June 23, 2021

Dividends are Still King in a Sideways Market
The market is hovering at a high level within bad breath distance of the all-time high. But that factoid is deceiving. The market really has not gone anywhere but sideways for about two months.

There are two primary reasons for the sideways direction of late. One, stocks couldn’t continue to climb forever after a nearly 90% move higher from the pandemic lows of last year. A consolidation is necessary and healthy. And two, the market tends to anticipate six months or so into the future. Investors can’t decide what will drive stocks higher by the end the year when the economy slows, and comparisons get tougher.

Investors had been gravitating toward value and dividends in the sideways market, to the benefit of most of the stocks in this portfolio. But there was a rude interruption last week. The market got a little ugly. The Dow had its worst week since October, down 3.4%. And several stocks in this portfolio were under pressure.

The culprit was the Fed announcement that it intends to raise the benchmark Fed Funds rate twice by the end of 2023. This was more hawkish than the market expected. It prompted a selloff in companies that benefit from a steeper yield curve, as higher short rates combined with the recent pullback in the ten-year Treasury rate flattens the yield curve. Also, commodity-based companies sold off on the specter of less inflation resulting from the tougher Fed.

What nonsense.

The ten-year Treasury rate is trending down for now after a huge move higher early this year. But there will continue to be upward pressure on rates as the economy booms. And short-term rates aren’t going anywhere for another two years. Then there’s inflation.

Inflation has been running higher than it has in decades. There are supply shortages amidst the unprecedented economic shut down last year and rapid opening up this year. The inflation is likely temporary until the supply issues work themselves out. However, there is speculation that the huge increase in money supply from trillions in stimulus and a booming economy could cause lasting inflation. But either way, what are a couple of measly rate hikes two years from now going to do about it?

The Fed raising rates, usually 0.25% at a time, from the 0% Armageddon level of the pandemic panic three years after the fact is supposed to slay the big bad inflation beast? If such a lame pushback is going to kill it, it couldn’t have been much of a problem.

Last week’s action was about bored traders. The red-hot market has gone sideways for months, and traders are desperate for action. They make a big deal out of anything they can get their hands on. But the move is temporary. The market will likely continue sideways throughout the summer as investors sort out the post-pandemic environment.

The selloff in portfolio stocks is likely temporary as investors should continue to desire dividend and value stocks in a flat market. The recent noise presents a better opportunity to buy several stocks if you don’t own them already.

High Yield Tier
AGNC Investment Corp. (AGNC – yield 8.4%) – After a more than year-long, seldom-interrupted move higher, this mortgage REIT finally took a hit. It retreated from a recent high of 18.70 per share to under 17 as the yield curve flattened. AGNC benefits from a steepening yield curve and stocks like that got creamed last week. That said, I think there is a very good chance long rates increase from here. But even if they don’t, the dividend is safe, and the REIT will benefit in a booming economy. BUY

Enterprise Product Partners (EPD – yield 7.5%) – EPD was minding its own business making new post-pandemic highs, and then it got clobbered along with the rest of the energy sector last week amidst that inflation trade nonsense. EPD didn’t fall much. And the uptrend is still intact. The midstream REIT isn’t even levered to commodity prices and business is good while the stock price is still far from the pre-pandemic levels. BUY

ONEOK Inc. (OKE – yield 6.7%) – This fellow midstream energy company, in the form of a regular corporation, is a similar story to EPD, except it tends to move faster. OKE has already gained back almost all of what it lost last week. It looks like just a blip in the uptrend. Earnings for ONEOK are higher than they were before the pandemic and growing at a good clip in the recovery while the price is still way below the pre-pandemic high. The dividend is solid, the price is a great value and the stock should continue trending higher. BUY

Realty Income (O – yield 4.1%) – REITs got caught up in the selling last week. I’m not sure why. I guess because they benefit from inflation, and since the Fed is taking such dramatic steps to fight it by insinuating that they might start raising rates in two years, REITs sold off. Nothing has changed about the Realty story except that it’s at a better buy point now. BUY

STAG Industrial (STAG – yield 3.8%) – This more cyclical industrial REIT didn’t really sell down with the sector and remains near the all-time high. Its industrial properties and e-commerce warehouses remain in high demand. And that demand is likely to grow stronger in the full recovery. Meanwhile, the industrial subsector is still highly fragmented with plenty of opportunities for STAG to grow. It’s a great company. Let’s see how far it runs. HOLD

Verizon Communications (VZ – yield 4.5%) – I’ll give VZ more time because things might improve for the wireless giant. Its advantage of being more focused on the core wireless business was made clear by AT&T’s issues from trying to do the same thing. Also, Verizon is shedding what’s left of its media companies and honing focus even more. Plus, 5G is really arriving and should be a bigger story in the market as we move past the pandemic. HOLD

