The rollout of the new 5G technology is an evolution that is thrusting the world into a digital age that will change the world. This new technology will have a huge effect on the market in 2020 and beyond.
Companies that benefit from 5G have a powerful catalyst for growth that will push stock prices to a new level. But finding stocks in the area that are still cheap and defensive in a pricey and uncertain market is a challenge.
In this issue I identify a company that is defensive and high dividend-paying. But, unlike most stocks in that area, it is still reasonably priced. At the same time, the company has massive exposure to 5G and a huge catalyst for growth. With this company you can play offense and defense at the same time.
Cabot Dividend Investor 220
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A Perfect Answer for a Precarious Market
Here we are at a brand new all-time high for the market. Stocks shrugged off impeachment and are now whistling past the coronavirus. These are mere speed bumps for a market that seems destined to forge ever higher.
It has been a glorious run. The S&P 500 was up nearly 30% in 2019. It’s up over 16% since October 8. The economy is strong and, with interest rates so low, money has no place else to go but stocks to fetch a decent return. It is also helping that the coronavirus is spooking money away from foreign markets and into U.S. markets.
But I’m not so sure we’re out of the coronavirus woods yet. It may never be that big a deal in this country but it’s causing massive disruptions in China, and China is a huge factor in the global economy. I’ve seen this compared to the SARS outbreak in 2003, but it’s much worse.
First of all, it’s more widespread already than SARS ever was. But, more importantly, China only accounted for 4% of global GDP in 2003; now it’s 16%. That’s a problem for the global economy. And I don’t have much faith in the global economy as it is. It was wobbly already and it doesn’t take much to knock it down. It’s like pushing over a broomstick.
I don’t think stunted global growth will wreck our economy. But it doesn’t have to. All it has to do is spoil the raging bull market euphoria. And that’s not a high bar. I’m cautious in the near term. Once this bull runs out of gas, things could get choppy.
Don’t get me wrong—I’m still positive on the market for the rest of the year. But I don’t want to take a lot of risk or overpay under these precarious near-term circumstances.
I prefer to play things safe at this point. But playing it safe is easier said than done. Safe stocks, namely in the REIT and Utility sectors, have been wildly popular for a long time and prices are very high. Just look at the performance of so many stocks in this portfolio. It’s tougher to play it safe than it used to be.
But I found the perfect answer to the current quandary. It’s a relatively safe stock in a defensive business that pays a high dividend. But it’s not expensive. It’s cheap. But that’s only half the story. The company also has a growth catalyst that is hitting the market now and is likely to be a big factor for years to come.
What to Do Now
There are a large number of portfolio positions at or very near their all-time or the 52-week highs, including BIP, CHCT, STAG, NEE, XEL, ABBV, CCI and ARE. They all have one thing in common: They are all in safe or defensive sectors, REITs and Utilities and, in the case of ABBV, Healthcare.
That’s no accident. The market loves these safe sectors right now. It may look euphoric but investors have one foot on safety in this late stage of the bull market. And with interest rates still low, investors will continue to gravitate toward dividends. While most of these stocks are expensive to buy at this point, they are well worth holding as the current dynamic should continue for a while.
In terms of new money I continue to be a big believer in 5G for 2020 and beyond. It is a huge game-changing technology that I think will have a bigger effect on stocks than investors currently realize. Look at Crown Castle (CCI). It’s a conservative REIT that invests in 5G infrastructure properties and it’s up 30% since being added to the portfolio in late May.
While CCI has moved out of the buy range, chip maker Qualcomm (QCOM) is still in the buy range and has huge exposure to 5G. I think as the year rolls on that stock can move a lot higher. It’s a stock that I would buy first if I was new to the newsletter.
I would also buy marijuana REIT Innovative Industrial Properties (IIPR) first. The marijuana farm REIT has spectacular earnings growth and a good price. It was knocked down unjustifiably with the rest of the marijuana sector in the second half of last year. But now the sector is recovering and IIPR continues to grow earnings.
Featured Buy
Verizon Communications (VZ)
Verizon in the largest U.S. wireless carrier. Of the four major U.S. telecom carriers (Verizon, AT&T, Sprint and T-Mobile), Verizon has by far the most wireless revenues with the largest network and coverage.
Verizon also has other sources of revenue in addition to wireless services including fixed line services including cable and internet (12%), as well as enterprise services like payment processing, online shopping and security systems (10%) and some online media. But, make no mistake about it, wireless is the main part of the business, accounting for 70% of revenues and 85% of adjusted earnings.
It is the closest thing to a pure wireless company. The other providers are distracted and tied up with mergers (the pending Sprint/T-Mobile merger and AT&T’s absorption of Time Warner) while Verizon is focused on wireless. That’s a good thing, as I will explain.
