There is tremendous growth ahead for technology. There will be incredible opportunities to invest. While you probably don’t associate technology stocks with a dividend newsletter, things are changing. In this issue I identify a technological behemoth that is now a blue chip dividend payer. Its products are so widely used that owning the stock provides a great way to play the technology revolution in general and gain exposure to the explosive growth.
Cabot Dividend Investor 419
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Exploit the Accelerating Technological Revolution
We have a tendency to focus on our everyday lives without truly appreciating how the world is changing around us. But understanding the tectonic shifts outside of our near-term consciousness is crucial to successful investing.
I realized the other day that I’ve lived in my current house for 26 years now. Time sure flies. After thinking about that for a while I realized just how much things have changed since then, not only in terms of personal circumstance but the world around us.
In 1993, when my wife and I moved in, we didn’t own a computer or a cell phone. We had never heard of the internet. Neither of us had ever sent an email or a text. Even just 15 years ago no one had ever heard of social media. Facebook and Twitter didn’t exist. There was no such thing as a smartphone or a tablet or any kind of mobile device.
Things that are staples of everyday life today didn’t even exist as recently as 2005. Now, everywhere I go people seem to be fiddling with their phones. Everyday life has become inundated with smartphones, the internet, laptops, iPads, smart TVs and even smart cars. These things didn’t exist a few years ago; people can’t seem to live without them now.
Historians make the claim that people living before the Industrial Revolution could have lived relatively similar lives a thousand years earlier. Not anymore. My son is 22 and if he went back in time just 10 or 15 years he’d be like a fish out of water.
Technological innovation has dramatically accelerated in recent years, to the point where it’s changing everyday life. And technology begets more technology. New technology acts as a springboard for further advances. Technology has reached a critical mass tipping point and is now altering real life in a tangible way right before our eyes, at an accelerating pace.
Ten years or even five years from now we will use things on a regular basis that we aren’t even aware of today. Big new things are already well on their way. Drones can already deliver stuff to your door and widespread use is right around the corner. Self-driving cars should be common in a few years. Wearable technology is already here and will soon monitor people’s vital signs.
Other technologies are right around the corner, like hover technology and 3D printers that could enable you to print a pair of shoes from your home. Robotics are already here too, and artificial intelligence could supply robotic maids (seriously). Holograms from our computers and devices could enable us to tour far-off places and perhaps replace televisions as a way watch movies or sporting events. And I’m only just scratching the surface.
The bottom line is that there is tremendous growth ahead for technology. And there will be incredible opportunities in which to invest. While you probably don’t associate technology stocks with a dividend newsletter, things are changing. In this issue I identify a technological behemoth that is now a blue-chip dividend payer. Its products are so widely used that owning the stock provides a great way to play the technology revolution in general and gain exposure to the explosive growth.
[highlight_box]What To Do Now: Things are good. The economy appears to be stronger than most expected. The Atlanta Fed is estimating first-quarter GDP growth at 2.8%. That’s a sweet number considering that the first quarter tends to be about 1% slower than the rest of the year. Housing starts and consumer confidence are strong and now it appears that the global economy is also in better shape than previously forecast.
Not coincidentally, the market is making new all-time highs. Earnings are exceeding expectations. The recovery and the bull market are rolling on for now. What does all that growth that mean to you fortunate people who subscribe to Cabot Dividend Investor?
There is good reason to continue holding those portfolio positions with solid momentum. With the positive market scenario, these stocks should trend higher in the weeks ahead at least: Stag Industrial (STAG), American Express (AXP), Ecolab (ECL), McCormick (MKC), NextEra Energy (NEE) and Excel Energy (XEL).
For new money, I continue to favor value stocks. Stock prices are high and the strong performance we’ve seen from the market so far this year is likely to slow going forward. I believe investors will favor high dividend stocks that sell at reasonable valuations over the intermediate term. Those portfolio positions include the strong individual stories of Brookfield Infrastructure Partners (BIP), Enterprise Product Partners (EPD), AbbVie (ABBV) and Altria (MO).[/highlight_box]
Featured Buy
Intel Corporation (INTC)
The technological revolution has had its superstars. Old superstars get replaced by new ones, growing earnings at a breakneck clip. After all, companies can only grow at warp speed for a while until they become too big to grow that fast. Juggernauts of the past morph into something else. The very best ones become blue-chip companies.
