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.
Cabot Dividend Investor Issue: May 11, 2022
A Bargain Ripe for Plucking
The market has been ugly for sure. The S&P 500 is near the cusp of bear market territory, down 20% from the high. But the selling may be overdone. Many good stocks are down as much as 50% and could move a lot higher later this year.
It could still be early to bargain hunt. But it might not be too early to do it very selectively. Companies that are likely to continue to grow earnings and their dividend are likely to recover. There is one such opportunity in the cannabis sector.
Look, we already have inflation. Let’s get some weed too and make this a more complete 1970s experience.
That famous illegal substance from your youth is making a big splash in the present day. Marijuana is becoming legal across much of the country and is now one of the fastest-growing industries in the United States. That may sound silly. But make no mistake about it, it is big business, and it presents an incredible investment opportunity.
The growth of marijuana is undeniable.
It is already the most used recreational drug in the world. And usage is growing like crazy. Global marijuana use has grown by 60% over the last decade and more than tenfold in the U.S. in the last 25 years. In fact, the U.S. is the marijuana capital of the world and currently accounts for anywhere from one third to one half of global consumption, depending on estimates.
But the industry has been born from a new trend toward legalization. It became legal throughout Canada in 2018. And the drug is now legal for medical use in 37 U.S. states and recreational use in 18 states. Demand is expected to grow more than 24% every year between now and 2025. At that level of growth, the market for the product doubles every 3.2 years. And the market is growing just as fast globally.
The sector can be volatile though. And it has been decimated in this market. The ETFMG Alternative Harvest ETF (MJ), the largest cannabis ETF, has fallen 70% from the 2021 high. The sell-off 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.
As I mentioned, we could be early. But it’s worth noting that this same stock was purchased in this portfolio years ago. It had just taken a beating in the market and we scooped it up cheap. The position returned over 150% in a little more than a year.
What to Do Now
It has been a rotten market so far this year. But the last couple of weeks have been a new level of bad.
Many stocks are in a bear market. The technology-heavy Nasdaq index has been in bear market territory for much of the year. The broader S&P 500 index closed on Monday down over 16% YTD and more than 17% from the high. One more bad day could officially put us into a bear market and end the bull market that began in early 2020.
It’s not hard to figure out why: inflation and the Fed. Of course, there is still uncertainty surrounding the war and Covid is bad in China. But inflation is the main event. It has been increasingly perceived as unlikely the Fed will be able to tame inflation without dragging the economy into a recession or close to it.
Instead of looking ahead to above-par economic growth and record earnings, as investors did during the bull run, investors are facing a slowing economy, high inflation, and rising interest rates. Stocks are pricing in that new unfortunate reality.
Of course, things could turn out better than recent gloomy projections indicate. Inflation may have peaked and start to abate. If inflation starts coming down, the Fed may not have to be as aggressive as some currently fear. The market will react very favorably if it starts to look like we can escape high inflation without a recession. But that certainly hasn’t happened yet.
Right now, it might be a 50/50 proposition whether the market falls into bear territory and beyond or if it stays above that level and recovers. If the S&P closes below that crucial 20% barrier, it will end the bull market that began in early 2020. It’s a huge phycological level and its crossing will likely prompt more selling. We are near the cusp.
It’s also worth noting that there were two times during the last bull market that the S&P came within a whisker of being down 20% but stayed above and recovered. We could be very near the low point for the year. And there are several stocks that are screaming buys right now. But I’m holding off for the most part because there is still too great a risk that stocks will fall further in the days and weeks ahead.
If and when there is evidence that the short-term danger has passed, several of the portfolio positions will be upgraded from “HOLD” to “BUY” ratings. But the coast isn’t clear yet. I will err on the side of caution at this crucial juncture.
Of course, we don’t want to completely miss the possible opportunity. In this month’s issue, I highlight a stock for purchase that is already down 52% YTD and more than 55% from the 52-week high. The company is expected to grow earnings 37% this year and pays a rapidly growing dividend with a current 5.2% yield.
Earnings almost always win in the end. Of course, the stock could fall further in the days and weeks ahead if the market stays ugly. The purchase may require a strong constitution in the near term. But I strongly believe the price will be a lot higher later in the year than it is now.
