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Dividend Investor
Safe Income and Dividend Growth

September 21, 2022

It’s all about the Fed today. The woefully behind-the-curve Central Bank will announce another Fed Funds rate hike today. The increase is widely expected to be another 0.75%. But some worry it could be 1.00%.

The market’s hopes were dashed when August inflation was worse than expected. That means the Fed will have to continue to be hawkish and for a while longer. Plus, after four rate hikes so far, two straight quarters of GDP contraction, and a bear market; inflation isn’t budging yet.

Rising Rates and Dwindling Hope

It’s all about the Fed today. The woefully behind-the-curve Central Bank will announce another Fed Funds rate hike today. The increase is widely expected to be another 0.75%. But some worry it could be 1.00%.

The market’s hopes were dashed when August inflation was worse than expected. That means the Fed will have to continue to be hawkish and for a while longer. Plus, after four rate hikes so far, two straight quarters of GDP contraction, and a bear market; inflation isn’t budging yet. That means it is increasingly likely that inflation will not get under control without a deeper recession.

If the hike is just 0.75%, the market will probably rally in relief. A 1.00% hike could prompt another leg down in the market this week. We’ll see. But the general narrative is the same regardless.

We’re likely heading toward a situation where bad news will be good news. The more the economy rolls over in the months ahead, the sooner the Fed will stop hiking rates, and the sooner the economy can recover. Recessions aren’t historically that bad for stocks because they start rallying before it’s over. It’s the state of “looming recession” with no end in sight that is much worse for stocks.

Although bear markets have historically been an ideal time to buy stocks cheaply ahead of the next bull market for longer-term investors, there is still a very high risk of further downside in the weeks and months ahead. Things will probably get worse before they get better.

For that reason, the portfolio is still invested in mostly defensive stocks that are well suited for the current environment. There will be very attractive buying opportunities ahead of the next bull market. But not yet.

High Yield Tier

Enterprise Product Partners (EPD – yield 7.4%) – Even this defensive midstream energy stalwart got a little dinged up in the past week. But it only fell about 1 per share and appears to be moving back up already. Sure, EPD can bounce around in the near term. But it moves down a lot less than the overall market and the stock is ideally suited for the current environment. It sells at a cheap valuation with a high and safe dividend and operates in an industry with very favorable dynamics. (This security generates a K1 form at tax time). BUY

ONEOK Inc. (OKE – yield 6.3%) – OKE tends to be more volatile than the other midstream energy positions in the portfolio. It’s having a subpar year compared to its peers. That’s because it had a huge year last year, returning about 70% and earnings are not growing as much as other energy companies because they never went down much during the pandemic. Natural gas demand tends to be more resilient in a recession. This is one of the few companies that can endure inflation, recession or both. BUY

Realty Income (O – yield 4.7%) – The recent behavior of this legendary monthly income REIT has been ugly. After a 20% surge higher after the June low, O gave it all back and is currently near the lows of June. But O tends to move up and down a lot on a slow, longer-term trajectory higher. Earnings rose 10.2% and the company is navigating inflation and recession like a champ. The occupancy rate for its consumer staple tenants is the highest in 10 years and the company increased guidance. HOLD

The Williams Companies, Inc. (WMB – yield 5.3%) – Although this newest addition to the portfolio has dipped a little bit lately in the turbulent market, the uptrend since the June low is still intact. WMB tends to trend higher in the absence of indiscriminate selling in the overall market. Operations are strong. The recently reported quarter featured a whopping 48% earnings per share spike over last year’s quarter. Williams also increased 2022 earnings guidance. It also has the same positive attributes as EPD and OKE in cheap valuation, a high dividend, and strong industry fundamentals. BUY

Medical Properties Trust, Inc. (MPW – yield 8.8%) – Although this hospital property REIT dipped along with just about everything else over the past couple of weeks, it is springing back nicely and is currently near the original purchase price. MPW is near the trough of its own bear market and sells at a fire-sale price already. The dirt-cheap valuation combined with the high and safe dividend should make MPW a great holding through future tumult and a solid longer-term play as well. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 4.0%) – The biopharmaceutical company stock has been a lousy performer since April, falling 18% from the high. That said, returns are still positive YTD (+8.1%) and ABBV has been stellar in the recent market tumult. The stock is actually higher over the past couple of weeks. This is one of the best big pharma companies out there with one of the best pipelines and a population aging at warp speed. It should pay to simply hold the stock and collect the dividend through rough patches en route to better things in the future. HOLD

Broadcom Inc. (AVGO – yield 3.3%) – The chipmaker and infrastructure software provider once again delivered on earnings with 40% earnings growth and a 25% revenue increase versus last year’s quarter. It also raised guidance for the rest of the year. But the stock is down over 25% YTD because it has been dragged down by the technology sector. It currently sells at a forward price/earnings ratio below that of the overall market and below its five-year average. But this market hasn’t seemed to care about any of that. Things may get worse before they get better for AVGO, but it can make up for lost time quickly when it turns around. BUY

