Happy Fourth of July
What a year this has been.
The world has been devastated by pestilence. The ensuing lockdowns have crashed the economy. The virus is getting worse not better. Strict lockdown restrictions are returning in many states. Meanwhile, the market is on an exuberant bender with indexes making new all time highs.
Let’s try to make sense of it.
It’s all about the vaccine. For the third straight week the market has rallied on the news of another coronavirus vaccine with positive late stage trial results. Vaccination is coming soon. That means the end of the pandemic sooner rather than later. The end of the pandemic means a full recovery and an economic boom. Stocks like that.
Remember, the market tends to look ahead six months of so. By then it sees an end to the pandemic and ensuing restrictions. It sees an unshackled economy making up for lost time. The market is reacting to the next phase of the recovery, regardless of whatever ugly turn the pandemic takes in the next month or two. To the market, it’s not Thanksgiving. It’s the Fourth of July.
The latest rally has been great news for us dividend investors. Real economy stocks that have been neglected in the market recovery so far have come back to life. The energy, financial, and industrial sectors are on fire and leading the market higher.
These previously beleaguered stocks and sectors are still cheap in an expensive market. High dividend yields also tend to reside in these sectors. While the initial phase of the recovery was great to the highfalutin tech stock jocks, this next phase will reward us dividend investors. It will be glorious. And opportunities abound.
Have a happy Thanksgiving.
High Yield Tier
Rating change “BUY” to “HOLD”
B&G Foods (BGS – yield 7.2%) – The vaccine-intoxicated market has not embraced this packed food company. In fact, it has outright shunned it. This normally stodgy growth company has grown earnings over 30% during the pandemic as more people eat at home. BGS has returned 57% YTD and 80% over the last year. Despite the fact it’s still cheap on a valuation basis, this phase of the market sees BGS as a pandemic stock whose days have passed. I disagree because business and growth for the company is likely to stay strong well after the lockdowns. But the stock has languished since September. Until is displays an uptrend I am reducing it to a HOLD. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.8%) – The previous market recovery liked this infrastructure partnership. But the vaccine recovery loves it. The company’s crucial assets continued to generate reliable earnings through the recession. It looks like the post pandemic BIP will accelerate growth as it buys assets on the cheap. As well, the infrastructure subsector is becoming even more in-vogue with speculation of more emphasis in a Biden presidency. We’re lookin’ good here. BUY
Enterprise Product Partners (EPD – yield 8.8%) – Halleluiah! The long and painful wait is over. Since being added to the portfolio this was a stock that should be higher priced, based on fundamentals. But the market never gave it the time of day. That’s changing fast with the vaccine rally and anticipation of a full recovery. Investors are awakening to the splendor of a safe high yield, strong earnings, and a dirt cheap valuation. The stock is up over 20% in less than three weeks. I expect a lot more of the same going forward. You can collect that massive yield while you watch the stock move higher in the months ahead. BUY
STAG Industrial (STAG – 4.8%) – This monthly paying industrial REIT has been range-bound since peaking at a new all-time high in early August. But the business is well positioned with a great supply/demand dynamic for its properties. As well, it has been the historic pattern for this stock to trend higher in fits and starts. It should get a boost as a full recovery gains traction. I like this stock and believe it will make another upside move in the coming months. HOLD
Verizon Communications (VZ – 4.1%) – This stock has been solid through the recession. But it still hasn’t really broken out to a level beyond that of utility stock-like play. It should benefit bigly from 5G. We’ll see if it breaks a move as 5G becomes a much bigger story as the pandemic move into the rear view mirror. HOLD
Dividend Growth Tier
AbbVie (ABBV – 5.0%) – I love this stock longer term. If it was a chick and I was single I’d propose. But the hot story right now is the short term. ABBV has a tendency to bounce up and down on a longer term upward trajectory. It’s in the midst of a serious upward bounce. It peaked before the pandemic, then it declined. Then it peaked in the middle of the summer, then declined. Now, it’s peaking again. It made a new 52-week high. I don’t know how high this round of peaking will take it. But enjoy the ride. BUY
Altria (MO – 8.4%) – The cigarette maker stock is acting much better of late, along with a lot of the previous losers of this recovery. This company is in an epic battle. It has to replace shrinking cigarette volumes with other revenues. And so far the efforts have failed. In the near term Altria can gloss over the issue with price hikes and share buybacks to bolster earnings. Eventually, these other sources will have to work.