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%)
SOLD Invesco Preferred ETF (PGX) - $12.87 (Total Return 38.13%)
SOLD ½ U.S. Bancorp (USB) - $49.64 (Total Return 13.59%)
SOLD ½ Blackrock Enhanced Capital and Income Fund (CII) - $20.00 (Total Return -0.33%)
Buy Innovative Industrial Properties (IIPR)
Buy Innovative Industrial Properties (IIPR)
Innovative Industrial Properties is a Real Estate Investment Trust (REIT) specializing in the acquisition and ownership of properties that grow legal marijuana for medical use in the United States. The company currently operates 105 properties in 19 states under long-term leases.
Innovative has a great business model. While the cannabis sector has been struggling, IIPR has been a superstar. There’s a good reason for the outperformance. Innovative is making money, and a lot of it, right now. Most marijuana companies in the early stages of the industry are struggling to show a profit. And the stocks have been wildly volatile. But IIPR has been ringing the register for years.
Innovative purchases existing green houses and farms from marijuana growers and then leases the properties back to them. These companies often have trouble getting loans from banks and other conventional sources because marijuana is still not legal in the Federal level. Innovative, by buying the properties, gives them a much-needed cash injection.
The properties are leased back under long-term contracts, currently with an average contract length of over 16 years, with triple net leases, where the operator pays for maintenance, taxes and insurance.
How has the formula worked? The company has grown adjusted funds from operation by more than 1,500% since 2018. The quarterly dividend payout (currently yielding 5.2%) grew 600% over the same period, from $0.25 per share to the current $1.75. The stock returned 539% in the three years from the end of 2018 to the end of 2021, compared to a market return of 100% over the same period.
But now the stock is cheap.
IIPR has crashed this year. It’s down over 50% YTD and 55% from the 52-week high. The reason is mostly external market conditions. As the Fed is raising interest rates, investors have been rotating out of growth stocks. It’s also true that the company is facing increasing competition. And there is an outside risk that marijuana will be legalized at the Federal level, which would enable bank lending and diminish the REIT’s value as one of the few sources of funding.
Federal legalization is unlikely anytime soon. The political parties are at war and such a law will require bipartisan cooperation and consensus. … Like I said – I wouldn’t expect that anytime soon. There is also more than enough business to go around for a long time despite increasing competition.
This has been a brutal market for some of the superstars of last year. It’s a bear market in many previously high-performing sectors. Sure, there are some stocks that did get overpriced in the euphoria of the pandemic recovery. But the market tends to be indiscriminate in the short term and it taints some stocks unfairly. It is those stocks that become values and well worth scooping up in markets like this.
Innovative is still doing great business despite recent short-term market gyrations.
Earnings grew 75% in 2021. That growth rate will slow somewhat. Analysts are forecasting 37% revenue growth for 2022. Earnings grew 39% in the first quarter. But the stock trades at a price/earnings ratio lower than that of the overall market with much higher growth and a high dividend. Sure, stocks and sectors go in and out of favor in the near term. This one should come back into favor. And patience should be rewarded.
REITs are tax advantaged securities that tend to pay higher dividends than ordinary stock because they pay out money normally lost to taxes.
Sure, IIPR has been a great performer. And it will continue to grow earnings at a fast clip. But don’t forget the fact that this REIT is a phenomenal dividend payer and grower. IIPR yields 5.2% at the current price. That’s a huge payout these days. By last count, there were only about 20 stocks on the S&P 500 with yields of 5% or higher. But it’s the growth that is most remarkable.
The last quarterly dividend was $1.75 per share. That’s a 17% increase from the previous quarter’s dividend and a 33% hike from a year ago. The payout has risen from a quarterly rate of $0.15 in 2017. Stocks that grow dividends tend to be strong performers over time.
This is a phenomenal REIT that should see stellar earnings growth for years to come. Earnings win in the end. Investors are capable of doing just about anything in the short term. But they always come back to companies that are growing earnings at a fever clip. I believe the selling got overdone in the recent tumult. We can get in at a cheap price.
