Bring It on Fed
It’s Fed decision day. The Central Bank is going to raise rates. And the market loves it.
All three market indexes are up big for the second day in a row. Despite the fact that the Fed will today announce the first rate hike since 2018, it’s expected and the market isn’t worried. As a matter of fact, investors sense we will navigate this minefield with no additional cause for concern.
The Fed will announce a 0.25% rate hike and not the 0.50% hike that was feared at one point. They’ll no doubt say how serious they are about fighting inflation, but at the same time cognizant of the additional economic strain of the Russia/Ukraine thing. They’ll nuance words to convey that they will slay inflation while not upsetting the economy or the market, or something.
Investors sense that they probably won’t get a reason to be more pessimistic today. And they’ll take it, for now. But the problem of persistent inflation and a Fed that is woefully behind the curve in raising rates isn’t going away. That will likely haunt stocks for the rest of the year at least.
At the same time oil prices have crashed to below $100 per barrel from a high of over $130 just last week. Fears about the war have subsided, for now at least. And there’s something else. There is a new and growing sense that the war, inflation, and Fed rate hikes will dampen growth and lower energy demand. That could help with inflation and call the dogs off at the Fed. We’ll see if this new thinking gets any lasting traction.
The recent huge market gains do suggest that a near-term bottom is in. And that may indeed be the case. But uncertainty remains. The market is still at the mercy of highly unpredictable Russia/Ukraine headlines. We might not be out of the woods yet.
In the meantime, health care positions AbbVie Inc. (ABBV) and Eli Lilly (LLY) are hot. Financial stocks Visa (V) and Discover Financial (DFS) are rebounding strongly. And the portfolio will take profits on half of the Chevron (CVX) position this week.
High Yield Tier
Blackrock Enhanced Capital and Income Fund (CII – yield 6.0%) – Stocks may have bottomed. If the downtrend of the market is over, CII is looking good. It should continue to drift slightly higher. Plus, the high yield makes it attractive to investors in what is likely to be a more defensive and value-oriented market going forward. But we might not be out of the woods yet so it will remain a HOLD for now. HOLD
Enterprise Product Partners (EPD – yield 7.4%) – The recent up move for this midstream energy partnership appears to be over with the selloff in the energy sector. The sector had soared over 40% in just over two months this year. It was bound to take a breather. That’s okay, and not unexpected. EPD didn’t become overpriced. Meanwhile, business is strong, and that huge yield is safe. I still like the prospects for the rest of the year. (This security generates a K1 form at tax time). BUY
Global Ship Lease, Inc. (GSL – yield 3.5%) – The container ship company stock can be volatile. And it had a big move down this week. But it’s a cyclical international stock that has managed to drift 20% higher YTD in a down market with geopolitical tensions. That how good the container shipping business is. Demand outstrips supply and will for some time. Shipping rates and profits are high and will likely remain so. The stock could also take off when the environment stabilizes.
The dividend has been confusing. The company raised the quarterly dividend from 0.25 per share to 0.375. But the increase won’t take place until the next dividend. For now, the yield is just 3.5%. But it will be adjusted upward after this dividend to 5.5%. BUY
ONEOK Inc. (OKE – yield 5.7%) – It’s a similar story to EPD right now, although OKE can be more volatile. But even after a wave of selling in the sector it’s still not far from the high. Despite all the excitement in the sector, OKE is still reasonably valued while business is growing, and the high dividend is safe. BUY
Realty Income (O – yield 4.5%) – REITs have been behaving much better relative to the overall market in the past month. They had taken a hit in the selling earlier this year but investors appear to be coming around to the more defensive nature and strong dividend yield. O is an income stalwart that investors love. It should do well in an increasingly defensive-oriented market going forward. HOLD
Dividend Growth Tier
AbbVie (ABBV – yield 3.8%) – The stock is right about at the all-time high. In fact, ABBV has been by far the most reliable non-energy stock portfolio performer through the market tumult this year. ABBV is up 16% while the S&P is down over 11% YTD. ABBV is also vastly outperforming the very slightly positive YTD health care sector. Investors are becoming more confident that AbbVie can overcome the Humira patent expiration in 2023 as the new drugs and pipeline continue to impress. The stock also still sells at a cheap valuation of less than 11 times forward earnings. HOLD
Broadcom Inc. (AVGO – yield 2.8%) – This technology stalwart stock sold off at the very beginning of the year but has since rebounded and stabilized. Another stellar earnings quarter helped AVGO outperform the sector over the past coup of months. Business is booming as Broadcom benefits from the 5G rollout and should also benefit from increased internet usage further out. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.6%) – This defensive infrastructure partnership just continues to do its thing regardless of the market trends. It remains near the high and on a long-term, slow and bouncy uptrend. Reliable and growing income and solid dividends never really go out of style. I expect more of the same going forward, slow and reliable appreciation and income. (This security generates a K1 form at tax time). HOLD
Discover Financial Services (DFS – yield 1.9%) – This credit card company stock really took a beating after the Russian invasion of Ukraine. But the stock is rebounding strongly as the initial panic wanes. It’s all short-term noise and DFS remains a good buy at this level and is highly likely to see profits grow as more consumers charge an increasing amount of purchases. HOLD
Rating change “HOLD” to “SELL ½”
Chevron Corp. (CVX – yield 3.3%) – Energy had an incredible run in the first two-plus months of the year. The sector was up over 40% YTD last week as oil surged to a high of over $130 per barrel from $75 at the beginning of the year. But oil prices have pulled back dramatically to around $95 per barrel in the past week as investors worry that high prices, Fed rate hikes, and global turmoil will hinder energy demand.
