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Safe Income and Dividend Growth

August 17, 2022

Is this a bear market rally or a new bull market?

That’s the question investors are grappling with. Is this the end of the crummy market or is this 17% rally off the lows just a head fake? Let’s examine each possibility.

Is This Rally for Real?
Is this a bear market rally or a new bull market?

That’s the question investors are grappling with. Is this the end of the crummy market or is this 17% rally off the lows just a head fake? Let’s examine each possibility.

The market anticipates six to nine months out or so. By then, it is seeing a Fed that is all done raising rates, and maybe even talking about lowering them again. Inflation was lower in July than in June, as gas prices have fallen because of recession. There is increasing speculation that inflation has peaked and will continue to fall.

Investors are looking ahead to an environment without the nemesis of inflation and a hawkish Fed that dogged the market all year until this rally. We could also be coming out of recession early next year. Plus, it’s worth noting that stocks took off from the lows of the pandemic bear market in March of 2020 and never looked back, despite the fact that the pandemic mess would last more than a year longer.

That’s the rosy scenario investors have been embracing, to the tune of a 17% rally so far. I hope that is what happens. But there are reasons to be skeptical.

Inflation is far from beat. It dipped this month but there is no guarantee it won’t rise again in future months. Even if it has peaked, it’s still way too high. It’s highly optimistic to believe that it can be conquered with a few more rate hikes. The Fed may continue to have to raise rates for most of next year. Then there’s recession.

We are likely already in a recession that it is hard to see pulling out of in the next couple of quarters while the Fed continues to raise rates and inflation pressures consumers. That will hurt earnings. While earnings have been solid this quarter, up about 6.7% on average, they aren’t as good as they seem. If energy stocks are taken out of the math, average earnings would be lower than last year’s quarter.

Also, bear market rallies are common. There were several double-digit rallies in the financial crisis bear market before the market bottomed.

I hope the rosy scenario prevails. But I remain skeptical for now. In addition, even if stocks can maintain the higher prices achieved in this rally, it will take more good news to generate a sustained move higher from current levels.

High Yield Tier
Enterprise Product Partners (EPD – yield 7.0%) – This midstream energy Goliath is still cheap and high-yielding. Despite continuing strong operation performance where the most recent quarter posted earnings growth of 23% and distributable cash flow increased 30% over last year’s quarter, EPD still trades below the pre-pandemic high. It should be in strong position to thrive with inflation, as contracts have built-in adjustments, and recession. The distribution is rock solid as well with 1.9 times cash flow coverage in the last quarter. EPD is a great place to be right now. (This security generates a K-1 form at tax time). BUY

ONEOK Inc. (OKE – yield 5.9%) – This midstream energy company is also solid for many of the same reasons as EPD. But OKE had a sizable 30% decline this year at the low. The stock has since reversed course and has moved about 20% higher from the June low. It sold off because it had such a huge year in 2021, returning over 60%, and earnings growth is sluggish compared to the sector, which has had 299% earnings growth this quarter. The difference is because ONEOK’s earnings didn’t plummet in the pandemic. In fact, they continued to grow. Such resilience shows that OKE should be solid in a recession. BUY

Realty Income (O – yield 4.0%) – This legendary monthly income REIT is marching back to the 52-week high. O has been a star performer in this recession-fearing environment. Although it deals in retail properties, most tenants are staples like supermarkets and drug stores. It is seen as a defensive income stock. Earnings were stellar, rising 10.2%, and the company is navigating inflation and recession like a champ. The occupancy rate for its consumer staple tenants is the highest in 10 years and the company increased guidance on the pace of acquisitions, to ensure future growth. This stock is a great place to be in the current market environment. HOLD

The Williams Companies, Inc. (WMB – yield 5.0%) – The stock is behaving like OKE. It had a strong year in 2021 and a steeper correction than most of its peers this year. OKE has also been trending higher since the June low. Natural gas demand is resilient and the company is growing. Earnings per share shot up 29% in the first half of 2022 versus the same period last year. The recently reported quarter featured a whopping 48% earnings per share spike over last year’s quarter. Williams also increased 2022 earnings guidance. BUY

Dividend Growth Tier
AbbVie (ABBV – yield 4.0%) – The biopharmaceutical company has been sputtering since the high in April. Part of the reason is an earnings disappointment. But a bigger part is that the stock had a huge surge in the six months prior to April and ABBV typically pulls back after big moves higher. It’s still a defensive company in a recession with an excellent longer-term prognosis amid the aging population. Earnings disappointments are part of the life of all pharma companies, even very successful ones. It should pay to simply hold the stock and collect the dividend through rough patches en route to better things in the future. HOLD

Broadcom Inc. (AVGO – yield 2.9%) – Like the rest of the technology sector and the overall market, AVGO got a nice move higher off the June low. The performance among tech stocks has been encouraging. After leading the overall market lower earlier this year, the sector has outperformed the index for the last several months. Broadcom is also very well positioned to benefit in a fundamental way from the 5G rollout and the proliferation of cloud computing. It reports earnings in a couple of weeks. Recent quarterly reports have been excellent and hopefully the stock gets a boost this time. BUY