Security type: Real Estate Investment Trust (REIT)
52-week range: $124.73- $288.02
Profile: Innovative Industrial Properties is a Real Estate Investment Trust (REIT) specializing in the acquisition and leasing back of properties that grow legal marijuana for medical use in the United States.
- The REIT operates in a highly unique and profitable niche that should have strong growth rates for years to come.
- The stock has been oversold and currently sells at valuations well below what the expected earnings growth rate justifies.
- IIPR is in a volatile sector and currently sells near the low point of that volatility.
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|
|EPD||Enterprise Product Partners (EPD)||02-25-19||28||Qtr.||1.80||8.30%||26||18%||7.1%||BUY||1|
|GSL||Global Ship Lease. Inc. (GSL)||01-12-22||23||Qtr.||1.50||6,41%||22||-5%||7.8%||BUY||1|
|OKE||ONEOK Inc. (OKE)||05-12-21||53||Qtr.||3.74||6.00%||62||27%||6.1%||BUY||1|
|O||Realty Income (O)||11-11-20||62||Monthly||2.81||4.2%||64||10%||4.70%||HOLD||1|
|Current High Yield Tier Totals:||6.2%||12.5%||6.4%|
|Dividend Growth Tier|
|AVGO||Broadcom Inc. (AVGO)||01-14-21||455||Qtr.||14.40||2.6%||581||33%||2.8%||HOLD||1|
|BIP||Brookfield Infrastucture Ptrs (BIP)||03-26-19||41||Qtr.||2.04||3.6%||59||80%||3.7%||HOLD||2/3|
|CVX||Chevron Corporation (CVX)||02-10-21||90||Qtr.||5.16||4.7%||161||85%||3.5%||HOLD||1/2|
|DFS||Discover Financial Services (DFS)||02-09-22||125||Qtr.||2.00||1.6%||105||-15%||2.2%||HOLD||1|
|LLY||Eli Lily and Company (LLY)||08-12-20||152||Qtr.||3.40||1.3%||286||93%||1.4%||HOLD||2/3|
|INTC||Intel Corporation (INTC)||03-09-22||48||Qtr.||1.46||3.1%||44||-7%||3.3%||BUY||1|
|VLO||Valero Energy Corp (VLO)||06-26-19||84||Qtr.||3.92||5.7%||120||66%||3.3%||HOLD||1/2|
|V||Visa Inc. (V)||12-08-21||209||Qtr.||1.50||0.7%||194||-7%||0.70%||HOLD||1|
|Current Dividend Growth Tier Totals:||3.0%||40.3%||2.7%|
|Safe Income Tier|
|NEE||NextEra Energy (NEE)||11-29-18||44||Qtr.||1.54||1.7%||70||70%||2.3%||HOLD||1/2|
|XEL||Xcel Energy (XEL)||10-01-14||31||Qtr.||1.83||2.8%||73||204%||2.7%||HOLD||2/3|
|Current Safe Income Tier Totals:||2.3%||137.0%||2.5%|
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.
Enterprise Product Partners (EPD – yield 7.1%) – Even in the terrible market recently, EPD has held up just fine. The S&P 500 closed Monday down over 16% YTD. But EPD has returned 23% YTD. It’s having a great year and has outperformed the market to the tune of about 40% YTD. That’s because it’s in the thriving energy sector and also sells at a cheap valuation with a high and safe distribution at a time when investors are compelled toward such things amidst the market uncertainty. EPD still has everything going for it even if the market struggles continue. (This security generates a K-1 form at tax time). BUY
Enterprise Product Partners (EPD)
Next ex-div date: July 28, 2022, est.
Global Ship Lease, Inc (GSL – yield 6.8%) – This container ship stock has certainly taken some lumps in the global growth pessimism of late. It’s down 24% since the beginning of April. But I have remained positive on the yearly prospects of the stock because the business will likely remain strong. Ugly markets sell it off but it tends to come right back when fear wanes. Global reported earnings yesterday that reflected that positive reality. Earnings increased 240% on four times higher revenue than last year’s quarter. The stock traded over 3% higher on Tuesday morning. BUY
Global Ship Lease, inc. (GSL)
Next ex-div date: May 23, 2022
ONEOK Inc. (OKE – yield 6.1%) – The story here is like that of fellow midstream energy operator EPD, except OKE tends to be more volatile. OKE has lagged the energy sector this year. After returning 69% in 2021, it has only returned about 8% YTD. Earnings reported last week failed to excite the market. But it’s misleading. Business never took a big hit during the pandemic because natural gas and NGL demand is so durable. The reported growth wasn’t exciting for an energy stock these days. But this high-yielding superstar is still in the right place and now sells at a valuation below the five-year averages. BUY
ONEOK Inc. (OKE)
Next ex-div date: July 28, 2022, est.