In fact, most of the 30 companies that make up the Dow Jones Industrial Average were once high-flying upstarts in their industries. The technology arena has spawned blue-chip Dow stocks as well. One them is this month’s Featured Buy: Intel Corporation (INTC).
Intel is truly one of the world’s technology powerhouses. The company is by far the largest computer chip maker in the world and holds an astounding 80% market share of microprocessors that go into personal computers (PCs) and computer servers. The company has over $70 billion in annual revenues and $264 billion in market capitalization.
In plain English, Intel makes the brains that operate computers. It makes platforms that consist of a microprocessor and a chip set. A processor is essentially the brains of a computer, controlling other devices in the system. These processors are the cutting edge of computer technology and the digital revolution and determine the power, speed and function of a computer.
Naturally, competition is fierce. Many players try to take market share. It’s a tribute to Intel’s high R&D commitment and funding that the company maintains such market dominance. Still, the company wins some and loses some. Over the last decade, Intel missed the smartphone and mobile device revolution, where other chip makers reign supreme. The mature PC market has been losing market share to mobile devices and that misstep hurt Intel.
But this is important to note: Although the company essentially blew it in the smartphone arena it was still able to grow earnings by more than 20% per year for the last five years. That’s the beauty of being in an industry that’s growing by leaps and bounds. Intel has such a prolific technology that it was able to fill the smartphone void elsewhere. Namely, it made up for it with rapid growth in the server market as the expansion of cloud computing necessitated a data center infrastructure buildout. Now, servers account for about half of Intel’s chip sales.
The expansion of technology was a tailwind that will likely get even stronger going forward. As I mentioned earlier, technology begets more technology and the pace of innovation tends to accelerate, like a snowball running downhill. Huge advances are coming in artificial intelligence and self-driving cars, where Intel has established a strong presence. In fact, the company sees a $300 billion per year addressable market in the following areas.
• 5G
• Data centers
• Internet of things
• Artificial intelligence
• Self-driving cars
Intel has it coming and going with this stuff. Every area presents individual opportunities. For example, Intel has made a string of strategic acquisitions to gain an advantage in artificial intelligence and self-driving technology (including Altera, Mobileye, Nervana and Movidius). It’s now at the forefront of these high-growth technologies.
Intel could absolutely knock the cover off the ball in these areas. Or maybe it won’t. I don’t really know. But either way Intel is sitting pretty because data centers and servers will have to be increased to accommodate the new technology. And Intel is already king in the server and infrastructure arena. Either it grows along at a fine clip with the infrastructure buildout or it grows along at an even faster clip with success in individual technologies.
After returning an average of over 25% per year for the last three years you would think INTC is too expensive. But it isn’t. It sells at less than 13 times forward earnings, much cheaper than the overall market. It pays a modest 2.35% yield but the dividend is well supported with just a 30% payout ratio. And the dividend is likely to grow along with earnings going forward.
It’s nice to own something that has the tailwind of being poised in front of a megatrend. Missteps tend to be forgiven more quickly and fortune tends to be highly rewarded. You only have to be half right if a company is in the right place at the right time. Sure, the stock can bounce around in the short term. But it’s hard to see how INTC won’t be a winner in the long term.
Intel Corporation (INTC)
Intel Corporation (INTC)
Security type: Common stock
Industry: Technology/Semiconductor
Price: $58.72
52-week range: $42.36 - $59.59
Yield: 2.35%
Profile: Intel is the world’s largest computer chip maker.
Positives
• Buildout in the server market, where Intel is king, seems inevitable as fast-growing new technologies will require more infrastructure.
• The company has a leg up in potential huge growth areas of artificial intelligence and self-driving cars.
• The company operates a massive and unmatched R&D budget and has a long track record of excellence.
• The stock is selling at cheap valuations.
Risks
• Intel still derives half of chip revenues from the PC market, which is in decline.