Sure, energy stock and oil prices could skyrocket forever. A pullback is quite reasonable at this point even if the prognosis for the sector is positive for the rest of the year. CVX is up 35% YTD and over 80% since being added to the portfolio a little over a year ago. I don’t know how this war will unfold. But I want to secure some of these profits. We’ll take half off the table and hold the rest for now. SELL ½
Eli Lilly and Company (LLY – yield 1.6%) – Ever so quietly, LLY in running back up to the high. The stock is a notorious bouncer (on a longer-term upward trend) and it was on the downside of a bounce earlier this year. But healthcare got popular again amidst the war uncertainty and LLY has surged. It’s up about 17% in the past month while the market is down. The long-term situation is still strong. It has a stellar pipeline and the likely approval of its potential mega-blockbuster Alzheimer’s drug later this year. HOLD
Intel Corporation (INTC – yield 3.2%) – The legendary chipmaker was added to the portfolio last week. The stock already had the stuffing kicked out of it and theoretically has relatively little downside from here. There are also some powerful growth catalysts in the years ahead. It hasn’t worked out over the last week as the tech sector was subjected to another round of furious selling. But INTC is rebounding strongly, and the safe story remains intact. BUY
Qualcomm Inc. (QCOM – yield 1.6%) – QCOM had remained very solid near the high point of the range after a big surge late last year despite a tortured technology sector market. But succumb it has. It capitulated over the past month and lost nearly all the gains from the recent surge. I stuck with the stock because it showed good relative strength and had a special set of circumstances that helped insulate it from pressure in the sector. Business is booming from 5G, and it raised earnings guidance, and future prospects are stellar as well. It has some support around this level, but if it weakens further, it will be sold. HOLD
U.S. Bancorp (USB – 3.5%) – Yeah, this regional bank stock has been knocked down a lot this year. But I regard the stock as one that looks ahead to a friendly bank environment and growing profits over the course of the year that has been temporarily disrupted. The yield curve was actually flattening for a while. But it has since rebounded as the 10-year Treasury got back to over 2% again. Inflationary pressure remains and should push yields higher. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now. HOLD
Valero Energy Corp. (VLO – yield 4.7%) – We took profits on CVX. Should we do the same with VLO? I say no. Valero is a different animal. It’s not about crude prices per se, but rather the crack spreads or cost versus price of refined products. And those are looking quite strong even if crude prices are taking a bath this week. VLO is not far from the high and should have further to run. HOLD
Visa Inc. (V – yield 0.7%) – Visa was a victim of the initial panic from the Russia/Ukraine situation as fears of a global economic slowdown took hold. But those initial fears are abating, and V is coming right back with a vengeance. Its business should grow sharply this year and the stock is still undervalued. HOLD
Safe Income Tier
Invesco Preferred ETF (PGX – yield 4.9%) – The ETF has fallen a bit in price over the past several month as rising interest rates and inflation have affected it. Preferred stocks tend to hold up relatively well in those conditions, but they are not immune. We will watch PGX for further weakness going forward. Only half of the position remains, but any further weakness from here will likely prompt selling the shares. HOLD
