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Dividend Investor
Safe Income and Dividend Growth

December 16, 2020

With Christmas just a little over a week away, the market tends to go into a holding pattern. It’s a lot like the last weeks of the summer. Investors tend to focus on other things while the market continues in the same fashion as it did right before people stopped paying attention.


Enjoy the Christmas Swoon Ahead of a Promising Year
It’s Christmas time.

With Christmas just a little over a week away, the market tends to go into a holding pattern. It’s a lot like the last weeks of the summer. Investors tend to focus on other things while the market continues in the same fashion as it did right before people stopped paying attention.

The market is in a place of trending slightly higher, albeit at a much slower pace than in November. The main story is still the vaccine. As a coronavirus vaccine is now being distributed, the end of the pandemic and ensuing full economic recovery is around the corner. A booming recovery awaits in the New Year.

Of course, beware of the media. It will always cast doubt on the story.

The press will say the vaccine stinks, the market is too high and the economy won’t fully rebound for a long time. That’s what they do. For some reason, negative news must get more viewers. Just tune into the local news. It will be all about a fire or a murder, unless of course a natural disaster comes along.

Money flow is a much more accurate harbinger of things to come. The market usually gets it right. And the market sees a full recovery in 2021. The rise of the real economy and more cyclical stocks is a testament to that perception.

While headlines can always disrupt things, the Christmas swoon is likely to deliver more of the same for the rest of the year. The rubber will hit the road in January as investors refocus. After such a rapid rise in stocks, a pullback is always very possible. Don’t be surprised if we see one early in the year.

I’m not saying a pullback will occur—just that it wouldn’t be unusual. If it happens, I will consider it a buying opportunity ahead of a full recovery on the other side of the pandemic.

In the meantime, there are two ratings changes in the portfolio this week: AbbVie (ABBV) and Digital Realty (DLR). There was bad news in chip maker Qualcomm (QCOM) this week and very good news for Eli Lilly (LLY) and Innovative Industrial properties (IIPR). Let’s get started.

High Yield Tier
B&G Foods (BGS – yield 6.5%) – This packaged food company stock has been stronger lately and is at the top of its recent range since the August high. It seems to be getting a bit of a boost from the worsening virus situation, as people continue to eat more at home and the pandemic earnings spike is expected to last longer. I think this will still be a good stock after the pandemic as people will still eat at home more and growth rates should be higher for a long time. But if the market wants to give it a boost over short-term considerations, let it. If it breaks out of the recent range I’ll consider raising the rating back to a BUY. HOLD

Brookfield Infrastructure Partners (BIP – yield 3.8%) – This operator of infrastructure assets all over the world seeks shareholder returns of 12% to 15% per year. They seek to achieve that in part by 5% to 9% annual dividend increases. Those are very strong numbers that the stock should achieve. The income is highly dependable and is growing through acquisitions and the asset rotation strategy of trading up for higher market assets. The company has recently acquired a huge presence in cell towers and has been picking up assets on the cheap this past year. The stock is technically solid too. BUY

Enterprise Product Partners (EPD – yield 8.4%) –The revival continues for this midstream energy company. It was up another 4.2% this past week and has now risen over 31% since the end of October. I think the revival in energy stocks is real and EPD still has a long way to go to get to the pre-pandemic level of about 30 per share (currently 21.54). It has reliable and growing operational performance, compelling value, a safe distribution, and strong momentum. BUY

STAG Industrial (STAG – yield 4.6%) – This monthly paying industrial REIT has been in a sideways fund since late summer. But it is still outperforming its REIT peer group for the year. Industrial REITs are somewhat cyclical but STAG is also seen as a pandemic beneficiary because of its exposure to e-commerce related warehouses. Industrial properties are hot and STAG should get a big boost as the full recovery comes to fruition in 2021. HOLD

Verizon Communications (VZ – yield 4.1%) – Wireless is a weird industry that requires massive investment in networks and has created an oligopoly. There is reliable income but little growth, making the companies more like old fashioned utilities. But the situation might get a lot better for VZ as 5G technology rolls out and creates many more opportunities to charge people for using its network, as well as upgrades in current subscriber plans. A growth catalyst should make this a much better stock going forward. HOLD

Dividend Growth Tier
Rating change “BUY” to “HOLD”
AbbVie (ABBV – yield 5.0%) – Despite very strong recent returns, up 28% since late October, the stock is still cheap, selling at less than 9 times forward earnings. It has a stellar pipeline that is more than capable of offsetting increasing competition for its blockbuster Humira drug, fears of which account for the cheap valuation. But the stock has a pattern of spiking higher and then pulling back for a while, albeit on an upward trend. It would be normal for ABBV to pull back after the recent spike that has delivered it to recent highs. It’s a great stock for the longer term. But, given the strong possibility of a pullback in the near term, the rating is being reduced to a HOLD for now. HOLD

Altria (MO – yield 8.2%) – The longer-term prognosis for this company and stock is still in question. It remains to be seen if the cigarette maker can offset the ever-decreasing amount of smokers with another revenue source. The market has already priced in a dismal forecast on that front. There is a greater likelihood of an upside surprise from the current pessimism. In the meantime, it’s a great income stock with a huge and safe dividend. And the stock is performing a lot better of late. BUY

