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Dividend Investor
Safe Income and Dividend Growth

September 8, 2021

It’s still an amazing market. The S&P is up 96% from the bear market low in March of 2020. The index is also up over 20% so far this year.

While the overall market may be pricey, there are still undervalued pockets within the market. The indexes don’t tell the whole story. Even in a market like this, some stocks get neglected.

The yield curve has flattened and two stocks in the portfolio, AGNC and USB, have pulled back as a result. I believe this interest rate dynamic is temporary and these stocks are good buys ahead of a likely reversal.

Cabot Dividend Investor 921

Great Value in a High-Priced Market
It’s still an amazing market. The S&P is up 96% from the bear market low in March of 2020. The index is also up over 20% so far this year.

It may seem too good to be true. It feels like the market is overdue for trouble. And we are heading into what is historically the worst time of year for stocks, September and October. Meanwhile, the Delta variant is still wreaking havoc and inflation is persistent.

The market could sell off in the weeks and months ahead. It’s entirely possible, as it always is. But remember an important fact that has buoyed the market for more than a decade: money has no place else to go but stocks to fetch a decent return.

Investors can get scared for a while. But fear always wanes. And when it does, investors find their way back to stocks. That’s why, with the exception of the short bear market last year, we’ve been in a bull market since 2009.

And while the overall market may be pricey, there are still undervalued pockets within the market. Energy stocks are a good example. There are currently four energy stocks in the portfolio and every one of them is selling below pre-pandemic prices. That’s despite the fact that business will boom in the second half of the year. Also, several of those stocks have significantly higher earnings now than before the pandemic.

The indexes don’t tell the whole story. Even in a market like this, some stocks get neglected. There is also value being created by the flattening yield curve, which I believe is temporary. In this issue, I highlight two terrific opportunities created by this likely temporary situation.

Monthly Activity
August 11
Purchased Spectrum Brands Holdings (SPB) – 81.55
Digital Realty Trust (DLR) – Rating change “BUY” to “HOLD”

August 25
Realty Income (O) – Rating change “BUY” to “HOLD”
Brookfield Infrastructure Properties (BIP) – Rating change “BUY” to “HOLD”
SELL 1/3 Eli Lilly (LLY) – 263.87, total return 76.8%

September 1
SELL Invesco BulletShares 2021 Corp. bond ETF (BSCL)

September 8
U.S. Bancorp (USB) – Rating change “HOLD” to “BUY”

What to Do Now
This is a tricky time. Times are good but not without worries. Throughout the summer, the booming economy and stellar earnings triumphed over concerns about the Delta variant and inflation, but not by that much.

There is some concern heading into September and October, which are historically the worst months for the market. Don’t get me wrong. Things are still generally good. The economy will likely grow at well above average levels for the next several quarters. Interest rates are low. And the Fed is still mostly dovish.

But the scales could get tipped toward the downside, at least for a little while, especially if any unforeseen negative headlines pop up. The market hasn’t settled on a new narrative for the fall yet. And until it tips its hand, I’m a little leery about being aggressive at this point.

We pulled back a little in recent weeks, downgrading several stocks and removing the “BUY” rating. We also took partial profits on high-flying Eli Lilly (LLY). But I still stand by the current “BUY” ratings even heading into an ominous time of year.

Even if the market does sell off in the next couple of months, it will likely present a buying opportunity. And there are still good pockets of value in the current market. There are three areas in particular that are good buys at this point and should trend higher over the rest of the year.

One area is energy. I know. Those stocks have resumed their status as the most hated stocks on the market. But they are being undervalued. Portfolio positions Enterprise Product Partners (EPD), ONEOK (OKE), Chevron (CVX) and Valero (VLO) are still selling below the pre-pandemic prices. Although the overall market may have hit peak earnings growth, the second half of the year should be best for energy.

