inflation adjustments built into its contracts.
In an uncertain market, EPD provides a huge and safe income and sells at a bargain valuation in a hot sector that is likely to continue performing well for the rest of the year at least.
Buy ONEOK, Inc. (OKE)
ONEOK is a large U.S. midstream energy company specializing in natural gas. It owns one of the nation’s premier natural gas liquids (NGLs) systems connecting NGL supply in the Rocky Mountains, mid-continent, and Permian regions in key market centers, and also has an extensive network of natural gas gathering, processing, storage and transportation assets. A whopping 10% of U.S. natural gas production uses ONEOK’s infrastructure.
Here are some things to like about the company and stock:
- Investment-grade rated debt
- 85% of earnings are fee-based
- 26 years of stable and growing dividends
- C corporation structure (generate a 1099 and not a K-1)
Earnings are resilient because ONEOK operates in the best segments and is well-positioned in the high growth shale regions. Natural gas is a rapidly growing fuel source that is much cleaner burning than oil or coal. NGL is by far the fastest growing fossil fuel source. Midstream energy is a solid income-generating industry right now. But ONEOK is solid all the time.
The desirability and resilience of natural gas was beautifully illustrated in the performance of the asset during the pandemic. ONEOK’s natural gas and NGL volumes continued to grow in 2020 despite it being one of the worst years ever for the energy industry. The company posted earnings growth (as reflected in adjusted EBITDA) for 2020 and throughout the lockdowns in 2021.
OKE has returned 21% YTD and 45% over the last year but still sells at about 17 times forward earnings and is still below the pre-pandemic high. Looking ahead, business should continue to grow. ONEOK has guided for 8.6% earnings growth in 2022. Demand for natural gas liquids (which accounts for 60% of earnings) is expected to increase more than 20% per year until 2040.
There are some great things about the dividend. For one, it is a regular dividend and doesn’t generate a K-1 at tax time. It also qualifies for the maximum 15% tax. It may not be yield quite as much as EPD but it’s still one of only 14 S&P 500 companies that currently pays a better than 5% yield. OKE has also grown the dividend payout by an average of 13% per year for the past 21 years.
Portfolio at a Glance, Portfolio Updates and Dividend Calendar
Portfolio at a Glance
|High Yield Tier|
|Security (Symbol)||Date Added||Price Added||Div Freq.||Indicated Annual Dividend||Yield On Cost||Price on|
|Total Return||Current Yield||CDI Opinion||Pos. Size|
Cap & Inc. (CII)
|GSL||Global Ship Lease,|
|OKE||ONEOK Inc. (OKE)||05-12-21||53||Qtr.||3.74||6.00%||70||40%||5.3%||BUY||1|
|O||Realty Income (O)||11-11-20||62||Monthly||2.81||4.2%||72||24%||4.1%||HOLD||1|
|Current High Yield|
|Dividend Growth Tier|
|AVGO||Broadcom Inc. (AVGO)||01-14-21||455||Qtr.||14.40||2.6%||581||33%||2.8%||HOLD||1|
|LLY||Eli Lily and Company|
|INTC||Intel Corporation (INTC)||03-09-22||48||Qtr.||1.46||3.1%||47||-2%||3.1%||BUY||1|
|USB||U.S. Bancorp (USB)||12-09-20||45||Qtr.||1.68||3.2%||52||18%||3.6%||SELL 1/2||1|
|VLO||Valero Energy Corp|
|V||Visa Inc. (V)||12-08-21||209||Qtr.||1.50||0.7%||215||3%||0.70%||HOLD||1|
|Current Dividend Growth|
|Safe Income Tier|
|PGX||Invesco Preferred (PGX)||04-01-14||14||Monthly||0.74||4.9%||13||38%||4.9%||HOLD||1/2|
|NEE||NextEra Energy (NEE)||11-29-18||44||Qtr.||1.54||1.7%||85||106%||1.9%||HOLD||1/2|
|XEL||Xcel Energy (XEL)||10-01-14||31||Qtr.||1.83||2.8%||74||207%||2.6%||HOLD||2/3|
|Current Safe Income|
High Yield Tier
The investments in our High Yield Tier have been chosen for their high current payouts. These investments will often be riskier or have less capital appreciation potential than those in our other two tiers, but they’re appropriate for investors who want to generate maximum income from their portfolios right now.
Blackrock Enhanced Capital and Income Fund (CII – yield 5.9%) – On the one hand, this covered call fund tends to move along with the overall market in the near term, and the market looks dicey here. That’s why half of the position was sold last week. On the other hand, CII is a great income generator at a time of still-low interest rates and uncertain markets. Investors need income and will likely gravitate toward investments like this in the months ahead as they give up on the prospects of lasting upside traction for the overall market. HOLD
Blackrock Enhanced Capital Income Fund (CII)
Next ex-div date: June 14, 2022, est.
