The First Week of Fall is a Wild One
It’s been a wild week so far in the market.
It started off on Monday with the worst selloff in months. News that Chinese real estate giant Evergrande will likely default on $80 million in debt payments this month and possibly $300 billion in total debt sent markets reeling. There is fear that such an event could cause contagion and ripple through the financial markets.
But that was Monday.
Today, markets are rallying as much as they fell on Monday ahead of the Fed meeting this afternoon. The central bank is expected to weigh in on its bond purchases and interest rate timeline. It is expected that the tapering of bond purchases will begin before the end of the year but possibly not until next year. It’s also expected that rates will not be raised until 2023.
The expectation is also that the Evergrande situation will remain contained, for now. We’ll see what happens on those two fronts. But the market is feeling optimistic so far and the buyers are out in full force.
This week’s volatility is a stark change from the calm of the summer. I still remain cautious in the near term. The market is still high and due for a correction and September and October are historically the worst months for the market. Meanwhile, the virus is spreading, the Evergrande issue could still get worse, and there is no guarantee what the Fed will say.
That said, I’m still optimistic over the rest of the year. A selloff or correction will likely be short-lived if it indeed it occurs. Money still has no place else to go but stocks to fetch a decent return and the economy is still strong. Plus, the virus should abate before long.
Despite the near-term risk and volatility, there are still great opportunities in the portfolio’s finance and energy stocks. U.S. Bancorp (USB) and AGNC Investment Corp. (AGNC) should benefit as interest rates likely trend higher from here and energy stock prices have been held to still-low levels largely because of the virus.
High Yield Tier
AGNC Investment Corp. (AGNC – yield 9.0%) – I like AGNC and the yield curve trade right now. The stock has pulled back and wallowed for a while as the 10-year Treasury rate has come down. But there is a high probability that rate will go higher over the remainder of the year. AGNC shouldn’t have much downside from here and the dividend is safe. With the addition of some capital appreciation resulting from the steeping yield curve, it’s a nice investment. BUY
Blackrock Enhanced Capital and Income Fund (CII – yield 5.4%) – This covered call ETF was reduced to a hold last week as the risk of a market selloff grew much higher than normal. It tends to move with the overall market. We’ll see how things shake out over the next few weeks. In the meantime, it provides a solid yield. HOLD
Enterprise Product Partners (EPD – yield 8.4%) – It was another lousy week for energy stocks. But things remain very solid operationally for this midstream partnership. Business should continue to improve in the recovery over the rest of the year and that huge dividend is safe. But for now, energy stocks are being held captive by the virus. We probably won’t see a significant move higher until news improves on the virus front. BUY
ONEOK Inc. (OKE – yield 7.0%) – The same thing is true for this midstream energy company. I believe at some point in the not-too-distant future energy stock will get another strong rally. And OKE will be in a good position. Business is strong and getting even stronger and OKE moves a lot faster when the going is good. Eventually, that safe 7% yield combined with the cheap price and strong fundamental story should propel the stock higher. BUY
Realty Income (O – yield 4.2%) – This legendary income REIT has pulled back in the month of September. The REIT sector overall has pulled back this month after a good run in the summer. But the story remains solid. Realty stock is still below the pre-pandemic price while earnings are higher than they were then. Also, the VEREIT (VER) merger should be accretive to earnings by about 10% right away. HOLD
STAG Industrial (STAG – yield 3.5%) – This industrial REIT is still looking strong. Even though STAG rallied 45% between February and September, it has been solid during the REIT selloff and the volatility this week. It continues to be a great environment for industrial REITs and this stock could have more upside. We’ll see if it rallies again from here in the next few weeks. HOLD