Another area is technology. Portfolio positions Qualcomm (QCOM) and Broadcom (AVGO) are still floundering while business is booming. These companies are benefitting from the 5G rollout and should have more fantastic quarters ahead. Technology stocks have been lagging. But we are in the midst of a technological revolution. Investors will warm to the sector before long. And QCOM and AVGO are still cheap.

The other current opportunity is in the yield curve stocks, AGNC Investment Corp. (AGNC) and U.S. Bancorp (USB). I elaborate on these opportunities in the “Featured Stock” section.

Featured StockS

Buy AGNC Investment Corp. (AGNC) and U.S. Bancorp (USB)
The yield curve has flattened and two stocks in the portfolio, AGNC and USB, have pulled back as a result. I believe this interest rate dynamic is temporary and these stocks are good buys ahead of a likely reversal. Let me explain.

A yield curve is the difference between long- and short-term interest rates. Certain companies profit from the difference between the two. They borrow at short-term rates and lend at longer-term rates, profiting from the spread.

Short-term rates, largely defined by the benchmark Fed Funds rate, are currently between 0% and 0.25% and have been since the pandemic hit. The Fed has announced it does not intend to raise that rate until 2023. Longer-term rates, gauged by the benchmark 10-year Treasury rate, have fallen from 1.75% in March to below 1.2% in early August (currently 1.37%), thus flattening the yield curve.

Yet, the economy is booming. Earnings have been spectacular. This is an environment where rates historically rise. Why have rates fallen?

There are several reasons. The market anticipates and is looking beyond this pandemic recovery. The booming growth will fade and we will be in a more normal growth environment. There’s also the Delta variant, which will curtail growth in the near term as well. Then there’s the Fed, whose $120 billion per month bond-buying program effectively puts downward pressure on rates.

Let’s look at those factors. The economy will most certainly normalize after the pandemic recovery. But the 10-year rate averaged between 2% and 3% before the pandemic. That was a normal environment. In fact, the 10-year averaged between 2% and 3% during both the Obama and Trump administrations. Rates are still well below those normal-economy levels.

The Fed will also likely start tapering those bond purchases before the end of this year, or at least next year. That will remove a force holding rates down. Plus, there is still persistent inflation. Of course, the current thinking is that this inflation won’t last long. But it is still another force that should put upward pressure on rates in the near term.

In short, I believe interest rates have fallen too far and are likely to trend higher in the months ahead. This will benefit two portfolio stocks in particular.

AGNC Investment Corp. (AGNC)
Yield 8.9%
AGNC is a mortgage real estate investment trust (mREIT) that invests predominantly in U.S. government-backed residential mortgages. It pays a very high dividend yield and makes payments on a monthly basis.

While typical REITs own actual physical real estate properties, charge rent, and pass that income on to shareholders, mortgage REITs are a different animal. They buy mortgages and generate income from monthly mortgage payments. A mortgage REIT borrows money at low short-term rates and uses that money to buy mortgages that pay higher long-term interest rates, making a profit on the difference, or the net interest spread.

AGNC invests almost entirely in mortgages backed by Fannie Mae and Freddie Mac, so there is virtually zero credit risk. However, there is certainly interest rate risk. It’s all about the spread. If the difference between the short-term rates at which it borrows money and the mortgage interest paid increases, so do profits. When the spread decreases profits fall.

AGNC has been thriving in the market recovery as the economy recovered and interest rates rose. The stock rose from under 10 per share in the pandemic bear market to almost 19 by the end of May this year. Since then, AGNC has pulled back to the current 16 per share as the flattening yield curve has weighed on profits.

But despite the lower rates, business is solid in the booming economy as mortgage demand is high. The REIT is earning more than enough to at least maintain the current dividend. So, you’re getting a safe 8.9% yield on a stock that is likely to appreciate if rates trend higher.

U.S. Bancorp (USB)
Yield 3.2%
U.S. Bancorp (USB) is the fifth-largest bank in the United States and the country’s largest regional bank with over 3,000 bank branches in 25 states in the western and northern U.S. The Minneapolis bank was founded in 1863 and now has more than 70,000 employees and $543 billion in assets.