Enterprise Product Partners (EPD – yield 7.1%) – This midstream energy partnership has been a slow mover relative to its peers but has achieved high returns for the last year and so far this year. It is currently making new 52-week highs and things look very good going forward. That massive yield is safe. The stock is still cheaply valued, and still below the pre-pandemic high despite higher earnings. Energy production is increasing and will likely continue to do so. And Enterprise has inflation adjustments build into the contracts. (This security generates a K-1 form at tax time.) BUY
Enterprise Product Partners (EPD)
Next ex-div date: April 28, 2022
Global Ship Lease, Inc. (GSL – yield 6.5%) – The container ship company had been a stellar performer, returning 88% over the past year and 374% over the last three years. Container shipping rates remain very high and are likely to stay that way for a while as demand exceeds supply. In fact, the company once again upgraded earnings guidance for the year and the upcoming quarter. But GSL has been crushed lately, down over 20% from the high achieved in March.
There is no company-specific news. The likely reason for the plunge is a new wave of growth fears amidst the inflation and Fed tightening. This recent shift in perception is hurting stocks levered to global trade. GSL had also taken a hit when the war began but recovered strongly after the initial panic waned. I believe the recent selling is an overreaction as the fundamentals for container shipping should remain very strong for some time. BUY
Global Ship Lease, Inc. (GSL)
Next ex-div date: May 19, 2022, est.
ONEOK Inc. (OKE – yield 5.3%) – The good times have been rolling for this midstream energy corporation as well. It has returned 45% over the past year and more than 20% YTD, yet OKE still sells below the pre-pandemic high. It’s down slightly from the 52-week high made recently, but prospects remain strong. It is one of the few places to get a high and safe yield from a stock selling at a reasonable valuation but with momentum. BUY
ONEOK Inc. (OKE)
Next ex-div date: April 28, 2022, est.
Realty Income (O – yield 4.1%) – Yeah, the return hasn’t been exciting. But it never is with this legendary monthly income stock. It has only returned about 1% YTD. But it does have positive returns in a down year for the market, and the sector and is actually close to the 52-week high. Its retail staple drugstores and supermarkets should be quite safe and resilient. Plus, it will get an earnings boost from a huge acquisition last year. And investors should put a premium on income during the uncertain market going forward. HOLD
Realty Income (O)
Next ex-div date: April 30, 2022, est.
Dividend Growth Tier
To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.
AbbVie (ABBV – yield 3.2%) – Healthcare is in a sweet position these days. It’s a very defensive industry that has little to fear from slowing economic growth and has been a relative underperformer with still reasonable valuations. It’s no wonder the two healthcare positions in the portfolio have been soaring to new highs while the world goes to hell in a hand basket.
ABBV was a turnaround story that was bleeding for over a year when it was added to the portfolio in the early days of 2019. Now, the stock is at an all-time high in a down market and has returned 27% YTD, 63% over the past year, and 157% since being added to the portfolio. The stellar research and drug pipeline is enabling AbbVie to overcome the expected revenue loss from the Humira patent expiration next year. Meanwhile, ABBV is still cheap at less than 12 times forward earnings. HOLD
AbbVie Inc. (ABBV)
Next ex-div date: April 13, 2022
Broadcom Inc. (AVGO – yield 2.8%) – Ew. Isn’t this the company that killed it on earnings and then rallied strongly despite a tough market for the tech sector? Well, the tech troubles are getting to AVGO again. Inflation and slowing growth threaten demand and margins for the industry, and as such talk worsens, so does performance in the sector. But Broadcom is one of the few tech companies that can successfully navigate this environment. Profits are not as levered to consumer product demand and should be much more resilient than the overall industry. HOLD
Broadcom Inc. (AVGO)
Next ex-div date: June 21, 2022, est.
Brookfield Infrastructure Partners (BIP – yield 3.2%) – There has been a shift among investors toward value, safety and income. That shift is quite evident in BIP. Utilities have been the best-performing sector YTD next to energy. BIP has broken out to new highs and has returned double digits YTD. But the price hasn’t gotten too high and there should still be room to run as investors continue to gravitate toward safe income. Brookfield should also get strong earnings growth from the purchase of a large energy pipeline company last year. (This security generates a K-1 form at tax time.) HOLD
Brookfield Infrastructure Partners (BIP)
Next ex-div date: May 30, 2022, est.
Chevron Corp. (CVX – yield 3.3%) – This oil-price-levered global energy giant is still off the recent high but well above the recent lows. Things could have gone either way when half the position was sold last month. Since then, the market has seemed to determine that the likeliest direction of oil prices in the foreseeable future is to the upside. CVX has quickly run back to within bad breath distance of the high and may will continue to fly higher. HOLD
Chevron Corp. (CVX)
Next ex-div date: May 16, 2022, est.
