Cabot Dividend Investor Weekly Update
The S&P 500 was up 13% for the quarter, making it the best first quarter since 1998 and the best overall quarter since 2009. It’s impossible to predict short-term gyrations in the market, at this point, it looks like a slow slog higher for the market for the rest of the year. It is an ideal environment for dividend stocks and only once change to the portfolio as we are selling one position.
The Meddling Fed
The first quarter is over and the results are in. The S&P 500 was up 13% for the quarter, making it the best first quarter since 1998 and the best overall quarter since 2009. Now what?
I think it’s safe to assume that the next three quarters won’t be that good. Otherwise the market would be up over 50% for the year. That’s not going to happen. At this point, the market has already made up for the negative excesses of late last year and now we face a slowing economy.
Surely, first quarter earnings won’t be as good as last year’s with tough comparisons. In fact, all of the problems that caused the December swoon still exist with the exception of the Fed, which announced it doesn’t intend to raise rates this year. Where do we go from here?
Sure, the economy is likely to grow at a slower pace than last year. But it’s still a long way from recession. Historically, the market tends to perform well at this stage of the economic cycle, at least for a while. And don’t forget, money really has no better place to go than the stock market to fetch a decent return. Bonds are low paying and treacherous and overseas markets are a highly unpredictable mess.
Although it’s impossible to predict short-term gyrations in the market, at this point, it looks like a slow slog higher for the market for the rest of the year. That may not be the best environment of some growth stocks, but it is an ideal environment for dividend stocks.
The defensive businesses and income generation of these investments tend to make them thrive in the environment we appear to be facing. That’s good news for the stocks in this portfolio and this newsletter. You are in the right place at the right time. I’ll do my absolute best to make sure you benefit and I will always watch your back.
High Yield Tier
BUY – Brookfield Infrastructure Partners (BIP $41 – yield 5.0%) – This stock was highlighted as the “Featured Buy” in the March issue that came out last week. There isn’t any news in the past week but the stock is up $1 per share. The company invests in essential infrastructure assets that are some of the most defensive, reliable income generating assets in the world. It’s a great business formula with a strong track record of success. Going forward there will be more infrastructure spending and investing and the sector is increasingly coming into vogue with investors.
HOLD – Community Health Trust (CHCT $36 – yield 4.5%) – After enduring a brief dip at the end of February, beginning of March, this small healthcare REIT has come roaring back. It has a great record of outperforming the index and the market and looks poised to move higher in the coming weeks.
BUY - Enterprise Product Partners (EPD $29 – yield 5.9%) – This is a blue chip infrastructure company in the middle of an historic energy boom for the country when oil and gas production is booming and the sector is increasingly in favor. But this MLP with a high and safe dividend yield and growing earnings hasn’t been able to break out. Since the oil price collapse of 2014 – 2016 the stock has been range bound, bumping its head on but never exceeding the $30 level. If it can break through this time the stock could be off to the races. It has a good chance and we should know relatively soon.
HOLD – STAG Industrial (STAG $30 – 4.8%) – This all star performing industrial REIT just keeps on going. But it has been trading in a range for more than two years. It just recently broke slightly above the old range. It is just about at the 52-week high and fairly valued. It also has a history of falling back after breaking the old highs, so I’m cautious here. I’ll be watching closely if it can break out to a new level or it starts to pull back. For now it’s a HOLD.
Dividend Growth Tier
BUY – AbbVie (ABBV $83 – 5.2%) – The drug maker was up about 3% yesterday on a down day for the market. It isn’t clear why but I suspect it is good news about one of the pipeline drugs that is getting out even though the information is not yet public. When the company reports earnings at the end of this month we might get a better idea of how fast overseas Humira sales are slipping versus how newly launched drug sales are growing. In the meantime, the stock goes ex-dividend in ten days.
BUY – Altria (MO $57 - 5.6%) – The stock of this cigarette maker wants to go up. It slowly trends higher while periodically being rudely interrupted by bad news. Today it’s down because of a Morgan Stanley report that cigarette sales volumes this year fell 8.8% through March as more smokers are shifting to vaping. This really isn’t news. It’s another reminder of the factors that are holding back Altria. The company is addressing the issues head on by raising prices on its flagship Marlboro brand and big investments in E-cigarette maker JUUL and marijuana company Cronos (CRON). I believe the stock will slowly move into the 60’s while it awaits further news on its new ventures.