But in the near term the stock is cheap and the high dividend is secure. There isn’t much downside at this point and the high yield is real. In the meantime, we can keep collecting the dividend income and see how far this phase of the market propels this neglected stock. BUY
Rating change “HOLD” to “SELL”
Crown Castle International (CCI – yield 3.2%) – I love the cell tower niche for a REIT. Demand for its properties should remain rock solid and growing with the 5G roll out. But the stock is pricey, and it looks like it’s sideways bound for a while. That’s not bad but there are better opportunities in vaccine land. And the yield isn’t high enough to justify being bored to tears indefinitely. This was a good, solid play that returned 40% in a year and a half in tumultuous times. But, in the absence of a compelling reason for a higher price, it’s time to part ways after it served the portfolio well. SELL
Digital Realty Trust (DLR – yield 3.4%) – One of the compelling things about this data center REIT is the fact that it moves independently of the market, with a beta of just 0.18. But lately, that individuality is annoying me. While the market is on a vaccine bender, DLR has moved lower. There’s no real reason for the recent down move. I think it did it just to be different. But the longer term prognosis for these technology properties and DLR is excellent. It’s also good to have in the portfolio in case the market turns south. BUY
Eli Lilly and Company (LLY - yield 2.0%) – This biopharmaceutical company stock has been in a real funk since the summer when it hit a high of 170 per share (currently 144). It got a big boost after the election as the market anticipated divided government and no draconian health care legislation. But that was the only good thing for the stock in the last four months. This is one of the very best companies in an industry that should inherit the future. Its drug pipeline is second to none. And Lilly has a proven ability to execute. But if it doesn’t build on the recent momentum I might lose patience and pull the plug on this one. BUY
Innovative Industrial Properties (IIPR – yield 3.0%) – This marijuana farm REIT has been such a beautiful addition to the portfolio. It has returned over 100% in a year. It had another big spike higher after the election as more states legalized marijuana. Selling the stock here would just be because it’s up so much, and that’s too good. The growth and fundamentals of the company are to die for. And the stock is still technically solid. After the latest big spike, it hasn’t pulled back. It’s just consolidating at the higher level. Let’s keep riding this horse until it shows signs of tiring. HOLD
Qualcomm Inc. (QCOM – yield 1.8%) – This 5G chip maker is a similar story to IIPR. The stock has been an incredible performer that isn’t showing signs of topping out yet. The uptrend is furious and intact. And fundamentals justify a higher move. Profits are rolling in beyond expectations as it collects royalties on the new 5G phones. It appears to have solved is legal problems with licensing issues that had been holding it back. And the stock is still relatively cheap for a growing technology company despite the recent performance. Go baby go! HOLD
Realty Income (O – 4.5%) – This legendary income REIT is a great addition to any dividend portfolio. It’s a super addition when the timing is right. And I think this is great timing. The stock has been unjustifiably held back by the misfortune of some of its peers during the pandemic. It’s cheap here and the pandemic worries are fading. Investors will find their way to perhaps the greatest income stock of all time with a 10-year Treasury yield at less than 1%. BUY
Valero Energy Corp. (VLO yield 7.0%) – This is a great company. It is the most cost efficient and technically advanced refiner in the world. But that doesn’t really matter right now. For the time being, VLO is a high leverage play on a vaccine and the end of the pandemic. That’s been a beautiful thing lately. VLO is up 50% since the first vaccine announcement on November 9th. This stock is cyclical and volatile. It didn’t deserve the punishment it took during the pandemic. Gasoline and diesel aren’t going out of style any time soon and profits will come back. Now we’re seeing the other side of the market’s impetuosity. This one can move higher fast. HOLD
Safe Income Tier
Rating change “HOLD” to “SELL”
Alexandria Real Estate Equities (ARE – yield 2.6%) – This life science and research lab niche REIT has been unimpressive but solid. Since being added to the portfolio in the summer of 2019 it has underperformed the market with a little bit less volatility. It delivered as advertised, sort of. But with no compelling upside potential from here and a yield of less than 3%, there are better opportunities as the market looks toward a post-pandemic world. Many high yielding stocks selling at compelling valuation are coming alive. I think we can find stocks that should do a lot better than ARE in the next year. SELL
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.3%) – This short-term bond ETF is a beautiful thing in uncertain markets. It’s nice to have something in the portfolio that you don’t have to worry about. It still has a yield that’s better than you’ll get in most traditional safe haven investments. BSCL is delivering as advertised. BUY
Invesco Preferred ETF (PGX – yield 5.1%) –This preferred stock ETF is rock solid in all but the most tumultuous market selloffs. PGX has been consistently trending back toward the high as the desire for income will probably edge it over the top. It is less volatile than the market in general and provides a high yield and excellent diversification from both the stock and bond markets. HOLD
NextEra Energy (NEE – yield 1.9%) – There have been great stocks for conservative investors over the years. But today, this regulated and alternative energy utility is the best of the best. It forges higher no matter what. Investor desire for reliable earnings in any environment combined with the growth of alternative energy is highly unlikely to wane any time soon. And NEE will continue to reap the rewards. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller alternative energy utility is similar to NEE except it has more volatility and more potential upside. The stock is still in the midst of a massive and pronounced uptrend. And alternative energy investments are only getting more popular. This is a stock that you just continue to hold. The performance beats the stuffing out of the market and with much less volatility. HOLD