The bank offers a wide range of services. There are four main divisions including consumer and business real estate banking, corporate and commercial banking, wealth management services and payment services. That probably sounds more complicated than it is.

Like most regional banks, revenues are generated primarily from net interest income (NII), which is the rate spread between the cost of money and the loan interest charged to customers. Half of the loan volume is to businesses with the rest primarily from residential mortgages and personal loans. The rest of the revenue is derived from banking fees.

Banks took it on the chin in the pandemic as loan activity dried up during the lockdowns and interest rates crashed. They didn’t participate in the recovery until last fall when the vaccines came within sight. From September to May USB stock soared 77% as business recovered with the economy.

Last quarter’s earnings were stellar as loan volume and fee business soared. But net interest income fell amidst the falling rates. The stock has floundered since early May because of the flattening yield curve. And, despite the booming economy, USB is still priced below where it was before the pandemic.

The huge recovery in USB was interrupted by falling longer-term interest rates. That recovery should be reignited if rates trend higher.

Portfolio at a Glance

High Yield Tier
Security (Symbol)Date AddedPrice AddedDiv Freq.Indicated Annual DividendYield On CostPrice on
9/3/21
Total ReturnCurrent YieldCDI OpinionPos. Size
AGNC Investment Corp. (AGNC)04-14-2117Monthly1.448.5%16-3%8.9%BUY1
Blackrock Enhanced Cap & Inc. (CII)07-13-2121Monthly1,125.3%224%5.1%BUY1
Enterprise Product Partners (EPD)02-25-1928Qtr.1.806.40%23-2%7.9%BUY1
ONEOK Inc. (OKE)05-12-2153Qtr.3.747.10%523%7.0%BUY1
Realty Income (O)11-11-2062Monthly2.814.5%7118%3.9%HOLD1
STAG Industrial (STAG)03-21-1824Monthly1.456.0%43116%3.4%HOLD1/2
Verizon Communications (VZ)02-12-2058Qtr.2.514.3%552%4.6%HOLD1
Current High Yield Tier Totals:5.7%27.4%5.4%
Dividend Growth Tier
AbbVie (ABBV)01-28-1978Qtr.5.206.7%10965%4.7%BUY2/3
Broadcom Inc. (AVGO)01-14-21455Qtr.14.403.2%49712%2.9%BUY1
Brookfield Infrastucture Ptrs (BIP)03-26-1941Qtr.2.045.0%5773%3.6%HOLD2/3
Chevron Corporation (CVX)02-10-2190Qtr.5.165.7%9710%5.5%HOLD1
Digital Realty Trust (DLR)09-09-20147Qtr.4.643.2%16617%2.8%HOLD1
Eli Lily and Company (LLY)08-12-20152Qtr.3.402.2%25574%1.3%HOLD2/3
KKR & Co. Inc. (KKR)03-09-2148Qtr.0.581.2%6338%0.9%HOLD1
Qualcomm (QCOM)11-26-1985Qtr.2.603.1%14479%1.9%BUY1/3
Spectrum Brands Holdings, Inc. (SPB)08-11-2181Qtr.1.682.1%79-3%2.1%BUY1
U.S. Bancorp (USB)12-09-2045Qtr.1.683.7%5625%3.3%HOLD1
Valero Energy Corp (VLO)06-26-1984Qtr.3.924.7%66-13%6.0%HOLD1/2
Current Dividend Growth Tier Totals:3.7%34.3%3.2%
Safe Income Tier
Invesco Preferred (PGX)04-01-1414Monthly0.745.3%1559%4.9%HOLD1/2
NextEra Energy (NEE)11-29-1844Qtr.1.543.5%85107%1.8%BUY1/2
Xcel Energy (XEL)10-01-1431Qtr.1.835.9%68183%2.6%BUY2/3
Current Safe Income Tier Totals:4.9%116.3%3.1%

Portfolio Updates

High Yield Tier

CDIpyramidHigh

The investments in our High Yield Tier have been chosen for their high current payouts. These investments will often be riskier or have less capital appreciation potential than those in our other two tiers, but they’re appropriate for investors who want to generate maximum income from their portfolios right now.

