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Dividend Investor
Safe Income and Dividend Growth

February 17, 2021

Earnings have been sensational. Reported earnings for S&P 500 companies have grown an average of 2% in the fourth quarter, compared to an expected -11%.


Stocks Binge on Good News
The market continues to move higher, and for good reasons.

It seems relentless. The S&P 500 is now up 20% since the beginning of November and 80% from the low of last March. And it doesn’t seem to want to stop moving still higher.

Why should it? Earnings have been sensational. Reported earnings for S&P 500 companies have grown an average of 2% in the fourth quarter, compared to an expected -11%. That means earnings are better than they were before the pandemic, and the economy still has one arm tied behind its back.

The economy and corporate profits continue to far exceed expectations at every step of the recovery so far. And that bodes very well for the rest of the year as vaccines end restrictions and an unshackled economy blasts off to a full recovery. The booming growth will be supplemented by trillions in stimulus spending for good measure, and record low interest rates. What’s not to like?

Well, this market pace simply can’t last. That’s fine. It is still a very promising year for the market. But the market usually doesn’t moderate its pace by simply slowing the upward ascent. It usually pulls back, like it did this past June and September. A market pullback or correction in the weeks and months ahead is likely, if not inevitable.

That means that some of these outsized recent gains should be regarded as temporary. And it’s prudent to take some profits off the table, as this advisory has done in recent weeks.

But a market pullback is normal and healthy. And a lower market will likely present a buying opportunity ahead of what is still a very positive environment for the rest of the year. Of course, what is true of the market indexes isn’t true for all stocks. While some stocks are in nose-bleed territory, others are still cheap.

Energy stocks in particular, including positions in Valero Energy (VLO), Enterprise Product Partners (EPD) and Chevron (CVX), still sell at cheap valuations and should be less vulnerable in a market pullback. These stocks have also been on the move again recently amidst better-than-expected economic and earnings news.

High Yield Tier
Brookfield Infrastructure Partners (BIP – yield 3.8%) – Enterprise has had a rough February, down about 6% for the month. The only real news was an offer to buy Canadian midstream energy company Inter Pipeline for about $3.6 billion. Inter scoffed at the offer as too low and nothing has yet gone through. It’s a smart time to buy this company on the cheap after a recession. The market is likely reacting negatively to the company rejecting the offer on fears that Brookfield will end up paying too much.

It’s most likely that Brookfield either gets a very good price or the deal blows up. Either way the partnership should be in good shape over the rest of this year. Earnings should be on the rise as new acquisitions come on line and energy and transportation assets return to normal with a full recovery. This pullback presents an excellent buying opportunity. BUY

Enterprise Product Partners (EPD – yield 8.2%) – The midstream energy partnership pulled back from the post-pandemic highs in the second half of January but has been again trending higher in February. While the company has resilient earnings and a safe dividend, the story is simpler than that. A full recovery ushered in by the vaccine will boost profits and lift the whole sector. EPD offers great value and a high distribution and should surely benefit. BUY

STAG Industrial (STAG – 4.4%) – This monthly paying industrial REIT has weathered the pandemic very well. Its biggest tenants are Amazon (AMZN) and the federal government. As well, the industrial real estate market has already been restored to pre-pandemic levels. It’s a solid holding heading towards a full recovery and it’s still cheap. HOLD

Verizon Communications (VZ – 4.6%) – The performance has been very disappointing in a great market. VZ has been an eyesore and a hindrance to this portfolio. However, it is trading near the low point of its range and the stock is a very strong down-market performer. With the market looking somewhat frothy at this point, VZ isn’t a bad stock to have right now. As well, the stock could get a decent ride as 5G becomes a bigger story in the post-pandemic market. It’s also worth noting that the stock is up over 4% today, probably because Warren Buffett just took a position in the stock. HOLD

Dividend Growth Tier
AbbVie (ABBV – yield 5.0%) – This biopharmaceutical stock continues to hang tough near the top of the range. Since the summer of 2019, ABBV has had a pattern of moving up and down on an upward trend. It has typically surged to a new recent high and then pulled back for a few months. ABBV made a new, new high in November and is still hanging around. It could be poised for a breakout beyond the old pattern. HOLD

Altria (MO – yield 8.3%) – For 2020, revenue was up 4.2% and adjusted earnings grew 3.6% from 2019. And that was through the pandemic recession. Cigarette profits were up over 10% for the year. It continues to grow earnings and can handily afford the huge dividend. The longer term will depend on whether it can develop new sources of revenue to offset smoking declines. It whiffed on JUUL but has other possibilities. We’ll see. It’s a solid income stock that could be something better in the future. BUY

Broadcom Inc. (AVGO – yield 2.9%) – The technology giant has been looking strong. It was up more than 7% in February, although it’s down today. Broadcom doesn’t announce earnings until March but other company results are indicating a strong semiconductor market. Last quarter, wireless revenue soared 43%. That boost should continue in the quarters ahead as more phones are sold. The stock is showing a lot of technical strength ahead of what should be a great year for 5G stocks. BUY