Verizon Communications (VZ – yield 4.7%) – VZ is a strong down-market stock that is good to have in a dicey market like this. Plus, there is still a hope that 5G becomes a bigger story after the current headlines fade. Despite the lackluster performance, VZ is worth holding here because of its strong track record in down markets and its future potential to rally as a result of increased profits from the 5G rollout. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 4.9%) – ABBV hasn’t recovered from the selloff after the FDA announced it will require a warning label on its new immunology drug Rinvoq one month ago. It’s not good news because this is a star drug that AbbVie needs to overcome lost revenues when Humira loses its U.S. patent in 2023. But it isn’t a game changer. The story is still intact. Meanwhile, ABBV has strong technical support around the current level. BUY
Broadcom Inc. (AVGO – yield 2.9%) – This chipmaker stock has been a lackluster performer since the tech rally petered out in February. That said, AVGO is still very near the all-time high despite the precarious market. It’s been behaving better on a relative basis since it announced strong earnings that beat expectations earlier this month. I believe in Broadcom. It should continue to benefit from the 5G rollout over the next several quarters while it’s also built for long-term growth. BUY
Brookfield Infrastructure Partners (BIP – yield 3.6%) – Business is good for this infrastructure partnership. Between the rebound in transportation assets in the recovery, new projects coming online, and the recent Inter Pipeline acquisition, earnings should grow nicely in the quarters ahead. But the stock has behaved true to form. It always pulls back and consolidates after making a new high. It’s just the nature of the beast. HOLD
Chevron Corp. (CVX – yield 5.7%) – CVX has held up well in what has been an awful environment for energy stocks over the summer. While the overall market has passed peak earnings growth, Chevron’s best quarters will be in the second half of the year as higher prices will be fully realized along with stronger demand. But the stock probably won’t go anywhere until the virus news gets better. It should be worth the wait. HOLD
Digital Realty Trust (DLR – yield 2.9%) – Although this data center REIT pulled back after making a new high, as it usually does, it tends to hold up well in down markets. That’s a nice attribute to have as volatility increases in what is typically the worst months of the year for stocks. We took profits last week but it’s still worth holding the other half for its downside prowess. HOLD
Eli Lilly and Company (LLY – yield 1.3%) – Returns have been great for this best-in-class pharma company stock since being added to the portfolio. It’s a great company with one of the best pipelines in the business with a bright long-term future. But it tends to bounce around a lot. It’s currently in a bounce down after soaring to new all-time highs on optimism regarding its pipeline Alzheimer’s drug. We took profits when the going was good. When it gains positive momentum again, I will likely add back some of the position. HOLD
KKR & Co. Inc. (KKR – yield 0.9%) – There’s an issue with this asset manager stock. It was down 6% on Monday over concern about the likely Evergrande default. Markets sold off as fear of contagion from the Chinese real estate problems spread. KKR has real estate investments that would be negatively affected if the issue escalates into a bigger crisis. As of now, it looks like the issue will most likely be contained, and KKR moved up since. For now, we will hold on and see. But if the issue persists or gets worse, I will consider taking profits. HOLD
Qualcomm Inc. (QCOM – yield 1.9%) – The chipmaker stock is down about 10% in the month of September. I don’t see a good reason for the selloff. Earnings have been spectacular and will likely remain excellent for the next several quarters. Things also look solid further down the road. I believe in the stock and it’s in oversold territory. BUY
Spectrum Brands Holdings, Inc. (SPB – yield 1.8%) – This home essentials retailer had a huge day a couple of weeks ago. The company announced the sale of its Home Improvement unit for $4.3 billion. That prompted a one-day 19% rally in the stock. Needless to say, the market loves the idea.