Dividend Growth Tier
AbbVie (ABBV – yield 4.5%) – This biopharmaceutical giant is still close to the 52-week high. AbbVie has one of the best pipelines in the business and is fully capable of replacing Humira revenues when that drug loses its U.S. patent in 2023. But because of the worry, it sells at an absurdly low valuation. The stock broke out to a higher range recently and it could have a nice run if health care comes back into favor in this sideways market. BUY

Broadcom Inc. (AVGO – yield 3.1%) – It’s been a long sideways slog for AVGO, along with the rest of the technology sector. The stock is still bouncing around below the February high. But I believe the recent performance is because of short-term factors that will fade away. Broadcom is ideally positioned as a crucial technology infrastructure leader that will benefit as technology proliferates and as 5G rolls out. It could bounce around for a while, but it is still a good buy for the longer haul. BUY

Brookfield Infrastructure Partners (BIP – yield 3.8%) – The infrastructure partnership pulled off the recent high a little bit. But the uptrend is still very much intact. The upward trend isn’t a thing of beauty, and it can be hard to notice. It’s very gradual and choppy. But it’s moving in the right direction and has a lot going for it. Earnings are growing and the infrastructure sector is in the news and getting more attention. BIP isn’t sexy. But it’s good. BUY

Chevron Corp. (CVX – yield 5.0%) – The energy-giant stock only took a tiny hit in last week’s sector selloff. CVX peeked along with the rest of the energy sector in early March. But it hasn’t pulled back much. It’s hanging tough at a high level. It’s also a good sign that the stock is still below pre-pandemic prices despite the fact that business is getting much better than at that time. I think CVX has more left in the tank. And I’m expecting another run in the months ahead. HOLD

Digital Realty Trust (DLR – yield 3.0%) – After marching to a new all-time high the week before last, DLR has retreated about 6%. It’s partially because of the sector selloff last week and partly because that’s normal behavior for this stock. But it’s a strong growth story in the date center business and the stock may resume a move toward higher highs in the weeks ahead. BUY

Eli Lilly and Company (LLY - yield 1.5%) – LLY has a fantastic pipeline and is a great long-term hold. In the near term it’s bounced around, but mostly higher. There is also a potential game-changer on the horizon. The recent Biogen (BIIB) approval stoked optimism about Lilly’s pending Alzheimer’s treatment. Lilly has a better drug that could be a potential mega blockbuster. We’ll see what happens. But it’s certainly positive news. HOLD

KKR & Co. Inc. (KKR – yield 1.0%) – This alternative investment wealth manager stock just made a new all-time high. It’s behaving a lot better than the financial sector in general lately because it isn’t really a yield curve play. It’s in the more insulated wealth management area and in the highest-growth echelon of that subsector. The company is the best at what it does, and this stock has been an absolute superstar. I expect the magnificence to continue. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – Most of what I said about AVGO is true for QCOM. It’s been held back by the sector recently. But great things are still happening for the company. Earnings were stupendous and Qualcomm should continue to benefit mightily from the 5G rollout in the near term, as it earns royalties on phone sales. When the tech sector gets moving again, and it will, QCOM could have another big run higher. HOLD

U.S. Bancorp (USB – yield 3.0%) – This best-in-class bank stock has been solid after the financial sector topped out after a big surge. But it’s taken a hit lately. It’s down about 8% in the last couple of weeks. As a regional bank, it benefits from a steeper yield curve and those stocks sold off last week. That said, I still like USB. I don’t buy the notion that the yield curve won’t steepen going forward. And the bank still benefits mightily from a booming economy. BUY

Valero Energy Corp. (VLO – yield 4.8%) – This refiner stock is climbing right back from the energy sector selloff last week. In fact, VLO has regained just about everything it lost and it’s not that far from the recent high. The story is just too good. Demand for gasoline and diesel and other refined products has to boom in the full recovery. Meanwhile, the stock is still cheap and trending the right way. HOLD

Safe Income Tier
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 1.8%) – This short-term bond fund is a safe port. While the market is promising for the rest of the 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. That said, the bonds in this ETF mature at the end of this year. HOLD

Invesco Preferred ETF (PGX – yield 5.0%) – After falling during the pandemic, this preferred stock ETF has recovered and is back near the pre-pandemic high. 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. HOLD

NextEra Energy (NEE – yield 2.1%) – This combination regulated and alternative energy utility is down but not out. After relentlessly forging higher for a long time, this juggernaut lost its mojo. It’s still down about 15% from the high in January. But nothing has changed fundamentally, and the environment ahead will likely be even better for NEE than before as the new Administration showers clean energy companies with subsidies and tax breaks and other goodies. BUY

Xcel Energy (XEL – yield 2.7%) – This smaller and lesser-known alternative energy utility stock has retreated from the recent high it made last month, down a little over 8%. That’s not unusual behavior for XEL. It bounces around a lot on a longer-term uptrend. Alternative energy has been out of favor. But that shouldn’t last long. It’s in the spotlight in the new Administration. When the sector gets moving again it should be a big tailwind for XEL as investor seek conservative ways to play the trend. BUY