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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor Weekly Update

It’s one of those special days in the market where the Fed will make a highly anticipated decision on interest rates. It is widely expected that the Central Bank will cut the Fed Funds rate by 0.25%.


Rate Decision Day

It’s one of those special days in the market where the Fed will make a highly anticipated decision on interest rates. It is widely expected that the Central Bank will cut the Fed Funds rate by 0.25%.

The rate cut is already baked into stock prices. If the Fed doesn’t cut the rate, the market will freak. At the same time, an actual rate cut will do little to rally stocks and speculation will immediately focus on the next possible rate cut. Right now, that is expected in December.

Why is the Fed cutting rates?

Some may say that it is because the economy stinks. The powers-that-be know the real deal and they know the economy is in trouble. Why else would they cut rates in a strong economy and market? I think it’s different this time.

Unprecedented Central Bank intervention in the U.S. and abroad during this recovery has skewed the normal market math. The Fed had raised the Fed Funds rate eight times (by 0.25% each time) since late 2015, and the first rate cut this June was an attempt to bring rates closer to historical norms in the late stages of a recovery. But it did so in a world that is very abnormal.

Rates overseas are low and even negative in some cases. The rate hikes didn’t fit into a discombobulated interest rate world. The inverted yield curve isn’t a historical signal of impending recession, but rather an indication that the Fed raised U.S. short-term rates too much under the unusual circumstances. The Fed is trying to make amends by pulling back and lowering rates.

The good news is that the rate cuts aren’t indicative of a weak economy. The bad news is that all this unprecedented Central Bank meddling could end badly some day.

Then there’s oil. Crude oil prices spiked 14.7% in one day after Saudi Arabian oil assets were bombed, taking half of the country’s production offline for at least several weeks. There is also an increased risk of rising tensions in the area. The market doesn’t like the increased risk but higher oil prices don’t have the negative effect on the economy that they used to. Markets are trying to shrug it off for now and resume the slow slog higher.

High Yield Tier

BUY – Brookfield Infrastructure Partners (BIP 48 – yield 4.2%) – The infrastructure MLP took a breather this week but it’s still up almost 7% for the last month and 40% so far this year. It’s still reasonably value though because it’s coming of a rare bad year in 2018. It’s selling below most of its 5-year valuations, a period in which the stock averaged a 15.5% average annual return. High dividend stocks with defensive businesses are in vogue right now, as is the infrastructure subsector. It also helps that new assets coming online should continue to boost earnings in the quarters ahead.

HOLD – Community Health Trust (CHCT 44 – yield 3.8%) – This small healthcare REIT had an ever-so-brief pullback of more than 5% a couple of weeks ago. But it has gotten it all back and then some this past week and is now at new all-time highs. Even though the stock is up 50% so far this year it doesn’t seem to want to give anything back. The market loves this stock. I love that the market loves this stock. It still wants to go higher despite lofty valuations. Let it ride.

BUY - Enterprise Product Partners (EPD 29 – yield 6.1%) – The energy sector finally got some. It’s the top-performing sector over the past month, up over 11%, but it’s mostly benefitting the commodity price-sensitive companies. EPD is still in the same vicinity it’s been in since March, around the 30 high point of its five-year range. This is a blue-chip energy company that is growing earnings as new projects come on line. The stock price is still 30% below the 2014 high while earnings have grown 11% per year over those five years and should accelerate going forward. Eventually the market will figure it out. Enjoy the 6% yield in the meantime.

HOLD – STAG Industrial (STAG 30 – 4.8%) – This industrial REIT, and monthly dividend payer, should continue to hold its own for the foreseeable future. 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 if the market rallies. It also pays a sizable 4.9% yield with a monthly payout.

