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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor Weekly Update

The economy is still solid and the market isn’t overpriced in this low interest rate world. The S&P 500 is only 2% higher than it was in January of 2018, 20 months ago. The stock market is still the best place to be. Fear spikes and then it wanes. And when fear inevitably wanes, money always trickles back into the market because it’s the only game in town.


The Bull Market Lives On

Summer is over. It’s time to drain the pool, time to go to school, what a bummer.

Slacking is no longer the consensus mode of behavior. Investors are refocusing on the market situation. It’s a good time to take stock of where we are and where we might be going as the earth cools.

Despite all the negative headlines and market turbulence over the past month or so, the S&P 500 is less than 3% from its all-time high. True, the summer slog higher was interrupted by the escalation of the trade war with China. It was exactly the news the market didn’t want to hear. And I don’t believe the trade issues will be resolved any time soon. But the market will likely forge higher anyway because, at the end of the day, money still has no place else to go but stocks to earn a decent return.

All that has really happened is the market has stopped going up, temporarily. It hasn’t really gone down. We might not be out of the woods yet. There could still be some ugly days ahead. But I am still positive about the market over the rest of the year.

The economy is still solid and the market isn’t overpriced in this low interest rate world. The S&P 500 is only 2% higher than it was in January of 2018, 20 months ago. The stock market is still the best place to be. Fear spikes and then it wanes. And when fear inevitably wanes, money always trickles back into the market because it’s the only game in town.

Dividends are king in the current environment. Investors realize that there probably isn’t another 50% or 100% spike left in this aging bull market. And dividends are likely to be a big part of returns going forward. Consider this. If you own a stock that pays a 6% yield, over the past 20 months you got over 9% in dividends alone while the market only moved 2% higher.

Investors continue to flock into safe, dividend-paying REITs and utilities. Several portfolio positions in those sectors are making new all-time highs while the overall market fumbles around.

High Yield Tier

BUY – Brookfield Infrastructure Partners (BIP 47 – yield 4.3%) – In the defensive infrastructure space, this MLP has successfully grown cash flow by an annual average of 18% per year over the past decade and the stock has averaged a 17% return over the same period, compared to a return of just 9% for the overall market. It owns some of the safest, most recession-resistant assets on the planet in things like transportation, telecommunications, water and energy infrastructure. The stock has also significantly outperformed the S&P over the past tumultuous month and notched a new high. The stock is an investor favorite in the uncertain environment and could continue to run higher.

HOLD – Community Health Trust (CHCT 43 – yield 3.8%) – Let the good times roll for this small healthcare REIT. It’s a star performer in a perfect market niche for the current environment. REITs are doing great and should continue to do so as rates are likely to be cut more. And healthcare is the ultimate defensive sector that investors gravitate toward when they fear recession. In addition, the smaller size than its peers gives it more upside. It’s had a terrific year so far, up over 50%. We’ll see how long it the exceptional performance continues.

BUY – Enterprise Product Partners (EPD 28 – yield 6.1%) – The company seems to be firing on all cylinders. It is an elite and highly successful American energy company operating in the midst of the energy boom. An estimated $44 billion per year will need to be spent on energy infrastructure to accommodate the new supply through 2035. Opportunities for growth abound. EPD has $5 billion in projects under construction and between $5 and $10 billion in development. That should provide ample growth to go with the 6% yield. The market doesn’t like the energy sector right now. While EPD has been outperforming the sector by a lot, it still isn’t getting the respect it deserves. But the market usually gets it right eventually.

HOLD – STAG Industrial (STAG 29 – 4.9%) – This industrial REIT, and monthly dividend payer, should continue to hold its own in the uncertain environment. While the stock has outperformed the market over the past year, it has underperformed its REIT peers. The reason is likely because it is in a more cyclical REIT sector, which should give it more upside than its peers when the market rallies.

Dividend Growth Tier

BUY – AbbVie (ABBV 65 – 6.5%) – Sure, the market isn’t moving this stock higher right now. But it has limited downside, having already been beaten down, and it pays a monster 6.5% dividend. The stock is well suited to the current volatile and uncertain market, and it could perform quite well longer term. The market is worried about its ability to overcome patent expirations. This happens to pharma stocks sometimes. I bought Eli Lilly (LLY) under similar circumstances years ago and the stock has returned about 300% since. It’s still a great pharma stock with the tailwind of the aging population and a great pipeline. It’s a great stock on sale and investors will flock back into the name at some point. In the meantime, you get paid to wait.