• Competition from other chip makers is relentless.
• The company missed out on the smartphone chip market.
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.
BUY – Brookfield Infrastructure Partners (BIP 42 – yield 4.9%) – After a rare down year in 2018 this infrastructure MLP is back on track, up 21% year-to-date. In addition to the reliable cash flow and great business model the company has new assets coming on line in the next several months that should boost earnings. Technically, the stock looks strong as it is consolidating at recent highs. It also helps that the infrastructure sector is increasingly in vogue with investors and BIPs defensive and high-yielding features should be popular going forward.
HOLD – Community Health Trust (CHCT 37 – yield 4.5%) – REITs are a good asset class to be in right now and Healthcare is a great sector. This healthcare property REIT is in both. The stock has been on fire, up 44% over the past year and 23% year-to-date. This newer, smaller stock has only publicly traded for about four years but the performance has been spectacular. It is continuing to make new highs so it’s worth hanging on for the ride. It will probably pull back at some point … but not yet.
BUY – Enterprise Product Partners (EPD 29 – yield 5.9%) – Everything is looking good for this energy infrastructure giant. It has an excellent track record, a stellar balance sheet and a great yield. It’s also dirt cheap while the country is in the midst of an energy boom. And 26 out of 27 analysts that cover the stock rate it a “BUY” or “STRONG BUY’. As I’ve been mentioning the stock has been range-bound since early 2016. If it can break out above 30 per share this time around it can go a lot higher. We’ll see what happens in the next few weeks. It announces first-quarter earnings in a few weeks. Maybe that’s what it will take.
HOLD – STAG Industrial (STAG 29 – yield 4.8%) – This all-star performing industrial REIT has been trading in a range for more than two years, but just recently broke slightly above the old range. It is just about at the 52-week high and still fairly valued. It also has a history of falling back after breaking the old highs, so I’m cautious here. I’ll be watching closely if it can break out to a new level or it starts to pull back. It pulled back a just a little recently but might be healthy. There is no cause for alarm yet but I’ll be watching. The earnings announcement on April 30 may reveal STAG’s direction.
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.
BUY – AbbVie (ABBV 79 – yield 5.3%) – This biopharmaceutical giant fell back down again last week from the 83 level. It was knocked down with the rest of the Healthcare sector on nervousness about political talk about drug price caps and a single-payer plan. As I’ve often said it is a great company that has been undeservedly knocked down. It’s down 15% so far this year. Overseas competition for Humira can easily be offset by sales of its newly launched drugs, especially hematology/oncology drugs Imbruvica and Venclexta. However, the near term is still in question. The company announces first-quarter earnings tomorrow (Thursday) morning. That should give us an idea of the near-term direction. Regardless, I’m confident in the intermediate and longer term for this dirt cheap company, and you get a 5%-plus yield while you wait.
BUY – Altria (MO 55 – yield 5.6%) – The cigarette maker also announces first-quarter earnings tomorrow. The stock has good momentum overall but it gets periodically knocked back by negative statement from the regulators and a recent report of faster-than-expected volume slippage in tobacco product smokers. It’s still up 14% from the last earnings announcement at the end of January. The earnings may reveal information about volumes and dictate the near-term direction of the stock. However, recent investments in marijuana and e-cigarettes will take longer to play out. The stock is still 17% off its 52-week high with a huge dividend payout and I believe it will be a longer-term winner. But we’ll see what happens with earnings.
BUY – American Express (AXP 114 – yield 1.4%) – Here’s a company that already reported earnings this cycle, last week. On the surface, the report was somewhat mixed with slightly higher than expected earnings and lower revenues. Revenues were hurt by currency and otherwise solid. The company did a good job of adding members and the global situation, which I’ve been watching, was solid. The company was also upbeat about the rest of the year. The stock has been higher since the announcement so it looks like the market liked it. AXP looks poised to break through the resistance of 114.50 and continue higher.
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.
BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.2%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
The beauty of these two positions is that there’s never anything to say. They just forge along as advertised. You get steady market value and the modest payout. It’s a great place to earn something while diversifying away from the risks of the stock and bond markets.
