Beyond the incessant trumpeting of current events by every orifice of the media, a future awaits. And it’s right around the bend. Beneath the current noise, tectonic plates are moving below the surface, and the world is changing.
Identifying these underlying shifts is a great way to find winning investments. And there is a particular shift that is affecting the market far more than any other, the rapid pace of technological advancement. It is the greatest force driving the market and its dominance is likely to grow.
When investors focus on the world beyond the virus and the elections they will ask what’s next. What is next for the market is what is next for technology. And 5G is central to that discussion.
5G will drive the next phase of technological innovation and launch the world into a new digital age. In this month’s issue, I highlight a major player in the technology space that will benefit directly and massively from the rollout. It’s still cheap, pays a good dividend and is on the cusp of an epic year.
Cabot Dividend Investor 121
A Goliath of the Dawning Digital Age
Are you sick of hearing about the virus and the election? I know I am. But there’s good news. As hard as it may be to believe, these current obsessions will fade away, and soon. As the smoke from a tumultuous 2020 finally clears away, what will investors see?
It’s hard to look beyond the current headlines. But, in the grand scheme of things, it’s mostly just short term surface noise. Meanwhile, massive longer-term changes are occurring below our feet. Below all this noise, tectonic plates are shifting and changing the world forever.
Identifying these underlying shifts while the world focuses on other things is a great way to find winning investments for the future. And there is a particular shift that is affecting the market far more than any other, the hypersonic pace of technological advancement.
When historians far into the future look back at the current time, they won’t see the vaccine or Donald Trump. They’ll see the current time period as the emergence of the Digital Age. And that’s what the market sees too.
Just look at what’s been happening. Last year, technology was the best performing sector of the S&P 500 by far, returning more than three times the rest of the index. The technology-stock-heavy Nasdaq Index was up 43% for the year. And last year’s performance was no aberration.
Technology has been the best performing sector of the S&P 500 for the past three-, five-, and ten-year periods also, and by a lot. The five largest stocks on the index are all technology companies. These companies have grown so large that they now represent more than 20% of an index of 500 stocks.
Technology has driven the market over the last decade. Without it, it would have been a lame bull market and a slow recovery from the pandemic. And there is every reason to believe technology will continue its dominance. In fact, the outperformance is likely to increase as technology is on the cusp of a massive acceleration.
What will investors see as the pandemic fades? What will be next? What’s next for the market is what is next for technology. And 5G is central to that discussion. It is the infrastructure that will launch the next wave of technological innovation and thrust the world onto a digital age. And it’s just rolling out now.
In this month’s issue, I highlight a major player in the technology space that will benefit directly and massively from the rollout. It’s still cheap, pays a good dividend and is on the cusp of an epic year.
What to Do Now
The market is high. All three indexes have made new all-time highs recently. It’s not the best time to be too aggressive. Yet, the prognosis for 2021 is positive.
The S&P 500 has soared an astounding 70% since the lows of last March. The vaccine announcements in early November launched a new thrust higher for stocks as investors anticipate an end to the pandemic and a full blown economic recovery later in the year.
The market anticipates, and is already at least partially pricing in, a full recovery. That full recovery hasn’t happened yet. But it better. While nothing is certain, I am confident in a strong recovery later in the year. The economy has exceeded expectations in every step of this recovery so far. A booming economy, low interest rates and lots of stimulus should propel stocks higher for the year.
Of course, the market has moved higher rapidly recently and is certainly vulnerable to a pullback in the near term. But unless something big and unexpected happens (like a pandemic), I don’t foresee anything worse than we saw last June and August at this point.
While the market indexes are high, many stocks are still cheap and high yielding. The prospect of a full recovery is lifting previously downtrodden stocks such as portfolio energy stocks Enterprise Product Partners (EPD), Valero (VLO) as well as our bank stock U.S. Bancorp (USB). It’s still a good buy point for these stocks as they are likely to trend higher as the economic recovery gains traction this year.
It isn’t a bad time to take profits in some of the biggest recent gainers like Qualcomm (QCOM) and Innovative Industrial Properties (IIPR), up 90% and 170% respectively since being added to the portfolio. However, I am hanging on to the stocks at this point. QCOM should continue to benefit from the aforementioned 5G story. And IIPR is still showing technical strength in the near term as the marijuana sector continues to be red hot.