AGNC Investment Corp. (AGNC – yield 8.9%) – It looks like this mortgage REIT has found a bottom after falling from almost 19 per share to under 16 over the summer. Business is still steady and the dividend is solid in the strong economy. The flattening yield curve has been holding back profits and the stock price. But that yield curve is unlikely to flatten further with rates already too low. In fact, it’s a good bet that rates trend higher from here and propel the stock price higher. BUY

AGNC-090621

Next ex-div date: September 29, 2021, est.

Blackrock Enhanced Capital and Income Fund (CII – yield 5.1%) – It’s still a good environment for CII. The market is still moving higher and making new highs but not running away. CII gets the benefit of price appreciation as well as income from covered calls. It is generating a strong income and growing in value at the same time. Things are good right now but we’ll see how this market behaves in the fall. BUY

CII-090621

Next ex-div date: September 14, 2021

Enterprise Product Partners (EPD – yield 7.9%) – EPD was flying high, along with the rest of the energy sector, early this year. Then a consolidation occurred. Then the Delta variant stoked fears about growth and put further pressure on cyclical stocks. I don’t know how things will play out near term. But this is a company with a business that is booming in the second half. It sells at a dirt-cheap valuation with a safe and solid 7.9% yield. Those things should win out eventually. BUY

EPD-090621

Next ex-div date: October 29, 2021 est.

ONEOK Inc. (OKE – yield 7.0%) – The same things that are true about EPD are true for OKE. But business at ONEOK is even stronger. The cheap valuation is even more unjustified. And the stock moves a lot faster when things are going well. This is a turbo-charged EPD. If you like the EPD story, you should like the ONEOK story to the third power. BUY

OKE-090621

Next ex-div date: October 30, 2021 est.

Realty Income (O – yield 3.9%) – This legendary monthly income REIT has been terrific all summer. It’s doing what it is supposed to do, forging slowly higher while no one is paying attention. It’s at a new post-pandemic high. But it’s still somehow well below the highs before the pandemic. It has some room to run further and there is no reason not to expect it to do so. HOLD

O-090621

Next ex-div date: September 30, 2021 est.

STAG Industrial (STAG – yield 3.4%) – This industrial REIT is at a new all-time high. Of course, STAG has been making new highs all summer and I’m tired of mentioning it. Although it’s a more cyclical REIT at a time when cyclical stocks have been under pressure, it moves higher anyway. It’s cyclical in a way that is less affected by short-term factors. The demand for industrial properties is booming while supply is limited. The industrial space is still very fragmented with plenty of growth opportunity through acquisitions. We’ll see how far this one can run. HOLD

STAG-090621

Next ex-div date: September 29, 2021

Verizon Communications (VZ – yield 4.6%) – VZ has been more like a bond than a stock, except for the fact that it pays a decent yield. The stock price continues to go nowhere through almost any kind of market. It’s good to have in case of a down market but I’m losing patience. This post-Labor Day environment is the stock’s chance to shine. The 5G rollout should lift earnings to a higher level in the years ahead. Hopefully, 5G will become a more important story in the market as investors look ahead to a more normalized environment on the other side of the pandemic recovery. HOLD

VZ-090621

Next ex-div date: October 7, 2021

Dividend Growth Tier

CDIpyramidDiv

To be chosen for the Dividend Growth tier, investments must have a strong history of dividend increases and indicate both good potential for and high prioritization of continued dividend growth.