The telecommunications business was once high-growth technology as wireless proliferated in the 1990s. But it has since become a slow-growth, stodgy business, more like a utility. It takes a massive investment to build out these cellular networks, which is why there are so few providers left. The U.S. market is also saturated. Everybody already has a cellphone and a plan. And people are dumping fixed line services left and right to cut costs.
The only growth area of the business left is cellular data services, for which there is fierce competition. The predictable cash flow from cellphone plans provides predictable revenue from which to pay dividends. But there is little earnings growth left. These have been stocks for which you get a nice dividend but unexciting capital appreciation.
Verizon, as well as the other major telecom companies, have underperformed the market for years. Verizon’s stock price is still below its 1999 high. That said, a stock like this isn’t the worst thing to own in this market.
For one thing, you get a great dividend. Verizon is yielding 4.2%; AT&T yields 5.4%. Good luck getting that in a bond. Plus, they have underperformed the S&P 500 in a bull market, but they have still provided better returns than any other asset class. Over the last 10 years, while the S&P provided average annual returns of 14.41%, VZ averaged 11.19% over the same period. Plus, telecom providers tend to hold up well in a down market. It’s a defensive business, as people tend to still keep their phones and TV in a recession.
As it is, Verizon is a safe stock with a high dividend in an uncertain market. But unlike most safe stocks these days, Verizon sells at a cheap valuation of less than 13 times earnings compared to a price/earnings ratio of 22 for the overall market. I’m recommending VZ because in addition to all that it also has a new growth catalyst – 5G.
The 5G Opportunity
5G is the next generation of cellular wireless technology. But it’s far more than just an incremental advancement. Much higher speeds and internet connectivity will enable a new generation of technologies like artificial intelligence, self-driving cars, robotics, smart cities and much more. The technology is a game changer that will thrust the world into a digital age like nothing we’ve seen before (see my May 2019 issue).
Verizon’s focus on wireless not only enables it to achieve better profitability than its peers, but also allows the company to focus on upgrading its networks and expanding 5G technology. And it’s already well ahead of its peers as it built 5G mobile services in 30 cities in 2019, creating the most expansive 5G network and being first to the party in most cases.
Smartphones with 5G are just hitting the market this year. Apple (AAPL) launches its 5G-enabled phones in September. All the new technologies will need a much higher degree of internet connectivity through cellular networks. They will need Verizon, which controls the largest network. Naturally, Verizon will charge for additional services.
They will likely be able to charge higher fees per smartphone, as they will offer more and better services. It’s involved in the Internet of Things, which entails all things connected to the internet like autonomous cars, smart cities, health monitoring services, and a wide range of other things will ring the register as well. And, being first to the party, Verizon can lock in customers.
Look, Verizon by the old rules would be a solid choice in this market. It’s cheap, high dividend-paying and defensive. But when you also add the likely additional revenues and growth from 5G, it makes the stock a great pick.
Security type: Common Stock
Industry: Telecommunications
Price: $58.69
52-week range: $53.95 - $62.22
Yield: 4.1%
Profile: Verizon is the largest cellular wireless carrier in the U.S. with the largest network and coverage.
Positives
- Wireless communication is a defensive business that holds up well in down markets.
- The company has already rolled out 5G in 30 cities and is first to the party to book customers.
- New technology enabled by 5G will require much more cellular network access which Verizon will charge for.
- It is likely that fees per smart phone user will rise.
Risks
- Fierce competition in wireless holds down prices.
- Fixed line business continues to diminish.
- The Sprint/T-Mobile merger creates a stronger competitor.
Portfolio at a Glance
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.