Featured SToCK
5G is the fifth generation of cellular wireless technology. But it’s far more than just a normal incremental advancement, it’s a tipping point that will thrust the world into a new digital age and enable a host of new technologies that will transform the world.
Game-changing technology in self-driving cars, artificial intelligence and virtual reality are right around the corner. But not until the 5G infrastructure is in place. The build out began in haste last year and will continue regardless of what the virus does or how ugly the politics gets.
Last year, there was a huge rally in technology company stocks that benefited from the pandemic and lockdowns. As the pandemic fades, investors will look to the future. And that’s 5G.
Broadcom Inc. (AVGO)
Broadcom is a technology industry Goliath with $24 billion in annual net revenues. It’s an icon of the technology revolution with roots that trace back over 50 years to the old AT&T/Bell Labs. The company has many category-leading products in crucial areas of semiconductors and infrastructure software solutions.
The company essentially provides crucial equipment that enables technology to function as we know it today. It provides components that enable networks to operate together and communicate with each other from the service provider all the way the end user and device.
Broadband, its namesake, is the high-capacity transmission using a wide range of frequencies which enable a large number of messages to be communicated simultaneously. Broadcom products enable it by providing world-leading dominance in networking and wireless connectivity. The confusing AVGO stock symbol is for Avago Technologies, which Broadcom acquired in 2016.
Broadcom is a serial acquirer that keeps on top of the latest technology while trimming noncore businesses and thus raising its margins. Avago primarily provides radio frequency filters for smartphones. These filters are an important part of the 20% of revenue Broadcom generated from the high end smartphone market. It’s crucial technology that enables smartphones to operate efficiently in a congested market by ensuring that transmissions and date streams don’t interfere with one another.
All that may sound complicated. But there are two simple reasons for buying the stock. One, it is benefitting from the current environment as more businesses move online and into cloud based applications. Two, it will get a huge benefit from the 5G rollout in both the short and longer term.
In the latest quarter, wireless revenue soared 43%, primarily because of the launch of the new Apple (AAPL) 5G phones, which require more filters and other networking technology. That boost should continue in the quarters ahead. Longer term, Broadcom will see greater demand as its chips will be an enabling technology behind powerful emerging trends like the internet of things, self-driving cars and artificial intelligence.
Analysts are expecting revenue growth of 10% and earnings growth of 17% for 2021. That’s strong growth for a stock that sells at less than 17 times forward earnings. The company is also approaching a huge technological expansion from 5G in the years ahead. Keep in mind that an investment in this stock produced a total return better than 1,900% over the last ten years.
Then there’s the dividend.
It’s a huge benefit to have a growth technology company that also pays a dividend. At the current price, AVGO pays a 3.3% yield. That’s solid, especially considering the current low interest rate environment. But the growth potential of the dividend is the main event.
Over the past five years, AVGO grew the payout by a staggering compound annual growth rate (CAGR) of 49%. The annual dividend grew from $1.94 in 2015 to $14.40 at the current rate. The yield-on-cost of an initial investment in the stock five years ago would now be 10.8%. The company has room for future growth as the payout is still only about 48% of free cash flow.
Demand for products in cellular connectivity, networking and data centers is sharply on the rise and should continue to grow for some time. Broadcom is the one of the best in the business at providing the products that enable such things. More and more devices will need to connect to the internet and interact with each other as new 5G technology launches technological innovation and the digital economy to another level.
The timing seems great for AVGO, and the price is still reasonable. It’s a great way for more conservative investors to play in the technology sandbox while getting a growing dividend.
Broadcom Inc. (AVGO)
Security type: Common stock
Category: Technology
Price: $445.64
52-week range: $155.67 - $449.99
Yield: 3.23%
Profile: Broadcom is a huge player in the technology industry with many world-leading products in crucial aspects of networking and wireless connectivity.
Positives
- Broadcom will directly benefit from 5G technology both in the short and long term.
- The stock is reasonably valued and the dividend payout grows rapidly.
- It quells the threat of new competing technologies by buying the company.
Risks
- Broadcom has a high customer concentration in Apple and Samsung and earnings would suffer if they switch providers.
- The technology sector could take a breather after a record year in 2020.
Portfolio at a Glance
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Portfolio Updates
High Yield Tier
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.