Brookfield Infrastructure Partners (BIP – yield 3.5%) – Even this defensive infrastructure partnership has taken a hit. It’s down almost 5% this month. But just about everything goes down in a panicky market. The fact remains that BIP is ideally suited for the current environment. Revenues are highly recession resistant, and it has inflation adjustments built into the contracts. It also pays a solid dividend with a long-term uptrend and is less volatile than the overall market. (This security generates a K1 form at tax time). HOLD

Eli Lilly and Company (LLY – yield 1.3%) – This best-in-class pharma giant has slowed down a bit. The stock price is only up about 10% YTD after averaging returns of nearly 40% per year over the last three years. But so what? That’s still great outperformance this year and the stock is a defensive holding that is highly preferable as the economy bounds into recession. Also, Lilly has a strong pipeline and pending approvals of important drugs for Alzheimer’s and weight loss that could give it a big boost before the end of the year. HOLD

Intel Corporation (INTC – yield 5.0%) – The chipmaker just made a massive investment in chip production. It partnered with BIP for a $30 billion investment in a semiconductor fabrication plant where Intel will maintain majority control by providing 51% of the capital. It’s a big and bold move. But the stock is still under pressure as growing recession worry weighs on projected PC sales over the next year. The stock is dirt cheap with a very encouraging longer-term prognosis, but we’ll see if the tech sector continues to be under pressure in the days and weeks ahead. HOLD

Qualcomm Inc. (QCOM – yield 2.4%) – After a strong summer rally, QCOM has hit the skids again. It got hit as technology sold off again amid fears of higher rates and continuing inflation. Then it took another hit as semiconductor stocks sold off on recession worries. Even though QCOM is performing well individually on an operational basis, it just can’t overcome a market that is souring on the sector. The selling is overdone as earnings continue to be strong and the stock already sells at a cheap valuation. It can move higher fast and make up for lost time when the going gets good again. BUY

Visa Inc. (V – yield 0.8%) – As a cyclical stock, V gets selling pressure when the market reels over recession worries. But inflation isn’t a problem for Visa. On weakness, V usually falls to right around the 200 per share level. But the recent selling has taken it to a new lower level, around 190 per share. That’s a reflection of how serious the recent market selling is. Profits are soaring as the covid restrictions have come down internationally, but the stock has been held back by recent panic selling in the market.

Safe Income Tier

NextEra Energy (NEE – yield 1.9%) – This alternative energy utility took a sizable hit in the past two weeks, down about 6%. But the stock does have technical support around the current level and a defensive utility is ideal for the current market uncertainty. Despite the recent dip, NEE is still up over 20% in the last three months. It provides safety as a utility during a recession and offers growth as a clean energy provider amid high conventional energy prices. HOLD

Xcel Energy (XEL – yield 2.6%) – This smaller alternative energy utility also took a hit over the past couple weeks after soaring to a new high earlier this month. XEL is still up over 10% YTD in a market that’s down nearly 20% and is 15% higher over the last three months. In addition to being in timely sectors, utilities and clean energy, Xcel should also benefit from the passage of the CHIPs bill as it should get some generous subsidies and favorable treatment. HOLD

High Yield Tier
Security (Symbol)Date AddedPrice AddedDiv Freq.Indicated Annual DividendYield On CostPrice on
close 9/20/22
Total ReturnCurrent YieldCDI OpinionPos. Size
Enterprise Product Partners (EPD)02-25-1928Qtr.1.808.30%2620%7.4%BUY1
ONEOK Inc. (OKE)05-12-2153Qtr.3.746.00%6023%6.3%BUY1
Realty Income (O)11-11-2062Monthly2.814.2%6311%4.70%HOLD1
The Williams Companies, Inc.08-10-2233Qtr.1.705.3%32-2%5.30%BUY1
Medical Properties Trust, Inc.09-14-2214Qtr.1.168.4%13-3%8.80%BUY1
Current High Yield Tier Totals:6.4%9.8%6.5%
Dividend Growth Tier
AbbVie (ABBV)01-28-1978Qtr.5.204.8%142118%3.90%HOLD2/3
Broadcom Inc. (AVGO)01-14-21455Qtr.14.402.6%49314%3.3%BUY1
Brookfield Infrastucture Ptrs (BIP)03-26-1914Qtr.2.043.6%4192%3.5%HOLD2/3
Eli Lily and Company (LLY)08-12-20152Qtr.3.401.3%302105%1.3%HOLD2/3
Intel Corporation (INTC)03-09-2248Qtr.1.463.1%29-38%5.0%HOLD1
Qualcomm (QCOM)11-26-1985Qtr.2.601.5%12557%2.4%BUY1/3
Visa Inc. (V)12-08-21209Qtr.1.500.7%192-8%0.80%HOLD1
Current Dividend Growth Tier Totals:2.5%40.3%2.9%
Safe Income Tier
NextEra Energy (NEE)11-29-1844Qtr.1.541.7%86111%1.9%HOLD1/2
Xcel Energy (XEL)10-01-1431Qtr.1.832.8%74208%2.6%HOLD2/3
Current Safe Income Tier Totals:2.3%159.5%2.3%

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Tom Hutchinson is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran with extensive experience in multiple areas of investing and finance.