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Dividend Investor
Safe Income and Dividend Growth

May 20, 2020

We are in the midst of a rally that has continued for about two months. This market seems to want to go higher. While the rally has slowed significantly from the initial bounce off the lows in March, the overall market is still in an uptrend.


The Rally Forges On

The news is good and the market is up.

We are in the midst of a rally that has continued for about two months. This market seems to want to go higher. While the rally has slowed significantly from the initial bounce off the lows in March, the overall market is still in an uptrend.

The S&P 500 is now just a little over 12% off the all-time high set in February, and is now at the same level it was this past October. Where do we go from here? Is the market on its way to new highs? It sure looks like it.

But that doesn’t make any sense. And I’m optimistic about the future. I think the U.S. economy will come roaring back with a speed that surprises almost everyone. Clearly, the economy is starting to reopen already, and there might be a vaccine sooner rather than later. As well, there are trillions of dollars in stimulus money floating around and the Fed has pledged more support for the market if things get dicey again.

I’m down with all that. And I feel positive too. But we still have a lot of work to do before the economy gets anywhere near where it was this past October. There are 36 million new unemployed. The economy is forecast to shrink 30% to 40% in the second quarter. And the economy will restart with one hand tied behind its back for a while, as large gatherings are still prohibited and will still be taboo for a while beyond that.

In short, I believe the odds are high that the market has another significant selloff before it climbs to a new a new high, for two primary reasons. One is that even with an optimistic scenario, the economy will take a long time to get back where it was. Two, there is a high risk of disappointments and setbacks along the way.

For that reason, the Cabot Dividend Investor portfolio has not yet been buying aggressively. I think things are going in the right direction but the market has likely gotten ahead of itself as more stumbles probably lie ahead.

That said, this crisis and recovery is uneven. Certain companies are getting creamed while others are thriving. Right now, I’m primarily sticking with and only buying companies with businesses that remain strong through the recession and are poised to thrive in the post-virus market as well.

High Yield Tier

Brookfield Infrastructure Partners (BIP – yield 4.9%) – Although it has behaved well since the market bottom, this infrastructure company stock is still down over 20% from the high. That’s good. It’s still cheap. The earnings are proving resilient as its vital assets continue to earn in any economy. This crisis also may be setting up better future growth for Brookfield as it can acquire more assets on the cheap as the global economy struggles. The dividend is safe and this should be a solid holding through the rest of this crisis and a big winner afterwards as infrastructure investments become increasingly in vogue. BUY

Community Health Trust (CHCT – yield 4.6%) – The small healthcare REIT has a resilient business and rapidly growing earnings. But the stock has taken it on the chin in this bear market. It’s down 30% from the high in February. A big part of the reason is that CHCT had soared very fast since the beginning of 2019. We did take a profit in two-thirds of the position during the boom times. Now, it is still a solid and fast-growing healthcare REIT with the excesses out of the stock price. HOLD

Enterprise Product Partners (EPD – yield 9.6%) – The Energy sector has been the worst S&P 500 sector in this bear market (tied with the financial sector for that honor). But the sector was already beat up and undervalued before the coronavirus. Now the undervaluation has become silly. That said, energy is likely not out of the woods yet. The financial hardships brought on by crashing energy demand will start to hit companies in the next few months. And oil prices might stay depressed for a while.

There is tremendous value in the energy sector, but it still might be too early to buy. However, EPD should be one of the first stocks on the list to buy ahead of an industry recovery. It stores and pipes oil and gas and isn’t commodity-price sensitive. The company is also in stellar financial shape and should easily be able to endure a rough year and still pay the distribution. It may be too early to buy EPD, but it should be a big winner longer term and it pays an incredible 9.63% yield. HOLD

STAG Industrial (STAG – yield 5.9%) – This is a more cyclical REIT. And REITs as a group have underperformed in this bear market, largely because of market outperformance in prior years. STAG has two huge things going for it. One, its warehouse properties are booming as online shopping is exploding and the need for warehouse storage of properties is surging. And two, it pays monthly dividends. Earnings were solid and the excesses have been flushed out of the stock price. The stock should be solid from here. HOLD

Verizon Communications (VZ – yield 4.5%) – The wireless giant purchased video conferencing company BlueJeans for $500 million this week. The company is a strong player in an area that will likely remain hugely important after the virus. And Verizon’s deep pockets and huge industry presence will likely make it thrive. Other than that, the story is the same. Verizon’s business is solid through this crisis as people use wireless more than ever. And there is a strong catalyst for growth on the intermediate-term horizon with 5G. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 5.2%) – While Energy has been the worst-performing sector during this pandemic, Healthcare is the best. The sector is only down 3.38% from the highs while the overall market is down over 13%. It’s a defensive industry as people continue to take medicine in any economy, it’s a hero of the pandemic, and it has a huge longer-term headwind with the aging population. AbbVie is one of the best healthcare companies. It has one of the best drug pipelines in the industry and cutting-edge treatments. The overblown worry about Humira has kept the stock cheap. While ABBV is actually making a run toward its 52-week high of over 97 per share, it is still a long way from the 2018 high of 140. Meanwhile, it pays a huge 5.2% yield. BUY