Dividend Growth Tier

BUY – AbbVie (ABBV 71 – 6.1%) – The biopharmaceutical company has been performing well of late. It’s up 14% over the past month about 6% the past week. A few analysts upgraded the stock with positive things to say. But I believe the main underlying reason for the perked-up performance is that the stock just got way too cheap. The market is pricing in a worst-case scenario and ignoring the considerable fire power the company has to offset Humira competition. It has been the kind of a market where investors continue to shun out-of-favor stocks regardless of longer-term prospects and discombobulated pricing. But that mentality will change. It always does. In the meantime, you get a huge yield that is safe with limited downside.

HOLD – Altria (MO 41 – 8.1%) – Let the bad times roll. E-cigarette maker JUUL, in which Altria bought a considerable stake earlier this year, continues to wallow in headline and regulatory hell. In the past couple of weeks more news of lung disease from vaping has surfaced and President Trump threatened to outlaw all flavored products. The stock is ridiculously cheap with a safe 8% yield, but it keeps getting cheaper. It’s hard to see how the stock can move higher against a barrage of constant negative headlines. That said, the stock should get a bounce back from the current five-year low as the company continues to make money.

HOLD – American Express (AXP 119 - yield 1.3%) – The stock was down a little on Monday but quickly recovered and is up for the week. After stumbling in August, the market has been strong in September and is now very near the all-time high. AXP usually tracks the overall market in terms of general direction buy it has not participated in the latest up leg for the market. The other credit card companies have also behaved this way. It is not a big deal at this point but I will watch carefully to see if the trend continues.

BUY – Crown Castle International (CCI 141 – yield 3.2%) – After a healthy consolidation of about 10% the stock is moving higher again. The safer stocks underperformed as the market regained traction this month and CCI, being a safe stock superstar, went down more than average. But it appears that the market is again realizing that the 5G buildout is massive and will continue in any economy.

BUY – Valero Energy Corp. (VLO 83 – yield 4.4%) – The stock of this refiner is up 18% since late August. But it is still within the same range it has traded for most of the year. A breakout above 90 would represent a much more significant move. Valero is a prize pick in the sector as 2020 is shaping up to look like a much more prosperous year for refiners. The stock is dirt cheap still and over the last six months six analysts have upgraded the stock to a BUY rating with an average target price of just under 100. We’ll see if this latest upswing is range bound or if investors have started thinking about 2020.

Safe Income Tier

BUY – Alexandria Real Estate Equities (ARE 153 – yield 2.6%) – It’s a new all-time high. The slow and steady assent continues. 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 the dividend. It should be good-to-go in any type of market.

BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.3%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
Nothing new here. And that’s the beauty. They just keep rolling on at a steady price paying interest. These short-term investment grade rated corporate bond ETFs don’t pay much yield but they come as advertised, with consistent income and virtually zero volatility.

BUY – Invesco Preferred ETF (PGX 15 – yield 5.4%) – This preferred stock ETF has been a rock as well. It is a high yielding, safe haven port in an uncertain market. The lack of correlation to the stock and bond markets makes this a fantastic way to diversify. The 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 should be for a while.

HOLD – McCormick & Co (MKC 160 – yield 1.5%) – It looks like the spice maker is back on track after a rough week two weeks ago. It’s another safe stock that found its legs again after the market briefly turned on these safe plays. It added up to a healthy pullback. MKC seems poised to run higher but that could depend on third-quarter earnings, due out October 1.

HOLD – NextEra Energy (NEE 222 – yield 2.3%) – After a rough week for utility stocks a couple of weeks ago the sector has stabilized. Although this conservative utility has returned 30% already this year and averaged a 20% per-year return over the last five years, NEE could still have more room to run. It’s not only a utility but a best-in-class member of the sector that offers both stability and a higher level of growth.

HOLD – Xcel Energy (XEL 64 – yield 2.6%) – Its cutting-edge alternative energy business gives XEL growth properties that other utilities don’t have. Even when utility stocks fall out of favor with investors this one may well be the exception to the rule. It has a lot of what NEE has but the much smaller size probably gives it more upside potential.