B&G Foods (BGS – yield 6.9%) – The packaged food company stock is near the low point of its recent range of the last several months. The stock had a huge year in 2020, up over 50%, and still looks good going forward, even though the torrid rally sputtered in late summer. Although the stratospheric earnings growth from the pandemic won’t last, it should have earnings growth far better than pre-pandemic levels for a long time. And the stock is still cheap, at just 11 times forward earnings, with a high and safe dividend. HOLD
Brookfield Infrastructure Partners (BIP – yield 3.9%) – This operator of infrastructure assets is a tried and true hand in a subsector that is gaining increasing popularity. The stock performed on par with the market in 2020 with a 15.5% total return for the year. But next year there is a good chance it posts better relative performance. Earnings were resilient during the pandemic and should get a bounce as restrictions abate and transportation assets rebound. The partnership has also been using its considerable liquidity to purchase high-margin assets on the cheap as strapped governments sell to raise money. The combination should deliver a higher level of growth. BUY
Enterprise Product Partners (EPD – yield 8.3%) – This undervalued midstream energy giant is on the move again. EPD soared 30% after the vaccine announcement in early November and then pulled back a bit in the second half of December. But it has moved back up to recent highs in January and has regained momentum.
As a company that generates earnings from fees for the piping and storage of oil and gas, and not commodity prices, EPD never deserved to be knocked down as much as it was. Earnings are stable and the high distribution is rock solid. Despite the recent rally, the stock still has a long way to go to get to the pre-pandemic high and a much longer way to the all-time high. I believe this is still the beginning part of the recovery and there is a lot more to go in 2021. BUY
STAG Industrial (STAG – 4.7%) – This monthly-paying industrial REIT has done okay but hasn’t been a great performer in the market recovery. A lot of that has to do with the fact that the REIT sector has struggled while investors gravitated toward growth stocks. But I think STAG is very well positioned ahead of 2021 with its cyclical industrial properties and exposure to E-commerce. In addition, the industrial space is a good one as there is more demand for properties than supply. That fact should secure solid growth opportunities for a long time. HOLD
Verizon Communications (VZ – 4.4%) – This wireless giant is an income stalwart that offers a high and dependable payout with little earnings growth in the mature U.S. wireless market. It has become very much like an old-fashioned utility stock, offering less volatility and an income and little else. It’s been a good stock in flat and down markets and an underperformer in bull markets. A stock like this is still good to have in a conservative portfolio. But VZ may well offer more down the road as the 5G build out will enable more and higher fees in the quarters and years ahead. It’s a safe stock with performance that could get boosted to a higher level going forward. HOLD
Dividend Growth Tier
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 – 4.8%) – Despite returning nearly 30% over the past year, the cutting-edge health care company sells at a remarkably cheap valuation of just nine times forward earnings and pays a huge dividend for its kind. Even though ABBV just forged a brand new 52-week high, it is by no means frothy at the current price. It’s still a great buy longer term with its phenomenal pipeline and newly minted diversification from the Allergan merger.
That said, it is still rated a HOLD because recent trading patterns indicate a strong possibility of a pull back after the recent surge, before surging still higher again months down the road. Of course, it could be that ABBV is breaking the old the pattern, creating a very bullish indicator for the stock. But until the stock proves that, I will remain more cautious in the short term. HOLD
Altria (MO – 8.4%) – Unlike ABBV, the long-term trend in this cigarette company stock is still bearish. The downtrend reflects investor skepticism about Altria’s ability to replace falling cigarette volumes with another growth catalyst. The attempt to do that with E-cigarette maker JUUL failed miserably. That said, it pays a stratospheric yield that’s safe, has stable earnings for now, and sells at a dirt-cheap price in an expensive market. Those things make MO a decent portfolio holding for conservative and income investors right now. Plus, who knows. There is also a possibility that the stock turns things around in the longer-term trend. It could be that the bottom is already in. BUY
Digital Realty Trust (DLR – yield 3.4%) – This data center REIT has a great future and a lousy chart. Despite the fact future trends are extremely positive for data centers, as technology inevitable expands and proliferates, DLR is being seen by the current market as a pandemic beneficiary that is being punished as the pandemic end comes within sight. The stock is still in a longer-term uptrend, but the near-term trend has been ugly. Until DLR reverses current ugliness, it will be rated a HOLD. HOLD