HOLD – Altria (MO 44 – 7.6%) – The market still hasn’t warmed to the recently announced merger with Phillip Morris International (PM). Altria is down 4% and PM is down 11% since the news broke last week. I believe the merger makes a lot of sense and creates a buying opportunity in a stock that was already oversold. The increased scale of the two companies will enable them to better market the non-tobacco parts of the business that will be the growth drivers going forward. PM’s popular IQOS product can be better marketed in the U.S. and MO can take advantage of the huge international opportunity in E-cigarettes. The market is cranky right now and it hates the headlines about regulatory problems with JUUL, but this is a recession resistant business with a business model that could work very well. Time will tell. But the stock is undervalued with a massive dividend. It’s a HOLD for now until the stock gets its sea legs.

HOLD – American Express (AXP 118 - yield 1.3%) – This is a great company in a very profitable business and things have been stellar from an operational standpoint. But this is not a great down market stock. It also has a lot of exposure to the global economy. The stock sold off 40% when the global economy sputtered in 2015 and 2016. Although the market could have more bad days ahead, I am still positive over the rest of the year. But things can change. If the global economy or the market starts to turn south this stock might be a sell. But it’s a HOLD for now and things could rebound in the near future.

BUY – Crown Castle International (CCI 149 – yield 3.1%) – This cellular infrastructure REIT is really showing some down market chops. The 5G infrastructure buildout will continue in haste regardless of the economy. As well, this particular REIT only operates in the U.S. and has no exposure to China. The defensive nature of this REIT is paying off big time right now. In the past month the stock is up over 9% while the S&P 500 is in negative territory. You can play offense and defense at the same time and get a decent yield in the process.

BUY – Valero Energy Corp. (VLO 75 – yield 4.8%) – This is another stock that is out of favor and cheap. It’s been a bad year for refiners but the longer-term trend is positive. They still have a big advantage with cheap and abundant U.S. crude oil feedstock. As well, there is a good chance profits rebound strongly in 2020 with the new IMO standards and other factors swinging back into favor. It’s worth being patient. Things can turn around very quickly in the refining business. But if the market looks like it will turn seriously south, I’ll reconsider.

Safe Income Tier

BUY – Alexandria Real Estate Equities (ARE 152 – yield 2.7%) – High occupancy rates for its in-demand unique laboratory properties make this stock a favorite in the current environment. It’s a highly defensive REIT that consistently grows earnings and its dividend. It has delivered solid returns in the recent down market and should continue to be in favor going forward. Despite recent strong performance, the valuation is still reasonable.

BUY- Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)

BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.8%) This is the kind of market where you truly appreciate these bond funds. The prices never budge. 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 turn ugly you’re happy you have these. Holdings like these add intangible effects as well like giving you more confidence to stay invested in the rest of the portfolio.

BUY – Invesco Preferred ETF (PGX 15 – yield 5.4%) – This preferred stock ETF has held on like a rock in the market tumult so far. It is a high yielding, safe haven port in the market storm. The lack of correlation to the stock and bond markets makes this a fantastic portfolio holding in just about any market. Falling interest rates make it even more attractive on a relative basis. If you’re looking for a stable price and a strong yield this is a great holding and it’s thriving in the current environment.

HOLD – McCormick & Co (MKC 165- yield 1.4%) – The spice and condiment maker is not only outperforming the market but its defensive food industry peers as well. Sure, the stock is expensive relative to its historic valuations, but that has been the case for a while now as the stock continues to deliver. The cautious and yield-starved investor is a great friend to this stock. The current falling interest rate and uncertain investment environment should continue to reward MKC in the foreseeable future.

HOLD – NextEra Energy (NEE 225 – yield 2.3%) – There’s a reason why this utility has outperformed both the market and its peers in every measurable period over the past 15 years. It gets predictable, rock-solid income from its regulated business in growing and regulation friendly Florida while generating strong growth from its cutting edge alternative energy business. It’s a stock for the present and the future. As a result of these appealing characteristics, it has returned over 35% for the past year while the market was flat and while the market is in negative territory for the past month, NEE is up over 7%. This is a utility that delivers better than advertised and should continue to thrive for the foreseeable future.

HOLD – Xcel Energy (XEL 66 – yield 2.5%) – This is another clean energy utility that loves the uncertain market. By virtue of its smaller size, XEL has even outperformed NEE of late. While Wall Street frets over trade war headlines, this stock is busy making new all-time highs. The only drawback is that the stock is expensive. That’s why it’s not rated a BUY. But with a dose of uncertainty and falling interest rates this stock can easily get still more expensive.

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