Realty Income (O – yield 4.6%) – This unforgiving market has taken just about everything down with it, including this legendary income REIT. O has fallen more than 14% from the recent high in just a few weeks. Earnings were solid and beat estimates, but this market didn’t care. Sure, it will get knocked around with almost everything else in the panic selling. But investors will come back to a great monthly income payer with solid earnings that should be resilient in any economy. HOLD
Realty Income (O)
Next ex-div date: May 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 3.7%) – AbbVie reported earnings that disappointed last month and the stock dropped since. ABBV is currently down about 14% from the high of early April. Earnings grew about 26% from last year and revenue was up over 4%. But its cancer drug disappointed and the company lowered guidance for the year because of higher costs. Investors had become accustomed to stellar news from AbbVie, and this isn’t a good environment in which to let them down. The stock was due for a pullback, and everything is still on track. ABBV is still cheaply priced with a great dividend and a defensive business in an uncertain market. It is also holding up well during the steep market pullback HOLD
AbbVie Inc. (ABBV)
Next ex-div date: July 13, 2022, est.
Broadcom Inc. (AVGO – yield 2.9%) – Broadcom is a late earnings reporter. Earnings aren’t due until the beginning of June. I have no doubt that the report will be stellar, and the stock will get a boost on the news. How long the momentum last will depend on the market. This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. It will have its day in the sun again and patience should be rewarded. HOLD
Broadcom Inc. (AVGO)
Next ex-div date: June 21, 2022, est.
Brookfield Infrastructure Partners (BIP – yield 3.6%) – You know the market is getting ugly when BIP sells off. Recent selling has taken everything down. Even a defensive company with bankable and growing earnings with a strong dividend hasn’t been safe. The stock is down 16% form the recent high. Earnings were up 3% on a per-share basis but 22% excluding weather-related effects for last year’s quarter. Everything is still solid. This stock tends to pull back after a surge and then slowly recover, on a slow longer-term uptrend. (This security generates a K-1 form at tax time). HOLD
Brookfield Infrastructure Partners (BIP)
Next ex-div date: May 27, 2022
Discover Financial Services (DFS – yield 2.2%) – Discover reported better-than-expected earnings and announced a 20% increase in the quarterly dividend to $0.60 per share. Even with a tentative consumer in this uncertain environment, Discover should have a good year as consumers are likely to increase credit purchases going forward as the high Covid savings inevitably deplete. The stock, until the last couple of very bad days, had a positive YTD return in a down market. HOLD
Discover Financial Services (DFS)
Next ex-div date: May 25, 2022
Chevron Corp. (CVX – yield 3.5%) – The energy giant stock has leveled off over the past two months. It has good days and bad. But it has been bouncing around in a higher range since early March. We already took profits on one half of the position. Although CVX is already up over 30% YTD, I still believe that the greater risk for energy prices remains to the upside. Chevron is expected to grow earnings more than 100% this year over last year as it is highly levered to oil price. HOLD
Chevron Corp. (CVX)
Next ex-div date: May 18, 2022
Eli Lilly and Company (LLY – yield 1.4%) – Lilly killed it on earnings again last week. It beat expectations and raised guidance with earnings growth of 63%. There was also good news on its obesity drug in late-stage trials. The drug could be a blockbuster along with the Alzheimer’s drug which could be approved by the end of the year. LLY soared 4.3% the day of the report but is still down from the high.