Eli Lilly and Company (LLY - yield 1.8%) – Let the good times roll. LLY had a huge 11% jump on Monday after very positive phase II trial results for its new Alzheimer’s drug. Donanemab significantly slowed the rate of decline from the disease. It’s huge because there are no drugs for Alzheimer’s, which 50 million people have. Some speculate that such a drug could be a $10 billion blockbuster. But we’ll see if it pans out. Other promising drugs for the disease have petered out in later studies. More importantly, the recent news is further evidence of Lilly’s superior pipeline and strategy to address unmet needs. That strategy should continue to deliver solid results regardless of what happens with this drug. BUY
Innovative Industrial Properties (IIPR – yield 2.8%) – I’m so torn. It feels wrong not to take a profit on a stock that can be volatile and has delivered a 170% return in just a little more than a year. But I can’t justify interrupting a stock when it appears to want to keep delivering still-higher profits. If you feel compelled to take a profit here, I can’t fault you. You can’t go too wrong locking in a 170% profit in an uncertain world. But for now, the portfolio will hang on. HOLD
Qualcomm Inc. (QCOM – yield 1.7%) – It’s all about 5G. The chip maker stock had a great year. The position has returned 90% since being added to the portfolio in late 2019. But I don’t think the 5G story has really taken hold yet. QCOM is up for more individual reasons like the favorable court ruling and better than expected earnings. But the full throated market embrace of the 5G situation got delayed during the pandemic. QCOM is still reasonably valued and should get a boost from here as earnings continue to rise and the post-pandemic investor embraces 5G. HOLD
Realty Income (O – 4.7%) – This retail REIT has historically been an income investing superstar. Although a few of its tenants are having trouble with the lockdowns, it still grew year-over-year earnings in the first nine months of last year. Those troubled tenants should see a strong rebound as lockdowns are eased. In the meantime, this great income stock is still cheap while the cause of the cheapness is going away. This stock is likely to come back in vogue with yield-hungry investors as the virus situation normalizes. And O still has well over 30% to go to get back to the pre-pandemic high. BUY
U.S. Bancorp (USB – 3.4%) – Banks took it on the chin during the pandemic as interest rates crashed, loan activity dried up and loan loss provisions soared. USB fell 21% for 2020. But a new day is dawning. A full recovery should return this top notch bank as the year unfolds. The recovery in the stock is well underway and it’s up over 40% since late September. USB also got a boost as stock buyback restrictions were removed and Democrats swept the Georgia Senate elections, leading to a higher probability of more stimulus and higher interest rates. Despite the recent rally, USB is still well below the pre-pandemic high of over 60 per share. BUY
Valero Energy Corp. (VLO yield 6.7%) – This refiner stock is a high-leverage play on a full recovery in 2021. Although VLO made a huge move higher since early November and the upper thrust has completely petered out since early December, it has a lot of upside in the months ahead. I see the recent action on the stock as a healthy consolidation ahead of a much larger uptrend. It’s just the beginning of the move, not the end. BUY
Safe Income Tier
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 BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.2%) – Safety always has a place in any portfolio in an uncertain world. This short-term bond fund is safety’s poster child. Considering the 10-year treasury still yields just 1.18%, the yield isn’t bad for safe money by today’s standards. BUY
Invesco Preferred ETF (PGX – yield 4.9%) – This preferred stock ETF is a great way to diversify away from both the stock and bond markets while getting a solid yield. It’s a beautiful thing to earn 5% while rounding out a portfolio. HOLD
NextEra Energy (NEE – yield 1.7%) – There isn’t a lot to say here. I slobber all over this stock every week. This combination regulated and alternative energy utility delivers both growth and stability. Alternative energy keeps getting cheaper and more in demand. It’s a winning combination. The stock has blown away the performance of the overall market and should continue to do so. By the way, it just made a new all-time high. HOLD
Xcel Energy (XEL – yield 2.6%) – This smaller and more volatile alternative energy is near the low point in a pattern that moves up and down on a longer term uptrend. It’s been sucking some wind since investors have been looking elsewhere after the vaccine announcement and anticipation of a full economic recovery. I believe in alternative energy and the conservative way to play it. There is no apparent fundamental reason of the recent decline as of yet. But we’ll get a better picture of things after the earnings announcement later this month. BUY
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.
The next Cabot Dividend Investor issue will be published on February 10, 2021.
Cabot Wealth Network
Publishing independent investment advice since 1970.
President & CEO: Ed Coburn
Chairman & Chief Investment Strategist: Timothy Lutts
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