Chevron Corp. (CVX – yield 5.5%) – This best-in-class oil major has been hot. It’s up more than 11% since late January and close to a post-pandemic high. As well, like VZ, Warren Buffett just took a position in the stock, according to the latest filing. The newest portfolio addition stands to benefit from a full recovery later this year. Right now, it is at the high point of the recent range. We’ll see if it stays true to recent form or breaks out to a new level in the next week or so. BUY

Digital Realty Trust (DLR – yield 3.3%) – This data center REIT can’t seem to get out of its own way. It was raised to a BUY when it hit the low point of the recent range. It then started soaring higher. But now it’s retreated back near that low point. Earnings beat expectations but margins were lower and the company didn’t forecast an improvement in 2021. Despite recent action DLR still has a lot of things going for it right now. It’s in a growth business, trading near the lower range in a long-term uptrend, and it has a beta of just 0.11 in a pricey market. BUY

Eli Lilly and Company (LLY – yield 1.7%) – This big pharmaceutical company took off to the tune of better than a 70% gain in two months on a plethora of good news. It had two great earnings reports, hiked the dividend 10%, and there has been very encouraging news about drugs in the pipeline, including a potential blockbuster Alzheimer’s drug. The stock is taking a breather since the surge, which is to be expected. It’s still priced a little on the high side now, but for good reason. I love the stock for the longer term, but we’ll see about the near term. HOLD

Innovative Industrial Properties (IIPR – yield 2.6%) – This marijuana REIT is a great growth story. But the price has moved so high, it’s in uncharted territory. It moved almost 90% higher since the end of October and over 200% since being added to the portfolio in November of 2019. This portfolio has already taken profits on two thirds of the position. We are still holding the remaining third because the stock still hasn’t shown any technical weakness, although it’s down today. It may continue to forge higher but it can be volatile, and if IIPR shows any kind of duress we’ll sell the rest. HOLD

Qualcomm Inc. (QCOM – yield 1.6%) – After making huge gains, QCOM pulled back and has since gone sideways for the last couple of weeks after announcing fourth-quarter earnings. It beat earnings estimates with EPS growth of 119% from the year ago quarter but revenue fell short because of industry-wide supply shortages in 5G smartphones.

It also said that these supply shortages would persist through next quarter as well. The 5G royalties won’t flow in as the market expected when QCOM was flying high. But the story is still intact. The full bounty of the smartphone royalties just got pushed back a quarter or so. HOLD

Realty Income (O – yield 4.6%) – This legendary income stock has been moving sideways for about six months now. The stock should benefit as the pandemic fades and the economy gains more traction later in the year. Earnings were resilient during the pandemic as the REIT grew earnings in the first nine months of the year despite the lockdowns. But the market isn’t showing it any love yet. It’s a good stock to have if the market pulls back, but we’ll have to wait and see if it gets any traction in the weeks and months ahead. BUY

U.S. Bancorp (USB – yield 3.5%) – After a brief hiccup, this bank stock got some of its mojo back. It’s again near the post-pandemic high of 50 per share and appears poised to benefit from a full recovery later this year. All those trillions in stimulus should help as well in the months ahead. Not only should it boost growth but will likely put upward pressure on interest rates, which will improve net interest income for banks. BUY

Valero Energy Corp. (VLO – yield 6.1%) – This refiner and high leverage play on a full recovery has been on the march again. It consolidated and went sideways for a couple months after a huge initial surge following the vaccine announcement. But it has caught fire again and has broken out to new post-vaccine highs. Energy has rallied and will likely continue to do so. And VLO still has a long way to go to get to pre-pandemic levels. BUY

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.1%) – This short-term bond fund is a safe port. While the market is promising in the New Year, 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 at about 1%, the yield isn’t bad for safe money by today’s standards. BUY

Invesco Preferred ETF (PGX – yield 5.0%) – This preferred stock ETF is much less volatile than the stock market while providing a big yield. It also adds diversification as 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 1.7%) – NextEra offers the excitement and growth of alternative energy along with the comfort of a utility. That’s the right stuff for investors. It pulled back recently after a big surge, but that’s normal. The uptrend and chart is a thing of beauty. And I don’t see any reason why this stock won’t continue its charmed existence. Alternative energy is a big hit with investors and the intrigue is likely to grow as the new administration puts more focus on it. HOLD

Xcel Energy (XEL – yield 2.8%) – This smaller alternative energy utility is still one of the largest clean energy providers in the country. It recently passed the 10,000 MW wind power threshold, and is one of the first U.S. providers to do so. But the stock has been floundering since the vaccine announcement in early November as investor focus went to other areas. It’s at a low point in the range and I still believe it’s a good buy here. BUY

CDI Portfolio