Brookfield Infrastructure Partners (BIP – yield 3.7%) – The global infrastructure company is once again at a new all-time high. The company announced positive earnings on Monday that beat expectations with 11% funds from operations (FFOs) growth over last year’s quarter and a 7% year-over-year distribution hike. Brookfield’s capital recycling program, which involves trading up old assets for higher-margin new ones, contributed. New assets in North American railroads, Canadian natural gas pipelines and data infrastructure came on line in the fourth quarter. The stock moved 1.31% higher on the day following the announcement. Last week I sold one-third of the position as a precaution ahead of earnings. That probably cemented the good earnings report. Nevertheless, the stock is still strong and we’ll see if it continues to forge higher in the weeks ahead. HOLD
Community Health Trust (CHCT – yield 3.5%) – This small healthcare REIT has also just made a new all-time high. The stock had been a top performer but it pulled back significantly between late October and last December, though it has since resumed a powerful upward trend. Community Health doesn’t announce earnings until the end of the month and is basking in the strong market for REITs. The healthcare niche is a great one as the population ages and the fact that it is a small REIT probably gives it more juice. The stock is pricey but I won’t fight the tape, especially since two-thirds of the position was sold near the old highs. HOLD
Enterprise Product Partners (EPD – yield 7.0%) – Anything energy related seems to hate this coronavirus thing. It’s a kick in the head to a sector that was already rolling on the ground. But CHCT stock has always been a great value. Now it’s a really, really great value. It recently announced solid earnings with a 9% year-over-year increase. Everything is rock solid operationally and fundamentally. And the obscenely high 7% yield is safe, as the distribution was just increased for the 62nd consecutive quarter. It should also have solid growth in the quarters ahead as new projects continue to come on line. Investors continue to do this gem a tremendous injustice. I’m not sure how long the tyranny will last. But the market will wise up eventually. In the meantime, enjoy the sweet income. BUY
STAG Industrial (STAG – yield 4.4%) – This industrial REIT will announce earnings later this week. Other than that I don’t have much to say about the stock. And that’s the beauty of this industrial REIT. It has a great niche in the under-supplied industrial space market at a time when online shopping is creating growing demand for warehouse space. The profits have been slow and steady as has been the performance. It’s not winning any races buy it’s like a tortoise that just keeps on going in the right direction. It’s a little pricey but momentum is still solid. And it pays a dividend every single month. HOLD
SFL Corporation (SFL – yield 10.5%) – Unfortunately, the timing on this pick turned out to be bad because of the development of the coronavirus, which is bad news for the shipping industry. It will likely curtail trade volumes at least for a while and the sector will be directly affected. As a result, SFL has taken a bit of a beating since the crisis erupted. Since the crisis erupted, SFL has gone down about 10% while the Invesco Shipping ETF (SEA), which tracks stocks in the Dow Jones Shipping Index, is down almost 17%. The stock briefly bounced back last week and may again but if the weakness continues another week I will sell the position. 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 – yield 5.0%) – It was a fantastic week for this biotech giant. The stock moved over 15% higher in just five days and made a new 52-week high. Earnings beat expectations with 16% growth from last year’s quarter. Humira sales were better than expected with 9.8% U.S. growth, offsetting continued slippage overseas. It’s newly launched drugs also grew at a strong and better-than-expected clip and the company issued 2020 guidance that was well above expectations. Allergan (AGN) also announced better-than-expected earnings. And the merger is expected to close in the second quarter. It was a huge week and the stock broke out to a new level well beyond the former resistance at the 90 level to about 95. We’ll see if the stock pulls back somewhat, which would be normal, or continues to forge higher. BUY
Altria (MO – yield 7.3%) – It has been a lousy time for this stock. Altria took another $4.1 billion impairment charge on its JUUL stake after the $4.5 billion impairment it took in October. Altria took a disastrous $12.8 billion, 35% stake in the e-cigarette maker a little over a year ago. Since then, JUUL has been under relentless scrutiny from regulators for marketing to teens. And the stock took a hit after the earnings announcement. But remember the company still has investment in beer, wine, marijuana and other things. It also has the most popular cigarette brand in the country by far. And Altria just raised the dividend for the 50th consecutive year because of the predictability of sales. The stock remains undervalued with a recession resistant business and a massive 7.3% yield that is safe. HOLD
Crown Castle International (CCI – yield 3.2%) – The 5G cell tower REIT again hit a new all-time high. The stock has soared about 16% since mid-December and held up quite nicely during the recent selloff. The REIT is in a favorable sector right now and is especially well positioned as the 5G rollout will continue in haste, providing as much opportunity for growth as the company can handle. I’m still very positive on the stock going forward despite the fact that it was reduced from a “BUY” to a “HOLD” last week. I still consider the stock to be in an uptrend but I’m cautious here for new money as it has risen so quickly for a REIT. HOLD
Innovative Industrial Properties (IIPR – yield 4.2%) – The stock pulled back slightly this past week but it is still up over 20% so far this year. Despite a strong recent move I think the stock could have a lot more room to run. The marijuana farm REIT had fallen 50% from its midsummer high by late October, falling in sympathy with the overall marijuana sector that was taking a beating. But IIPR has more than doubled earnings and will continue to do so for a while. It really had no business selling off to that extent. Now, the marijuana sector appears to be moving higher after a huge down move. I believe that, given the earnings growth and the recovery in the sector, this stock could make a run at the old highs of about 140. BUY
Qualcomm Inc. (QCOM – yield 2.8%) – The chip maker announced better-than-expected earnings last week as demand for its 5G chips drove earnings and revenue higher. The company also raised guidance for the year. But then they said that the coronavirus outbreak in china could have a “material” impact on its near-term profit forecasts. The stock fell on the news and then regained to end about even. The good earnings were shadowed by the coronavirus warnings. That said, the 5G earnings will roll in even if a bit less so because of the virus. The stock still remains in a powerful uptrend that began at the start of 2019. I think this will buy more time to enter the stock, which I think is destined for higher prices as 5G continues to roll out. BUY
Valero Energy Corp. (VLO—yield 4.7%) – The refiner had an up week in an otherwise dismal month as the coronavirus put a damper on anything to do with energy. The risk is that the virus impact will be so bad that it materially affects demand for refined products globally for a big part of the year. While that is possible, I believe it is unlikely. The company was expecting a huge earnings bump in 2020 as fundamentals in the industry improve. The virus will likely disrupt that otherwise positive story in the near term and the stock will be held back. However, unless it becomes a massive problem, profits for refiners should significantly improve in the months ahead. But I will continue to monitor the situation. 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.