Brookfield Infrastructure Partners (BIP – yield 3.7%) – This defensive infrastructure partnership reported super earnings this month. Funds from operations were up 30% from last year’s quarter and a new record. That’s powerful growth for a highly defensive dividend-paying company. Results were higher across the board and Brookfield got the most growth from the midstream energy sector, powered by last year’s large pipeline company acquisition. BIP is still well off the high but has been trending consistently higher since June. (This security generates a K-1 form at tax time). HOLD

Eli Lilly and Company (LLY – yield 1.2%) – LLY is behaving like it normally does. After a big move higher it pulled back. It made a higher low and is now trending higher again. This pharmaceutical giant has proven time and time again that it is worth simply holding through the dip as the longer-term trend is consistently higher. Lilly has a strong pipeline and pending approvals of important drugs that could give it a big boost. HOLD

Intel Corporation (INTC – yield 4.0%) – The chip maker’s earnings were a disaster. Other semiconductor companies fared even worse. It’s a double whammy of coming back to earth since the pandemic and now recession. INTC had already been decimated before this latest wave of bad news. I’m skeptical that the news could get much worse for Intel and the longer term looks promising for this dirt-cheap stock. Hopefully, there is little downside left. We’ll see. HOLD

Qualcomm Inc. (QCOM – yield 2.0%) – The chip maker stock fell as much as 6.8% after its earnings report last week but has recovered somewhat since. The quarter beat expectations on 36% higher revenues and 54% higher earnings than last year’s quarter as smartphone royalties soared 59%. But the company lowered guidance for next quarter and the rest of the year as slowing global growth is expected to reduce handset sales. The market didn’t like that.

The likelihood of slowing phone sales has pressured this stock lower for most of the year. That’s why QCOM is still 25% off the high even after the recent surge. But those slower sales haven’t even materialized yet, and the company still expects 23% year-over-year revenue growth for the rest of the year. It should also benefit as 5G gets applied to many more devices. Slower sales were already priced into the stock. Meanwhile, it sells at just 12 times forward earnings with better than 20% growth ahead even in a recession. BUY

Visa Inc. (V – yield 0.7%) – Visa’s earnings knocked it out of the park. It beat expectations on both earnings and revenues, which were up 33% and 19%, respectively. The company continues to benefit from increased global business from the ending of Covid restrictions despite slower global growth. The stock is normally very quick to recover with the overall market, but it has been more sluggish this time around because of a pending bill in the Senate that will limit credit card fees. We’ll see what the bill looks like and gauge the chances of passage. In the meantime, business is still booming despite inflation and recession. HOLD

Safe Income Tier
NextEra Energy (NEE – yield 1.8%) – Despite a big move recently, NEE is lower YTD. It peaked at the end of December and pulled back. But it’s up 27% in the last two months and just a few percent off the all-time high. It also got a big boost from the climate change bill that will be very generous to companies like NEE. This is a great utility and a phenomenal way for conservative investors to play the growth in clean energy. HOLD

Xcel Energy (XEL – yield 2.5%) – XEL has been a stellar performer this year, up 15% in a down market. It has seriously cooled off after making a high in May. But the market recovery and the passage of the CHIPs bill gave it new life and lately it has been making new highs. Plus, it’s in two timely sectors, utilities and clean energy, and should be well positioned for the longer term as well. HOLD

High Yield Tier
Security (Symbol)Date AddedPrice AddedDiv Freq.Indicated Annual DividendYield On CostPrice on
close 8/16/22
Total ReturnCurrent YieldCDI OpinionPos. Size
Enterprise Product Partners (EPD)02-25-1928Qtr.1.808.30%2727%7.0%BUY1
ONEOK Inc. (OKE)05-12-2153Qtr.3.746.00%6330%5.9%BUY1
Realty Income (O)11-11-2062Monthly2.814.2%7429%4.00%HOLD1
The Williams Companies, Inc.08-10-2233Qtr.1.705.3%344%5.00%BUY1
Current High Yield Tier Totals:6.0%22.5%5.5%
Dividend Growth Tier
AbbVie (ABBV)01-28-1978Qtr.5.204.8%143119%4.00%HOLD2/3
Broadcom Inc. (AVGO)01-14-21455Qtr.14.402.6%55227%2.9%BUY1
Brookfield Infrastucture Ptrs (BIP)03-26-1914Qtr.2.043.6%4193%3.5%HOLD2/3
Eli Lily and Company (LLY)08-12-20152Qtr.3.401.3%310111%1.3%HOLD2/3
Intel Corporation (INTC)03-09-2248Qtr.1.463.1%36-23%4.0%HOLD1
Qualcomm (QCOM)11-26-1985Qtr.2.601.5%15088%2.0%BUY1/3
Visa Inc. (V)12-08-21209Qtr.1.500.7%2174%0.70%HOLD1
Current Dividend Growth Tier Totals:2.5%40.3%2.6%
Safe Income Tier
NextEra Energy (NEE)11-29-1844Qtr.1.541.7%91122%1.8%HOLD1/2
Xcel Energy (XEL)10-01-1431Qtr.1.832.8%77221%2.5%HOLD2/3
Current Safe Income Tier Totals:2.3%171.5%2.2%

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