AbbVie (ABBV – yield 4.7%) – AbbVie had a bad week last week as the stock plunged 7% in one day. The FDA announced it will require a warning label for blood clots and heart events for its arthritis drug Rinvoq, along with similar drugs at Lilly and Pfizer, after a recent study indicated Pfizer’s drug showed increased risks. The news hit ABBV a lot harder than the other companies because Rinvoq is a rising star and a big part of what is expected to replace lost Humira revenues when that drug faces generic competition in 2023.

As I mentioned last week, this kind of thing is normal for big pharma. Often you get drug news that causes sharp declines and rises in the stock. It’s not good news. But it doesn’t change the fundamental story that makes ABBV a great longer-term hold. I do think you can buy this dip. BUY

ABBV-090621

Next ex-div date: October 14, 2021, est.

Broadcom Inc. (AVGO – yield 2.9%) – The semiconductor and infrastructure software solutions company reported earnings last week that beat expectations, with 16% revenue growth and 29% earnings growth over last year’s quarter. The company is not being hobbled by supply shortages and raised guidance for the year. What’s not to like? This is an expensive tech company that is benefitting from the 5G rollout and should continue to generate strong return for many quarters to come. It should move when 5G becomes a market driver and technology stocks move again. BUY

AVGO-090621

Next ex-div date: September 21, 2021

Brookfield Infrastructure Partners (BIP – yield 3.6%) – BIP acts just like a good dividend stock should. It just ever-so-quietly forges slowly higher while paying a solid dividend. The stock just hit another new all-time high. And prospects have improved fundamentally. The Inter Pipeline deal will close this quarter and likely boost earnings to a higher level in the quarters ahead. But the stock does have a tendency to make new highs and then consolidate for a while. HOLD

BIP-090621

Next ex-div date: November 30, 2021 est.

Chevron Corp. (CVX – yield 5.5%) – Energy has been on the outs, first because of a consolidation after a strong surge higher and then because of growth and demand concerns due to the Delta variant. But despite this being peak earnings growth for the overall market, the strongest growth for Chevron should be in the second half of the year as it benefits from higher oil prices and a strong recovery. The Delta variant and peak earnings may give some the impression that the party is over for CVX. But it should have another surge as business booms the rest of the year. HOLD

CVX-090621

Next ex-div date: November 18, 2021 est.

Digital Realty Trust (DLR – yield 2.8%) – The world’s largest provider of data center properties has had a nice run since late July and over the past week. It’s at a new all-time high. DLR is notorious for pulling back after making new highs, so I’m cautious here. But it may continue to run for a while more before it consolidates. Let’s see if there’s more upside over the next several weeks. But if it starts to pull back, I will take profits in the stock. Keep an eye on this one in the weeks ahead. HOLD

DLR-090621

Next ex-div date: September 14, 2021

Eli Lilly and Company (LLY – yield 1.3%) – Lilly is a phenomenal big pharma player with a fantastic pipeline and a well-run business with great longer-term prospects. But the stock has had a huge run this year and in the past few months. LLY is up 55% YTD and 76% over the past year. Returns have blown away both its peers and the overall market. Much of the recent run came because of optimism about approval for its Alzheimer’s drug.

We took profits on one-third of the position a couple of weeks ago. The stock tends to pull back and consolidate after a huge run. Plus, the Alzheimer’s drug news that prompted the latest surge probably won’t have any new developments for several months. It seemed like a good time to secure some profit. HOLD

LLY-090621

Next ex-div date: November 12, 2021 est.

KKR & Co. Inc. (KKR – yield 0.9%) – Everything looks good for this financial superstar, although the stock has pulled back a little recently. The uptrend in place since late January is still strong. It should be. Business is booming in the asset management business and KKR is in the fastest growing alternative investment area. KKR’s track record blows away the competition and there is every reason to believe the outperformance will continue in the months and quarters ahead. HOLD

KKR-090621

Next ex-div date: November 13, 2021 est.