Rating change “BUY” to “HOLD”
Digital Realty Trust (DLR – yield 3.5%) – This data center REIT has a great fundamental and longer-term story as it specializes in a rapidly growing niche real estate area. But it has been under pressure lately, down almost 20% in the last couple of months. Part of the downdraft is the normal ebb and flow of the performance, and part is the fact that the market is shunning certain companies that benefitted during the pandemic. But the short-term technical situation continues to deteriorate. Therefore, it is being reduced to a HOLD rating until the current downtrend subsides. HOLD

Eli Lilly and Company (LLY - yield 2.0%) – This best-in-class pharmaceutical company has finally gotten hot. LLY is up 20% since the beginning of November and 10% in the past week and a half. The recent spike is based on positive company news. It had a big up day last week after it announced positive phase III trial results for a new diabetes treatment. This week, Lilly raised 2021 earnings guidance, announced a 15% dividend hike, and acquired a gene therapy company for $1 billion. The acquisition is well targeted and not too expensive.

This is the story playing out as expected. Lilly is a very well managed company with a proven ability to execute and one of the best drug pipelines in the business. Momentum is now being added to its list of attributes. BUY

Innovative Industrial Properties (IIPR – yield 2.8%) – The news just gets better as the stock continues to run. Another five states legalized marijuana in the election. Innovative is continuing to make lucrative acquisitions to ensure future growth. And it just raised the dividend by 6% sequentially and 24% year on year. The stock has now returned 150% since being added to the portfolio almost exactly a year ago. Despite the high returns, IIPR continues to break out to new all-time highs and has strong upward momentum. Why interrupt it? HOLD

Qualcomm Inc. (QCOM – yield 1.8%) – This chip maker stock took a hit last week. Apple (AAPL) announced it is developing its own 5G modems and purchased a company to get that done. Qualcomm currently provides those to Apple. The stock tumbled 9% on the day of the announcement.

There is a contract and Apple won’t be replacing QCOM modems soon. But the writing is on the wall. Apple is also working on developing its own 5G chip, and so is China. They just don’t have one yet, and QCOM remains the only game in town for now. But this was always the story. Eventually, Qualcomm will have to replace the revenues from its 5G chip exclusivity as competition ramps up. And it’s working on it. The market knew this. It just didn’t want to hear it. QCOM has since been recovering from the one-day plunge and is still on track to reap huge benefits from 5G over the next year and beyond. HOLD

Realty Income (O – 4.6%) – This is a conservative way to play the recovery. O has historically been one of the very best income stocks on the market, and it’s still cheap after the pandemic knocked it back unjustifiably. Despite pain in certain retail areas, the vast majority of Realty’s portfolio is doing fine, and the company still grew earnings over last year in the first nine months of the year. As the pandemic inevitably fades next year, this stock is likely to come back in vogue with yield hungry investors. It’s a good price with a great dividend. BUY

Valero Energy Corp. (VLO – yield 6.9%) – This is an aggressive way to play the recovery. VLO is up over 50% since the vaccine announcement. The full recovery in 2021 that the market is pricing in will necessarily include a huge boost in demand for gasoline, diesel and jet fuel. The stock still has a long way to go to get to the pre-pandemic highs of around 100 per share; it’s currently at 57.50. If this pandemic ends and the full recovery comes to fruition, VLO should move a lot higher over the next year. It may bounce around in the near term but the overall returns should be worth it. BUY

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.2%) – Sure, this short-term bond ETF doesn’t provide an exciting return or a high yield. But it comes as advertised. It’s a safe port in a crazy market. While the market has been booming lately, there are still a lot of uncertainties out there. It’s nice to have something in the portfolio that you don’t have to worry about. Plus, considering the 10-year Treasury still yields just 0.91%, the yield isn’t bad for safe money by today’s standards. BUY

Invesco Preferred ETF (PGX – yield 5.1%) – This preferred stock ETF is much less volatile than the stock market and provides a higher yield than all but the most aggressive bonds. It also provides diversification and preferred stock performance is historically not correlated to the stock and bond markets. It’s a great place to generate a solid yield while rounding out your portfolio. HOLD

NextEra Energy (NEE – yield 1.9%) – Alternative energy is hot stuff. It continues to get cheaper to produce, and more in demand. And the market seems to love anything to do with it. NEE is the best way for conservative investors to play the trend. It has a conventional regulated utility that provides steady income while being the world’s largest producer of wind and solar. The stock has consistently blown away the market returns, and with considerably less volatility. I see no reason for the story to change behavior going forward and it might get even better. HOLD

Xcel Energy (XEL – yield 2.6%) – This smaller and more volatile alternative energy utility was upgraded to a BUY last week, in our December issue. The stock pulled back a bit as the market rampaged on a vaccine bender and forgot about the longer-term trends. But it will certainly come back. The recent underperformance creates a good opportunity to get into this conservative alternative energy play. It’s been moving higher already. BUY

CDI Portfolio 121620