Alexandria Real Estate Equities (ARE – yield 2.5%) – The research lab and life science REIT seems to like the coronavirus. The company doesn’t have any exposure to possible negative effects in the global economy and it benefits as money flees overseas markets into the U.S. It’s also a defensive play as the market becomes uncertain. Of course, it was strong in the up market too. It’s also at a brand new all-time high. At this point, there’s no reason not to keep riding this bronco. It’s getting pricey but the momentum is to die for. HOLD
Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.7%) - The best thing I can say about this short-term, investment grade bond ETF is that there’s nothing to say. These bonds remain steady and predictable, just like they should. It’s comforting to have something in a portfolio that pays interest and is unaffected by market volatility. It tends to steady out portfolio performance and can help keep you invested in times of volatility. It also a nice yield for bonds that mature at the end of next year. BUY
Invesco Preferred ETF (PGX – yield 5.3%) – This preferred stock ETF is a great way to get a high yield and diversify into an asset class that is not correlated to the stock or bond markets. It is a rare way to get a good yield in a low interest rate world without taking on much risk. The performance has been solid and it remains a nice position to have in the late stages of the market cycle where uncertainty in the stock market continues to remain a factor. BUY
NextEra Energy (NEE – yield 1.9%) – Okay, I’ll just say what I say every week. The market loves Utilities right now and this is the best of the lot. It has one of the best regulated utilities in the country in Florida Power and Light and it also has growth from its alternative energy business, the biggest of its kind in the world. Another week has gone by and it has set another all-time high. After returning over 50% last year, the stock price is up 20% this year. The stock is expensive by every measure but it just wants to keep climbing higher. Let’s just keep riding the trend for now. HOLD
Xcel Energy (XEL – yield 2.5%) – This smaller alternative energy utility is also at the all-time high after a huge surge in 2020. The market loves utilities almost as much as it loves alternative energy companies. It has the right stuff for this market and it looks like it will never pull back. Like NEE, the stock has gotten expensive but the upward momentum still shows little sign of abating. I won’t fight the tape and will continue to hold the whole position as long as the getting is good. HOLD
Safe Stocks: It’s Different this Time
As I mentioned earlier, stocks have had a strong run recently. Bull market rallies are not unusual. But this rally is unusual in terms of sector participation.
The best performing sector over this up leg since early October is Technology. That’s no surprise. Technology leads just about every rally. It’s where most of the exciting growth is. What is surprising is that the next best performing sectors are Utilities and REITs. These defensive sectors typically outperform in down and flat markets. Rarely do they lead a rally. What’s going on?
Part of it is that late in the recovery and bull market investors are concerned. Recoveries always end in recession and bull markets always end in bear markets. And this recovery and bull market are already the oldest in history. Investors want to participate in a market that could go higher for a while, and also protect their rear ends in case the market turns south. These safer plays with recession resistant businesses are a good way to do it.
But there’s something else – interest rates.
Historically, in the late stages of a recovery, interest rates rise as the Fed tries to keep the market and the economy from overheating. Rising rates are bad for these slower growth, high dividend-paying sectors as the relative value of the dividends decreases. And they typically underperform the market. But interest rates have fallen. That’s highly unusual.
The U.S. central bank as well as central banks all over the world kept interest rates at near zero levels for most of this recovery. The Fed raised rates back but other countries didn’t follow. The relative levels of U.S. interest rates put the country at a disadvantage and the Fed took the unusual late-stage recovery step of lowering rates again. The Fed cut the Fed Funds rate three times last year.
Investors’ appetites for safety and falling interest rates have enabled safe sector stocks to participate in a late recovery rally where they normally underperform the market. That’s great for now. But beware.
These safe sector stocks may not perform as well when the market turns south as they have historically.
Normally, these stocks underperform the market in the run-up before a bear market. Part of the reason they don’t go down as much is because they haven’t risen so high. But this time these high-flying stocks could take an uncharacteristic beating when the market corrects, even though their businesses are more resilient in a recession.
It’s great when the mold is broken and these safe sectors perform uncharacteristically well in an up market. But the flip side of this may be uncharacteristic poor performance in a down market. Be aware of the increased risks. But I’ll be with you every step of the way.
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 March 11, 2020.
Cabot Wealth Network
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