Discover Financial Services (DFS – yield 1.8%) – The timing has been unfortunate with this one. The market has been turning on financial stocks amidst the increased talk of slowing economic growth. But Discover is different. A slower economy means that consumers start charging more. And that’s good for Discover and their exorbitant interest rates. The rising profits should fix the stock over the course of the year. HOLD
Discover Financial Services (DFS)
Next ex-div date: May 16, 2022, est.
Eli Lilly and Company (LLY – yield 1.3%) – LLY is the most recent portfolio position to cross the 100% return threshold. It was added to the portfolio in August of 2020 and has soared to new highs in a down market. LLY has returned over 12% YTD and 70% over the last year. Sure, defense is more popular in this market. But Lilly is one of the best at making drugs and treatments for ailments while the population ages at warp speed. That’s why LLY has had success that will likely continue. HOLD
Eli Lilly and Company (LLY)
Next ex-div date: May 14, 2022, est.
Intel Corporation (INTC – yield 3.1%) – The chip-making behemoth has things going for it in both the long and short terms. Longer term, it should see a much higher level of profitability than it has in the last five years as it goes all-out to compete in high-growth areas. In the short term, it’s cheap. Technology has been struggling. But INTC has already had the stuffing knocked out of it. It may dip further during particularly ugly spates for the sector. But the downside should be very limited. It pays a solid dividend with little downside ahead of what should be a bright future. That’s not a bad way to go in this market. BUY
Intel Corporation (INTC)
Next ex-div date: May 4, 2022, est.
Qualcomm Inc. (QCOM – yield 2.0%) – The smartphone chip-maker stock has been very weak of late. QCOM has stopped holding up well amidst the tech sector selling. But I’m holding on to the remaining one-third position for now. The fact that two-thirds of the position was already sold does weigh into the decision. The company has guided to 39% earnings growth in 2022 and may have some technical support around this level.
The big cause for concern is slowing smartphone sales in 2023. That will slow the growth rate and the market anticipates. Inflation could also further hurt growth levels next year. But the company still has huge anticipated growth and it still sells at just 12 times earnings. The good should outweigh the bad and we will hold for now. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: June 2, 2022, est.
U.S. Bancorp (USB – yield 3.6%) – Financials have turned ugly and so has USB. Rates are moving higher but there is growing concern for future economic growth amidst inflation and the Fed. The rate story is playing out, but we are losing the assumption of above-par growth for several more quarters. That’s why the portfolio sold half of this position last week and secured those profits. This may be a short-term overreaction. But it could be a new trend that lasts. We will hold the remaining half position for now. HOLD
U.S. Bancorp (USB)
Next ex-div date: June 30, 2022, est.
Valero Energy Corp. (VLO – yield 3.9%) – Gasoline and diesel prices and are widely anticipated to go still higher in the months ahead. Crack spreads continue to move higher with no end in sight. That’s why the stock is making a series of 52-week highs on anticipation of skyrocketing profits. Yet, the stock is still well below the all-time high. It should have further to run. We’ll see how much further it has to go. HOLD
Valero Energy Corp. (VLO)
Next ex-div date: May 2, 2022, est.
Visa Inc. (V – yield 0.7%) – Growth fears have been hurting V over the past couple of weeks. It recovered strongly after the initial panic over the Russia/Ukraine war. But investor worry that slower growth will reduce economic activity both here and overseas. We’ll see if the slowdown woes continue to gain traction or if economies slow sufficiently to impact Visa’s rather resilient payment processing business. The stock remains a HOLD for now. HOLD
Visa Inc. (V)
Next ex-div date: May 10, 2022, est.
Safe Income Tier
The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.
Invesco Preferred ETF (PGX – yield 4.9%) – A combination of growth fears and rising interest rates is hurting PGX. It recently made a new 52-week low. The possibility of stagflation is making preferred stocks less desirable. It’s up today and we will give the fund a chance to continue bouncing off the recent lows. But if it dips again, it will be sold. HOLD
Invesco Preferred ETF (PGX)
Next ex-div date: April 22, 2022, est.
NextEra Energy (NEE – yield 1.9%) – This alternative energy utility has had a sizable bounce since late February. Utility stocks are hot and clean energy is getting hotter as oil prices climb. It has pulled back a bit off the highs of late, but the stock may still continue its uptrend in the weeks ahead. It’s still a great stock longer term. NEE could be poised to make a run at the 52-week high. We’ll see how the next few weeks unfold. HOLD
NextEra Energy (NEE)
Next ex-div date: May 24, 2022, est.
Xcel Energy (XEL – yield 2.6%) – This smaller alternative energy utility stock has already soared to new highs. Again, the recent upside is likely because utility stocks have been popular as investors seek a safe haven in an uncertain market and alternative energy has also been strong as conventional energy prices soar with no end sight. XEL is on a different schedule than NEE because it had already established an uptrend and was technically stronger leading into the recent rally. Let’s see how far it climbs. HOLD
(XEL) Xcel Energy
Next ex-div date: June 14, 2022
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.
The next Cabot Dividend Investor issue will be published on May 11, 2022.