HOLD – Consolidated Edison (ED 84 – yield 3.5%) – The NYC utility is still behaving fairly well. After a very strong up move, for ED, the stock has been consolidating since mid March. It could potentially make a move toward its two-year high of about 89 per share from here, perhaps after the utility announces earnings in the first week of May. At that point we might get a better idea if it is going to surge higher or pull back. We’ll see. But for now it’s a HOLD.
HOLD – Ecolab (ECL 184 – yield 1.0%) – Sure, this chemical and sanitation company is getting pricey. It’s up over 25% already this year and over 6% in the past month. But it’s been on a tear since the December lows. As long as the stock is technically strong there’s no reason not to hold it. Ecolab reports earnings at the end of April. We’ll wait and see what happens after that.
BUY – Invesco Preferred ETF (PGX 15 – yield 5.6%) – The high yield and lack of correlation to the stock and bond markets make this a nice portfolio holding and income generator. I’ll take a juicy yield and monthly payments with a stable price in this market any day of the week. Preferred stocks took a dip during the market selloff, so I will watch this closely if things get ugly again. But for now, it’s been nice and steady. The monthly dividends are a nice bonus too.
HOLD – McCormick & Co (MKC 152 – yield 1.5%) – After stumbling on disappointing earnings in January on the heels of a fantastic year, the stock resumed its ascent and surpassed the January high. Valuations are getting very stretched and the stock has retreated somewhat since making a new high. It hasn’t yet pulled back enough for concern but I’m watching it closely. For now the uptrend is still intact and I will continue to HOLD.
BUY – NextEra Energy (NEE 190 – yield 2.6%) – NextEra reported solid first-quarter earnings yesterday. Earnings per share rose 12.2% from last year’s quarter and revenues increased 5.6%. The EPS number beat consensus estimates and revenues slightly missed. The utility anticipates annual earnings growth of 6% to 8% through 2021. This is fantastic growth for a utility. The market sort of yawned off the numbers, as they were largely expected. The stock still has upside momentum and looks strong technically. I like this stock in both the short and long terms.
HOLD – Xcel Energy (XEL 55 – yield 2.9%) – The chart for this smaller alternative energy utility looks identical to that of NEE. I like both utilities but you’re really getting the very same kind of thing. The Utility will report earnings later this week, and there is no reason not to be optimistic. I suspect we’ll get something similar the NEE. XEL is off its recent high but still looks pretty good on a technical basis. Continue holding it for now.
Last price as of mid-afternoon on April 24, 2019
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.
Bank on Megatrends
The world is always changing. In fact, one of the only constants in life is change. We see this in our individual lives. But the world around us also changes. It is crucial to successful investing to understand how and why the world is changing. Investing ahead of those changes is a winning strategy.
While the world changes all the time, there are far more select instances where we can see it changing in major ways that are identifiable. Fashions change with the wind. Trends come and go. But megatrends change the world. A megatrend is a major transformation like the Industrial Revolution, railroads and the technological revolution. While markets can do any old thing in the short term, over time they respond to these megatrends.
Right now, I can identify three such megatrends that are transforming the world: the aging of the population, the technological revolution and the growth of the global middle class. I talked about technology earlier. In the January issue I discussed how the population in the U.S. and around the world is older than ever before and rapidly getting older.
While everybody frets about the state of the world, it’s actually never been better. Billions of people are being lifted out of poverty and massive amounts of new consumers with discretionary income are arriving all the time. The CEO of Coca-Cola (KO) recently said that new markets for their products the size of the population of Manhattan are opening up every single year.
How do these trends affect things? Let’s go to the video tape. The best-performing sectors of the market over the past 10 years are Consumer stocks, Information Technology and Healthcare. The best-performing over the last five years are Information Technology, Consumer, Financials and Healthcare.
Sure, the market can bounce around and do crazy things in the near term. But over time these megatrends are dictating the tape. It’s no accident. There are a million pieces of investment advice out there. If you only remember one thing, remember this: Go the way the world is going and invest in front of a megatrend. It will give you a huge advantage over time.
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Your next issue will be published May 29, 2019
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