Altria (MO – yield 9.1%) – The bad news is that the JUUL acquisition is an unmitigated disaster, and the marijuana stake in Cronos (CRON) hasn’t worked out so far either. The good news is that people are smoking more in the recession. In the second quarter, cigarette volumes were up 6% over last year’s quarter and earnings grew 16%. As well, the marijuana acquisition will likely do better going forward and the joint venture for IOS with Philip Morris (PM) is very promising. Meanwhile, the stock is beaten to pulp, near a five-year low while the dividend yield is massive at over 9%, and it should be safe. HOLD

Crown Castle International (CCI – yield 3.1%) – Not all REITs are struggling. Cellular service is a main technology helping the country through this crisis as people depend on the service more than ever as they are stuck at home. As well, new 5G technology continues to roll out in haste, pandemic or no pandemic. For those reasons, the stock is only down slightly, and much less than the overall market, so far in this crisis. It was downgraded to a “HOLD” recently because the stock isn’t cheap enough to acquire in my view. However, it is a rock-solid stock to hold through the rest of this crisis and beyond. HOLD

Innovative Industrial Properties (IIPR – yield 5.1%) – Marijuana may go in and out of style as an investment, but earnings growth is always popular. The company is on track to more than double earnings this year. That’s huge growth for a REIT. It’s also worth noting that marijuana use doesn’t suffer in a bad economy. As well, more states are likely to legalize the stuff as they deal with budget shortfalls resulting from the lockdown. IIPR should handsomely reward you for any near term volatility over the longer term. BUY

Qualcomm Inc. (QCOM – yield 3.3%) – It’s all about 5G. This company has the only good 5G smartphone chip. While phone sales have fallen during the pandemic and the rollout of new 5G phones will be delayed somewhat, a tsunami is coming. On the other side of this lockdown, booming revenue and earnings await this company. This is a cyclical company that does a lot of business in China, and the stock is down the same as the overall market since the February highs. But the post-virus economy will be much kinder to QCOM than it will be to the S&P 500 companies in the aggregate. It’s a great stock to pick up on the cheap ahead of great times. I will target this company to buy in the next market downturn. HOLD

Valero Energy Corp. (VLO – yield 6.1%) – A refiner is not a good stock to own in a crashing economy. In this lockdown, demand for refined products has tanked. But the market looks forward and things are improving rapidly. Already demand has moved well off the bottom and crack spreads are increasing. This stock can move down in a hurry when business deteriorates, but it also rebounds very quickly. VLO is already up over 100% from the bottom in March. And the economy is opening up again. And people will likely opt for driving over public transportation and flying for a while. Refined product isn’t going away. It will power the economic recovery. HOLD

Safe Income Tier

Alexandria Real Estate Equities (ARE – yield 2.8%) – This defensive life science and research lab REIT has been a market performer so far during this bear market. The failure to outperform the market is because the stock was absolutely booming prior to the crisis and probably got overpriced. But it looks great from here. Guidance for the rest of 2020 was only lowered very slightly and the company has pulled back on is acquisitions strategy. The company has plenty of cash on hand as well. The defensive business is likely to be little affected by the recession and the dividend is safe. This is a great stock to hold through the crisis and beyond. HOLD

Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%) – This short-term bond ETF has held up well through the crisis because it isn’t in the stock market, the bonds are short term, and they are investment grade-rated. It’s a great holding in times like these, and it is delivering as advertised. BUY

Invesco Preferred ETF (PGX – yield 5.4%) – This preferred stock ETF continues to recover from a rather disturbing selloff in the midst of the market panic. It has a high yield but it does have downside if the market takes another plunge. That said, it is only down about half as much as the stock market in this downturn. The high dividend and diversification from the market should also bolster demand for this fund in the post-coronavirus market. HOLD

NextEra Energy (NEE – yield 2.4%) – A regulated utility is great stock to own in a recession as earnings remain relatively unaffected by the economy. But NEE is also a huge player in the high growth alternative energy business. You don’t have to sacrifice growth for safety or safety for growth. You get both. That’s why this stock tends to be so popular. If the market again turns south, I will recommend a “BUY” on NEE at a cheaper price. HOLD

Xcel Energy (XEL – yield 2.9%) – This smaller alternative energy utility has outperformed both its peers and the overall market during the downturn. In fact, the Utility sector has been one of the worst performers despite it being a defensive business because of outperformance prior to the bear market. But XEL was a superstar of the bull market that is holding its own during the downturn anyway. In the last earnings report management stated that Covid-19 was having a minimal impact on results and reiterated its previous earnings guidance for the year. This is still a great stock to own and I will upgrade it to a “BUY” if there is any significant move lower in the price. HOLD