BUY – American Express (AXP $113 – yield 1.3%) – The stock pulled back a little bit this week but that’s healthy. I raised this stock from “HOLD” to “BUY” last week because the company has stellar operational performance and strong momentum. It also helps that in an increasingly cashless world with a growing middle class the credit card business is a license to print money, as evidenced by the performance of large American credit card company stocks. The only thing that gives me pause is the deteriorating state of the global economy, which I will keep a sharp eye on. But as long as the global economy stays out of big trouble this stock should trend higher.
Safe Income Tier
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ $21 – yield 1.9%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL $21 – yield 2.4%)
It’s nice to have something in the portfolio that isn’t vulnerable to a market downturn. These funds fit the bill. The yield isn’t great but it’s something. As long as there are a lot of risks out there and we seem to be in the late stages of the economic cycle these short-term fixed income funds are worth holding.
HOLD – Consolidated Edison (ED $85 – yield 3.4%) – These are fast times for slow stocks and ED is benefitting. Sometimes the market doesn’t appreciate slow growth, high dividend paying companies. This isn’t one of those times. Right now, ED is loving life. And this could continue for a while. It also helps that the Fed stated it will stand pat on higher rates for the rest or the year.
HOLD – Ecolab (ECL $178 – yield 1.0%) – This chemical and sanitation company is everything I just said about ED to the third power. This is a stellar defensive outperformer that is in the wheelhouse of the current environment. While everybody speculates on the direction of the economy and the longevity of the bull market ECL just continues to forge to new all time highs. The only thing wrong with this stock right now is that the market is too good. The price keeps moving above the tree line but as long as the momentum is strong it will remain a HOLD.
HOLD – Hormel Foods (HRL $43 – yield 1.9%) – Sometimes a stock can be a victim of its own success. This is a great food company with defensive characteristics in a turbulent market that caused the stock to return over 30% in the past year. It seems to have run out of steam before the other defensive stocks because it has special risks associated with tariffs on China. I sold half the position a few weeks ago and the stock has been stuck in the mud ever since. We’ll see how the stock acts from here but for now it’s a HOLD.
BUY – Invesco Preferred ETF (PGX $15 – yield 5.7%) – This is a great place to diversify away from stocks and bonds and get a high yield in a portfolio of preferred stocks. I like it I like it I Iike it. I’ll take a juicy yield and monthly payments with a stable price in this market any day of the week.
HOLD – McCormick & Co (MKC $151 - yield 1.5%) – The spice king has returned over 40% over the past year. It stumbled in January after a disappointing earnings report but then the stock reset its relentless accent. It reported better earnings a couple of weeks ago. It now seems destined to make new highs. There is little not to like about this stock right now. I’m a believer.
BUY – NextEra Energy (NEE $189 – yield 2.3%) – Defensive utilities have their moments in the sun. But this company is much more. It is a best in class utility with huge exposure to the fastest growing energy sources. It is destined to provide reliable and growing income with growth as well. This is truly one of the very best stocks a dividend and income investor can own. Go baby go.
Rating change “HOLD” to “SELL”
SELL – UnitedHealth Group (UNH $244 – yield 1.5%) – Sometimes you have to accept that you just can’t fight the world and throw in the towel. This is a great company in an industry with enormous demographic tailwinds. Despite being the largest healthcare insurance company in the world already it is likely to grow annual earnings in the double digits over the next five year. But it has an Achilles heel in the risk of legislation from Washington. There’s a lot of talk right now about changing the system. I believe nothing will come of it anytime soon because the two parties are hopelessly dividend and can’t get together on anything. But it doesn’t matter what I think or even if I’m right if most investors are spooked by all the talk. As well, political rhetoric will only increase as the next election approaches. It’s a bad time for this stock and I am selling it.
HOLD – Xcel Energy (XEL $56 – yield 2.6%) – The stock blew right past the 52-week high and still has more upside momentum. Sure, Utilities have been the best performing sector of the market over the past year but Xcel has nearly doubled the index return of the period. It’s not a buy here because it is bumping up against the 52-week high but there is no reason to sell as long as the outperformance continues.