The division had been doing well as home improvement spending continues to be strong. But the other divisions are also home centric with similar earnings growth. The sale solves a huge problem. SPB has been held back by investor concern about its high debt levels. The company went bankrupt in 2009 and management was turning around it finances already. This huge cash injection eliminates the problem. Despite the higher price, the stock performance should be strong from here as home spending continues and a huge impediment has been removed. BUY
U.S. Bancorp (USB – yield 3.3%) – As I mentioned in this month’s issue, I like USB right now because of the yield curve trade, among other things as well. Business is strong in every aspect of the business in the strong economy, with the exception of net interest income. Profits have decrease as interest rates have fallen. But there is a high likelihood that rates increase over the rest of this year. That will complete the missing piece of the puzzle for this regional bank that is otherwise firing on all cylinders. BUY
Valero Energy Corp. (VLO – yield 6.0%) – Like the rest of the energy sector, this refiner stock is being held hostage by the delta variant. Demand for gasoline and diesel has been strong in the recovery but concerns about the virus and a negative effect on energy demand in a slowing economy is holding VLO back. I still believe there is another strong surge left in this stock in the months ahead as profits rebound strongly. But it likely won’t move until news about the virus gets better. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – 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 1.8%) – This regulated/alternative energy utility is benefitting from the recent misfortunes of cyclical stocks. That’s okay. We’ll take it. The stock is up about 15% since July. But NEE is so much better than just a cyclical alternative. It’s a fantastic way for conservative investor to play the huge growth in clean energy. It should get another good move higher when alternative energy inevitably comes back into favor again. BUY
Xcel Energy (XEL – yield 2.8%) – It’s been choppy for this smaller alternative energy utility. And it’s still bouncing around. But the alternative energy utility has a lot going for it. It’s a safe stock that should be a nice port in the storm if the market gets dicey. And it’s also a beneficiary of the growth in clean energy. BUY
| High Yield Tier | ||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on 9/22/21 | Total Return | Current Yield | CDI Opinion | Pos. Size |
| AGNC Investment Corp. (AGNC) | 04-14-21 | 17 | Monthly | 1.44 | 9.00% | 16 | -4% | 9.0% | BUY | 1 |
| Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.2% | 21 | -1% | 5.4% | HOLD | 1 |
| Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.10% | 22 | -7% | 8.4% | BUY | 1 |
| ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 7.00% | 55 | 3% | 7.0% | BUY | 1 |
| Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.1% | 68 | 10% | 4.2% | HOLD | 1 |
| STAG Industrial (STAG) | 03-21-18 | 24 | Monthly | 1.45 | 3.5% | 42 | 106% | 3.5% | HOLD | 1/2 |
| Verizon Communications (VZ) | 02-12-20 | 58 | Qtr. | 2.51 | 4.7% | 54 | -1% | 4.7% | HOLD | 1 |
| Current High Yield Tier Totals: | 5.5% | 22.2% | 5.6% | |||||||
| Dividend Growth Tier | ||||||||||
| AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 107 | 58% | 4.9% | BUY | 2/3 |
| Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.9% | 501 | 11% | 2.9% | BUY | 1 |
| Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 56 | 64% | 3.6% | HOLD | 2/3 |
| Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 5.5% | 99 | 7% | 5.7% | HOLD | 1 |
| Digital Realty Trust (DLR) | 09-09-20 | 147 | Qtr. | 4.64 | 2.9% | 160 | 11% | 2.9% | HOLD | 1/2 |
| Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 230 | 54% | 1.3% | HOLD | 1/3 |
| KKR & Co. Inc. (KKR) | 03-09-21 | 48 | Qtr. | 0.58 | 0.9% | 64 | 36% | 0.9% | HOLD | 1 |
| Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.9% | 133 | 63% | 1.9% | BUY | 1/3 |
| Spectrum Brands Holdings, Inc. (SPB) | 08-11-21 | 81 | Qtr. | 1.68 | 2.1% | 79 | 13% | 1.8% | BUY | 1 |
| U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.3% | 59 | 28% | 3.3% | BUY | 1 |
| Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 6.0% | 66 | -15% | 6.0% | HOLD | 1/2 |
| Current Dividend Growth Tier Totals: | 3.2% | 30.0% | 3.2% | |||||||
| Safe Income Tier | ||||||||||
| Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 15 | 57% | 4.9% | HOLD | 1/2 |
| NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.8% | 82 | 98% | 1.9% | BUY | 1/2 |
| Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 63 | 158% | 2.9% | BUY | 2/3 |
| Current Safe Income Tier Totals: | 3.2% | 104.3% | 3.2% | |||||||
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