The Fed Put Lives
Phew! Things were getting dicey. The market hates trade wars and the Trump Administration just opened another front with Mexico. But the Fed came to the rescue, insinuating an open mindedness to cutting the Fed Funds rate before the end of the year.
Now the market looks strong again. To today’s investor, there is virtually nothing that can’t be made better with a rate cut. You could offer the market peace and prosperity forever or a rate cut. They’ll take the rate cut.
Every market is a tug-of-war between good forces and bad forces. Trade wars are bad. Rate cuts are good. This week good is winning. It is my opinion that the trade issues with China will be with us for a while. The Chinese play the long game and have plenty of money to stimulate their economy in order to offset the negative effect of tariffs. Mexico is a different story.
It is unlikely that the Mexican government can fend off the money interests that can’t abide tariffs. It is my opinion that the issue will be solved quickly and that will be a positive for the market. Although the China trade war will likely drag on I think the market actually prefers a rate cut to a trade resolution. Therefore, I believe it is likely that the market resumes an upward trend.
But amidst the uncertainty investors are gravitating toward dividend stocks. The relative outperformance of safe dividend paying stocks over the past year has been the best in a long time. The strong performance should continue as rates have a downward bias in the foreseeable future.
Dividend stocks significantly outperform non-dividend stocks as a group over the long term. But now, dividend stocks look great in the short term as well. You’re in the right place at the right time.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 42 – yield 4.9%) – This company owns infrastructure assets all over the world and has been upgrading its portfolio of investments by selling lower performing assets and investing in better ones. A few days ago the company announced that it will be looking at data infrastructure assets for similar reasons that I recommended Crown Castle in last month’s issue. It has a portfolio of assets that enjoy monopolies in their area and generate reliable and defensive cash flow. Growth opportunities abound and the stock looks technically strong here.
HOLD – Community Health Trust (CHCT 38 – yield 4.5%) – The stock had a sizable 2.62% pullback during the market rally yesterday as investors salivated over cyclical stocks and shunned safer stocks in the euphoria over an anticipated Fed rate cut. So far, it’s been a one day changing of the guard. We’ll see if this rally is sustained. For now, this is still a star performing income producing REIT in a volatile market that still has momentum.
BUY – Enterprise Product Partners (EPD 28 – yield 5.9%) – Earnings revisions for this energy infrastructure giant have been trending higher. That’s a good sign for the near term. The MLP has also exceeded estimates for the last four quarters by an average of 17%. The company has another $3.5 billion in new projects coming on line this year that should help boost earnings. The stock is near a breakout but it has been hovering in the same range since the beginning of February. Hopefully there will be a catalyst soon. In the meantime, you get paid a 6.2% yield.
HOLD – STAG Industrial (STAG 30 – yield 4.8%) – This is the right stock at the right time. REITs have been king over the past tumultuous year. And among REITs, STAG is a true gem. It operates in a subsector of the business (industrials) with terrific supply/demand dynamics and does it quite well. But don’t take my word for it. Listen to the market. This stock has absolutely blown away the returns of not only the REIT index but the overall market as well over the past several years. The only problem is that it has gotten expensive and is no longer a bargain. But it still has momentum and for that reason I will continue to hold it.
Dividend Growth Tier
BUY – AbbVie (ABBV 77 – yield 5.3%) – The market continues to treat this stock like a red-headed stepchild. The company is about the best there is in an industry with tailwinds of historic proportions. It pays a high and well supported dividend. It has done a marvelous job of preparing for the future. But to today’s investor class, those things don’t matter. It’s only about next quarter. Short-sightedness in not a malady in today’s market, it’s a creed and a motto that investors are proud of. Eventually, the short term prognosis for this company will get good. And when it does, the market will make up for lost time. Until that day, just collect the 5.6% dividend and be patient.
BUY – Altria (MO 49 – yield 5.6%) – The cigarette maker is the best there has ever been in probably the best industry in the world for generating cash flow and dividends. But the tobacco industry is deteriorating at an increasing pace. To answer the problem, Altria has taken unprecedented steps of entering new growth industries in E-cigarettes and marijuana. It’s a promising endeavor that is yet unproven. With MO, you get a massive yield in a stock with little downside from here but it requires a leap-of-faith in the future. I believe the endurance of lousy momentum and bad headlines will be rewarded in the not-too-distant future.
HOLD – American Express (AXP 117 – yield 1.4%) – I love this company. In an increasingly cashless world, the credit card industry is a license to print money. In that wonderful world, AXP is a great player with a higher quality cliental. Fundamentally, it’s a great stock that currently offers both growth and value. But it is a cyclical stock with direction and momentum that mimic the overall market. It isn’t a down market stock. I believe the market will be okay for the rest of the year. Until that changes, AXP will remain a HOLD.
BUY – Crown Castle International (CCI 134 – yield 3.6%) – I’m proud of this new addition to the portfolio. The growth dynamics surrounding its industry, the 5G infrastructure build out, couldn’t be better. It offers both defense and growth in an uncertain market. I’m delighted by the stocks behavior in the first week, up 5% in a flat market. I wish the stock was cheaper but I guess you can’t have everything. With anticipated 20% per year average earnings growth over the next five years, the price is still reasonable.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.2%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
There is nothing to say about these safe short term bond ETFs. And that’s the beauty of them. They just keep rolling on at a steady price paying interest. When the market booms these ETFs seem like a waste and dead money but the recent volatility underscores why these safe havens make a lot of sense in a portfolio.
HOLD – Consolidated Edison (ED 89 – yield 3.5%) – The utility sector has been a top performer for the market over the past volatile month and year. Sometimes, boring is beautiful. The current market telegraphs to investors exactly why you need to own a stodgy old dividend stock like ED. The world might go to hell in a handbag but ED will keep chugging along. It also gets an added lift and bonus from the fact interest rates are not going higher and will likely decline.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – The high yield and lack of correlation to the stock and bond markets make this a nice portfolio holding and income generator. I’ll take a juicy yield and monthly payments with a stable price any day of the week. As well, the recent market turbulence could give investors a renewed appreciation for an investment like this.
HOLD – McCormick & Co (MKC 155 – yield 1.5%) – You know what people can’t live without – food. When the market is booming you don’t need a friend like McCormick. But when things get dicey it’s like “where have you been all my life?” The market performance has been poor over the past year. MKC returned 53% over the period. Any questions? The stock is getting pricey, but the spice maker already had good momentum and the renewed volatility should be a new tailwind for the stock.
HOLD – NextEra Energy (NEE 203 – yield 2.6%) – It’s a sweet market for utilities with uncertainty and falling interest rates. NEE is the best of the lot. Not only do you get defense but growth as well. I slobber all over this stock every week so I won’t go on here. It has good fundamentals and momentum and is well worth holding.
HOLD – Xcel Energy (XEL 59 – yield 2.9%) – Sure, the stock is expensive here, but for good reason. This is one of the very best utilities on the market. It has a growing alternative energy business and is a darling of the regulators. It also has strong momentum. Sprinkle in a dose of geopolitical tension and a dab of rate cuts and you have great stock to be invested in right now.