NextEra Energy (NEE – yield 2.0%) – The alternative energy utility stock was having an awful year so far until late February. Utility stocks then began to outperform the market as investors sought more safety in the turbulent market. Then oil prices soared, and clean energy benefitted as the high prices made it a better alternative. NEE initially soared and quickly gained back half its losses but has pulled back a little since. It’s still a great stock longer term. We’ll see how the next few weeks unfold. HOLD
Xcel Energy (XEL – yield 2.8%) – XEL is benefitting from the same things as NEE. But XEL wasn’t having as bad a year and the recent surge put it into positive territory YTD. I also like the longer-term prospects as a great way for conservative investors to play the growth of clean energy. And it is technically stronger than NEE in the near term. HOLD
| High Yield Tier | |||||||||||
| Security (Symbol) | Date Added | Price Added | Div Freq. | Indicated Annual Dividend | Yield On Cost | Price on close 3/15/22 | Total Return | Current Yield | CDI Opinion | Pos. Size | |
| CII | Blackrock Enhanced Cap & Inc. (CII) | 07-13-21 | 21 | Monthly | 1,12 | 5.6% | 20 | -3% | 6.0% | HOLD | 1 |
| EPD | Enterprise Product Partners (EPD) | 02-25-19 | 28 | Qtr. | 1.80 | 8.30% | 24 | 8% | 7.4% | BUY | 1 |
| GSL | Global Ship Lease. Inc. (GSL) | 01-12-22 | 23 | Qtr. | 1.50 | 6,41% | 28 | 18% | 3.5% | BUY | 1 |
| OKE | ONEOK Inc. (OKE) | 05-12-21 | 53 | Qtr. | 3.74 | 6.00% | 64 | 28% | 5.7% | BUY | 1 |
| O | Realty Income (O) | 11-11-20 | 62 | Monthly | 2.81 | 4.2% | 65 | 12% | 4.5% | HOLD | 1 |
| Current High Yield Tier Totals: | 6.2% | 16.5% | 5.3% | ||||||||
| Dividend Growth Tier | |||||||||||
| ABBV | AbbVie (ABBV) | 01-28-19 | 78 | Qtr. | 5.20 | 4.8% | 155 | 135% | 3.8% | HOLD | 2/3 |
| AVGO | Broadcom Inc. (AVGO) | 01-14-21 | 455 | Qtr. | 14.40 | 2.6% | 593 | 35% | 2.8% | HOLD | 1 |
| BIP | Brookfield Infrastucture Ptrs (BIP) | 03-26-19 | 41 | Qtr. | 2.04 | 3.6% | 60 | 84% | 3.6% | HOLD | 2/3 |
| CVX | Chevron Corporation (CVX) | 02-10-21 | 90 | Qtr. | 5.16 | 4.7% | 158 | 82% | 3.3% | SELL 1/2 | 1 |
| DFS | Discover Financial Services (DFS) | 02-09-22 | 125 | Qtr. | 2.00 | 1.6% | 110 | -11% | 1.9% | HOLD | 1 |
| LLY | Eli Lily and Company (LLY) | 08-12-20 | 152 | Qtr. | 3.40 | 1.3% | 275 | 86% | 1.5% | HOLD | 2/3 |
| INTC | Intel Corporation (INTC) | 03-09-22 | 48 | Qtr. | 1.46 | 3.1% | 45 | -6% | 3.2% | BUY | 1 |
| QCOM | Qualcomm (QCOM) | 11-26-19 | 85 | Qtr. | 2.60 | 1.5% | 144 | 80% | 1.8% | HOLD | 1/3 |
| USB | U.S. Bancorp (USB) | 12-09-20 | 45 | Qtr. | 1.68 | 3.2% | 54 | 23% | 3.5% | HOLD | 1 |
| VLO | Valero Energy Corp (VLO) | 06-26-19 | 84 | Qtr. | 3.92 | 5.7% | 85 | 16% | 4.3% | HOLD | 1/2 |
| V | Visa Inc. (V) | 12-08-21 | 209 | Qtr. | 1.50 | 0.7% | 206 | -1% | 0.80% | HOLD | 1 |
| Current Dividend Growth Tier Totals: | 3.0% | 40.3% | 2.8% | ||||||||
| Safe Income Tier | |||||||||||
| PGX | Invesco Preferred (PGX) | 04-01-14 | 14 | Monthly | 0.74 | 4.9% | 13 | 40% | 4.9% | HOLD | 1/2 |
| NEE | NextEra Energy (NEE) | 11-29-18 | 44 | Qtr. | 1.54 | 1.7% | 82 | 100% | 2.0% | HOLD | 1/2 |
| XEL | Xcel Energy (XEL) | 10-01-14 | 31 | Qtr. | 1.83 | 2.8% | 69 | 190% | 2.8% | HOLD | 2/3 |
| Current Safe Income Tier Totals: | 3.1% | 110.0% | 3.2% | ||||||||
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