The stock is notorious for surging and then pulling back for a while before the next surge. It doesn’t seem worth it trying to time the high and take profits because the stock remains on a longer-term uptrend. The population is aging at warp speed and Lilly is perhaps the best in the world at providing drugs and treatments. That’s a winning formula. HOLD
Eli Lilly and Company (LLY)
Next ex-div date: May 13, 2022
Intel Corporation (INTC – yield 3.3%) – Intel is a technology company. And this has been an awful market for technology stocks. Most are already in a bear market. I would have been nearly impossible for this stock to thrive over the last couple of months. But INTC already has the stuffing knocked out of it and was dirt cheap before this tech sell-off. As a result, INTC is down significantly less that the sector YTD (11% versus 25%). It has marvelous prospects for growth over the next few years. In the meantime, it pays a great dividend and has limited downside. BUY
Intel Corporation (INTC)
Next ex-div date: May 5, 2022
Qualcomm Inc. (QCOM – yield 2.2%) – Qualcomm reported earnings last week that once again impressed and raised guidance for the rest of the year. The stock jumped 10% after the report. Revenues and earnings continue to grow at a fever clip and will likely continue to do so for the rest of the year at least. It’s just in the wrong sector at the wrong time. But the company continues to deliver despite supply disruptions and other concerns and sells at a cheap valuation considering the growth rate. The good should outweigh the bad, especially considering the stock already got the stuffing kicked out of it. HOLD
Qualcomm Inc. (QCOM)
Next ex-div date: June 2, 2022, est.
Valero Energy Corp. (VLO – yield 3.3%) – VLO finally got whacked this week. The refiner stock had been soaring to new all-time highs until it finally pulled back this week amid selling in the energy sector. The latest surge was spurred by earnings that showed profit growth of better than 40% over last year’s quarter on rising volumes and the highest refining margins since 2015. This week’s energy selloff may have been a one-off event. The sector might get right back on track. We’ll see what happens. HOLD
Valero Energy Corp. (VLO)
Next ex-div date: May 11, 2022
Visa Inc. (V – yield 0.8%) – This global payments company stock is getting creamed in this market. It has fallen below 200 per share again. Growth concerns damage this stock whenever the market selling gets intense. But this stock should recover and remain strong this year. The tremendous earnings boost it gets globally from the removal of Covid restrictions easily outweighs slower global growth or geopolitical uncertainty. The real risk is that Covid blows up again and those restrictions return outside of China. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. HOLD
Visa Inc. (V)
Next ex-div date: May 12, 2022
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.
NextEra Energy (NEE – yield 2.2%) – This alternative energy utility stock took a big hit after the earnings announcement, falling more than 10%. The first quarter was terrific as the company reported 10.4% year-over-year growth, which was higher than the historical average and soundly beat expectations. The problem was that the Commerce Department is imposing tariffs and restrictions on solar panels coming from Southeast Asian countries, where NextEra gets theirs. The move could delay the company’s planned expansions in the solar area over the next year.
The market didn’t like the situation and the stock never really got a chance to recover as the market has plunged since. But this is still a great stock to own in this market and the longer-term prospects are great as well. HOLD
Xcel Energy (XEL – yield 2.7%) – The market has been so crummy it even stopped XEL from making new highs. The stock has leveled off since early this month and even pulled back a little in the volatility of recent days. But it held remarkably strong in the recent panic selling. XEL may have gotten slightly ahead of itself at the highs. But it is still a highly desirable stock in this market and is unlikely to pull back much more in the near term. Safety is unlikely to go out of style in this tumultuous year. It’s also a great way for conservative investors to play the growth of alternative energy. HOLD
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 June 8, 2022.
About the Analyst
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.
His range of experience includes specialized work in mortgage banking, commodity trading and in a financial advisory capacity for several of the nation’s largest investment banks.
For more than a decade Tom created and actively managed investment portfolios for private investors, corporate clients, pension plans and 401(K)s. He has a long track record of successfully building wealth and providing a high income while maintaining and growing principal.
As a financial writer, Tom’s byline has appeared in the Motley Fool, StreetAuthority, NewsMax, and more. He has written newsletters and articles for several of the nation’s largest online publications, conducted seminars and appeared on several national financial TV programs.
For the past seven years, Tom has authored a highly successful dividend and income portfolio with a stellar track record of success. At Cabot, Tom provides monthly Cabot Dividend Investor issues, regular weekly updates on every portfolio position and a weekly podcast discussing goings-on in the market.