Qualcomm Inc. (QCOM – yield 1.9%) – This 5G smartphone semiconductor stock is cheap at just 18 times earnings while business is booming. In the first nine months of this year, revenue is up 60% and earnings are up 129% over the same period last year. Sure, the tech sector has been slower. QCOM had a big run at the end of last year. But something has to give. The results justify a higher price, and earnings should remain strong for several more quarters at least. Patience should pay off with this one. BUY

QCOM-090621

Next ex-div date: December 1, 2021 est.

Spectrum Brands Holdings, Inc. (SPB – yield 2.1%) – This home essentials retailer stock hasn’t done anything since being added to the portfolio last month. Consumer stocks have been weaker as Delta variant concerns are weighing on confidence. But this is no ordinary retailer. It has a fantastic array of home-centric products at a time when the consumer is evolving into a much more home-inclined animal. The retail havoc is playing right into Spectrum’s wheelhouse. This company should be a winner in the new consumer landscape. BUY

SPB-090621

Next ex-div date: November 30, 2021 est.

Rating change “HOLD” to “BUY”
U.S. Bancorp (USB – yield 3.3%) – The main thing holding this bank stock back is the flattening yield curve. Business is booming otherwise and should stay very strong for a while. But the yield curve is likely to improve in the months ahead. It is likely the benchmark 10-year yield has moved too low for a booming economy and persistent inflation. I’m looking for another surge before the end of the year. In the meantime, it pays a 3.2% yield. BUY

USB-090621

Next ex-div date: September 30, 2021 est.

Valero Energy Corp. (VLO – yield 6.0%) – Sure, the energy rally has sputtered, and for good reasons. The massive rally earlier in the year was probably too much too fast. Plus, the Delta variant is weighing on energy demand. But VLO is down more than 20% from the high. The refiner stock tends to exaggerate the moves in the energy sector. But business is still very strong. Plus, this Delta variant stuff could fade away quickly. I believe there is another big upside move left for VLO in this recovery. It may not ignite in the crabby month of September, but hopefully in the months ahead. HOLD

VLO-090621

Next ex-div date: November 4, 2021 est.

Safe Income Tier

CDIpyramidSafe

The Safe Income tier of our portfolio holds long-term positions in high-quality stocks and other investments that generate steady income with minimal volatility and low risk. These positions are appropriate for all investors, but are meant to be held for the long term, primarily for income—don’t buy these thinking you’ll double your money in a year.

Invesco Preferred ETF (PGX – yield 4.9%) – This hybrid stock and fixed income investment is delivering as advertised. The fixed preferred stock payments provide bond-like characteristics with the ETF actually paying a meaningful yield. It also adds nice diversification to a portfolio as preferred stocks are not correlated to either the stock or bond markets. HOLD

PGX-090621

Next ex-div date: September 22, 2021 est.

NextEra Energy (NEE – yield 1.8%) – This has been a subpar year so far for this alternative energy/regulated utility. Investors seem to have forgotten all about the growth in alternative energy during the pandemic recovery. NEE has been bouncing around with the fortunes of cyclical stocks for most of the year. Lately, that’s been a good thing. And NEE has recently come alive, up around 15% since July.

But this isn’t some cyclical alternative stock. It’s a brilliant combination of regulated utility stability and clean energy growth. It had been an up-trending juggernaut as a conservative play on the growth in clean energy. I believe it will return to that Promised Land again. BUY

NEE-090621

Next ex-div date: November 26, 2021 est.

Xcel Energy (XEL – yield 2.6%) – Things have been choppy for this smaller alternative energy utility. It’s only up about 6% YTD. That’s not terrible. And it is trading at the higher end of the recent range. But this stock is capable of much better. At some point, clean energy will be a hot trade again as investors focus on the enormous growth. In the meantime, it’s well worth owning ahead of that likelihood. BUY

XEL-090621

Next ex-div date: September 14, 2021

Dividend Calendar
Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates estimated.

CDI September
CDI October


The next Cabot Dividend Investor issue will be published on October 13, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

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Chief Investment Strategist: Timothy Lutts
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