Good news is bad news and bad news is good news. Welcome to the upside down world of Fed rate cut anticipation. Earlier this week there was a much-stronger-than-expected employment report. The market didn’t like that and it sold off. Today, the Fed Chairman had negative things to say about the state of the economy. The market just loved it. There’s a big rally today.
The market is at new all-time highs. If there’s more bad news, it could go a lot higher. The biggest risk to the market right now is stronger-than-expected second-quarter GDP growth. In the near term, everything revolves around Fed rate cuts; the worse the news, the higher probability of more cuts, and vice versa.
The market can be just plain dumb in the near term. Shortsightedness and shallowness become invaluable assets at trading desks on Wall Street. But the market is much more rational in the longer term. It’s earnings season. And earnings matter. Sure, lower rates can prop up the market in the near term. But ultimately, individual companies will have to deliver the goods to sustain a rally.
It’s shaping up to be the best possible environment for dividend stocks. Insecurity regarding the state of the economy is propelling investors toward the more defensive companies and falling rates make the dividends even more valuable. At the same time, the economy is still secretly pretty good, so earnings should be solid.
The defensive companies in this portfolio continue to forge higher despite lofty valuations. Market mentality is signaling more of the same going forward. In the rest of the portfolio we have a different story. AbbVie and Altria continue to wallow in oblivion while Brookfield Infrastructure Partners and Enterprise Products Partners appear to be on the cusp of a breakout.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP 44 – yield 4.7%) – I like the current technical behavior of this infrastructure giant. It’s outperforming the market in every measurable period so far this year. It’s up about 30% on the year and it looks poised to test and break through its all-time high of 45 per share. At the same time, the stock is still reasonably valued because of underperformance last year. The asset rotation strategy is coming to fruition and earnings growth has resumed this year. It also pays a 4.58% yield with a dividend that has grown for 12 straight years.
HOLD – Community Health Trust (CHCT 41 – yield 4.2%) – There’s no news about this small healthcare REIT, just higher prices. The market continues to love REITs. After being the top-performing market sector last year, it has also been among the top-performing sectors in this year’s market rebound. While REITs have been strong over the past year, CHCT has nearly tripled the return of the index. It keeps making new highs just about every week. There’s no reason no to keep riding the momentum at this point.
BUY - Enterprise Product Partners (EPD 30 – yield 6.0%) – This energy infrastructure giant is loved by analysts. The company is the best in the business and earnings are on the rise as new projects are coming on line this year and next year. The stock is moving closer to the 30-per-share breakout level and earnings, reported at the end of this month, could get it over the hump. The consensus price target is 34 but I think is could go significantly higher than that.
HOLD – STAG Industrial (STAG 31 – 4.6%) – This industrial REIT continues to look strong. It broke out to new highs in June and after pulling back slightly it’s been slowly inching back to those June highs. STAG is a high dividend payer with a great niche in a strong REIT sector. Industrial REITs enjoy a high demand that outstrips current supply. The sector seems to be benefitting from the proliferation of e-commerce as much retail space is moving into warehouses. The market loves this monthly dividend payer right now and it still has good momentum.
Dividend Growth Tier
HOLD – AbbVie (ABBV 71 – 6.0%) – After the drop in stock price following the announcement of the Allergan (AGN) purchase late last month, the stock regained most of the losses but pulled back somewhat this past week. The story is the same as it was last week: The deal helps AbbVie diversify away from its reliance on arthritis drug Humira and buys time for its best-in-class pipeline to come to fruition. The market continues to digest the deal and it will probably take some time for it to prove worthy enough for the market’s approval. In the meantime, ABBV is incredibly cheap and is undervalued even with a pessimistic view of the deal. It sells at just 8 times earnings while paying a 6% dividend with just a 52% payout ratio. For now it’s a HOLD.
HOLD – Altria (MO 49 - $6.6%) – The stock has been trending down since the beginning of April. Every time it starts to move up it gets knocked back down. MO has problems with falling cigarette volume sales in the U.S. It is trying to combat that issue by taking out stakes in E-cigarette maker JUUL and marijuana company Cronos. Now there is a question as to whether JUUL can get approval from the FDA necessary to sell its product. The good news is that the stock is dirt cheap at 10 times forward earnings with earnings projected to continue to grow at 7% per year for the next five years. Meanwhile, the massive 6.6% payout appears quite safe.
HOLD – American Express (AXP 127 - yield 1.3%) – The credit card business is a great place to be as the world moves to increasingly cashless transactions. The trend should continue for some time. Amex has a high quality clientele with much less delinquency than average and it charges high, bankable fees. As long as the economy is okay and the market is on a solid footing this stock should continue to do well. The stock is reasonably priced at 15 times forward earnings and could easily move higher. The company announced second-quarter earnings at the end of next week and there’s no reason not to expect solid performance.
BUY – Crown Castle International (CCI 136 – yield 3.4%) – The growth dynamics surrounding the 5G infrastructure buildout are amazing. This is a REIT that offers both defense and growth in an uncertain market. REITs are a great place to be right now and this stock offers significantly more growth than most with a projected average of 20% earnings growth over the next five years and a solid and growing dividend.
BUY – Valero Energy Corp. (VLO 82 – yield 4.4%) – In my view, this is the best refiner in the country. The longer trend is still strong for American refiners with the advantage of cheaper crude oil feedstock. And Valero has moved down and is cheap because of temporary factors. Things are turning around and it should also get a boost from the new fuel standards required by the International Maritime Organization (IMO) starting in 2020. I see this as a stock that recently had a down leg in an uptrend. The big rebound in earnings will likely occur in 2020, but the market looks ahead. Meanwhile, analysts are expecting stronger second-quarter earnings, to be reported on July 25.
Safe Income Tier
BUY- Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.8%)
There is nothing to say about these safe short-term bond ETFs. Isn’t that beautiful? 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 when things get ugly you’ll be happy you have these.
HOLD – Consolidated Edison (ED 89– yield 3.3%) – This is still a good time for utilities with the market uncertainty and interest rates likely to fall. Utilities have been the number one performing sector of the market over the past year. But even so far in this up year, ED has kept pace with the S&P 500. The stock has had a great run recently and may have gotten a little ahead of itself but the momentum remains. It could go higher in the weeks and months ahead.
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. The stock price has barely budged for this entire year so far and that’s exactly what investors sign up for with this ETF. Enjoy the juicy yield and stable price in this uncertain market.
HOLD – McCormick & Co (MKC 158- yield 1.4%) – The spice maker is yet another safe stock that keeps on rising despite lofty valuations. I sold half of the position to take profits ahead of the second-quarter earnings announcement and the stock just kept on going. It’s overpriced, but it might get even more overpriced in the weeks ahead. For now it’s a HOLD.
HOLD – NextEra Energy (NEE 210 – yield 2.4%) – You can’t argue with results. This stock has been beating the market and the utility index consistently for the past several years. It’s the country’s largest utility, offering stability and growth in its alternative energy business. The combination is delectable for today’s investor. Sure, valuations are getting stretched but offering safe growth in an uncertain market with falling interest rates deserves a premium. It’s a HOLD here because of the high price, despite the momentum.
HOLD – Xcel Energy (XEL 61 – yield 2.7%) – Ditto on everything I just said about NEE. Being a much smaller utility, XEL could have more upside left in the tank than NEE. This upstart clean energy utility still has very favorable tailwinds and momentum. It’s up over 25% so far this year and 38% over the past 12 months. There’s a reason it’s beating the pants off its peers and the overall market. That reason should continue to propel this stock still higher going forward.
