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Dividend Investor
Safe Income and Dividend Growth

Cabot Dividend Investor 519

The world is changing. That’s nothing new. But in terms of technology it’s changing at a faster pace than ever before. There’s a new term you’ve probably seen floating around the news, it’s called 5G. It represents a change so profound that as investors we need to understand it.

Cabot Dividend Investor 519

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The Incredible Opportunity of 5G

Technology seems to provide us with new English words all the time. Nobody ever heard the terms “tweet” or “selfie” or “photobomb” just a few years ago. So many new terms are thrown around that it’s tempting to ignore some of them.

But there’s a brand new term you’ve probably run across of late that is worth paying attention to. It’s called 5G. The term is much more important than a neat new language factoid. It represents a massive shift in how our world will function, and is therefore something that you as an investor need to understand.

What is 5G and why is it important?

It means the “fifth generation” of cellular wireless network technology. A new generation rolls around every ten years or so, from the first one that enabled cell phones in the first place to the third and fourth generations that enabled smart phones and mobile data. Each generation marks a major step in capabilities. This generation adds massive speed and enables connectivity to the internet with far superior speed, scope and scale.

You may be thinking so what, big deal. It’s another smart phone improvement that young people and techies will drool all over that you won’t even use. But it’s about so much more than smart phone gadgetry. 5G represents a massive leap forward in mobile information access that will thrust us into a new age of technology.

The phone is evolving into not so much a powerful computer in and of itself but rather a means of access into massive super computers and those capabilities. Not only will a handheld device access the most powerful technologies in the world, but so will cars and drones and robots. 5G is the infrastructure that will enable self-driving cars, artificial intelligence, virtual reality, smart cities and so much more. It has incredible medical and military applications.

5G isn’t a garden-variety generational cell phone advancement; it’s a crucial tipping of critical mass into a new age of technology. How important is it? It is front and center of the current trade fight with China and the struggle for dominance and power. This advancement is seen to be crucial to a nation’s strategic advantage.

In fact, 5G technology is considered such a national imperative that the FCC streamlined the rules so that the 5G rollout can continue in haste. Infrastructure is key. Every new generation requires more and better cell towers and supporting structures. This new generation requires even more because, although it provides great speeds and power, it doesn’t have the cell signal range of previous generations. Therefore, it requires more towers and supporting technologies to increase the range and relieve congestion.

This month’s featured buy is a Real Estate Investment Trust (REIT) that leases cellular wireless technology infrastructure (cell towers, small cells, fiber optic cables). It is a huge player that is front and center of the 5G build out and the business is likely to grow rain or shine, regardless of the economy.

[highlight_box]What To Do Now: The market is sputtering. It’s been down for five straight weeks. The China trade war continues to produce market-roiling headlines in the near term. And it appears unlikely that a resolution will be in the offing anytime soon as both sides seem to be digging in. There is also growing concern about slowing U.S. economic growth.

I mentioned last week that I’m still positive on the market for the remainder of the year. The economy remains resilient as tangible damage from the trade war is likely overblown. And now, the specter of a Fed rate cut is on the table. That said, the market could be volatile for a while longer. Cyclical companies are likely to be under pressure while safer plays in utilities and REITs are likely to outperform the market.

In the past rough year for the overall market, the safe dividend plays in the portfolio have done very well. Although several have become relatively high priced and near their 52-week highs, they still have solid momentum in the near term as investors flee to safety amidst the volatility. It’s worth continuing to hold those stocks for now.

In terms of new money, my favorite positions right now are Brookfield Infrastructure Partners (BIP) and Enterprise Product Partners (EPD). These companies both have bankable and growing earnings, sell at cheap valuations, and look strong on a technical basis. In my view, BIP and EPD offer the most upside potential in the near term and should hold up well if market trends worsen.[/highlight_box]

Featured Buy

Crown Castle International Corp. (CCI)

Crown Castle International Corp. (CCI) is a REIT that owns and leases roughly 40,000 cell towers, 65,000 small cell towers and 70,000 miles of fiber optic cable primarily to wireless service providers—predominately in the largest U.S. cities. It operates exclusively in the U.S. and about 70% of revenue comes from the big four U.S. mobile carriers (AT&T, Verizon, Sprint, T-Mobile).

These properties enable mobile data traffic and access to the internet from mobile devices. Despite all those people you always see fiddling with their phones, mobile data is just getting started. It currently accounts for just 6% of all internet traffic, up from 3% two years ago. This traffic, and the infrastructure it requires, is expected to grow like crazy.

Mobile data traffic is expected to grow at a staggering rate of 36% per year through 2022. Cisco (CSCO) estimates that the amount of mobile data traffic will grow fivefold between 2017 and 2022. Mobile data is how devices connect to the cloud and supercomputers. It is the means by which cars will be autonomous and communicate with other cars, heavy machinery can be operated from a distance, drones can be operated, homes and cities are connected, police and military can coordinate and vital body signs can be monitored. I can go on and on but you get the idea.

You know why I like the cell tower business right now, but why Crown Castle instead of its competitors? Aside from the major mobile carriers themselves, the three largest players in the business are all REITs. The other two are American Tower Corp. (AMT), the largest, and SBA Communications, the smallest of the three. There are several reasons why I prefer Crown Castle.

One is that CCI only operates in the U.S. and the others do business in places like India, China and Brazil. I believe the 5G infrastructure story is so good that I don’t want to risk any weirdness from places that I don’t understand screwing things up. We saw the risk of foreign influence in the recent foray with Intel (INTC).

The other difference is small cells. CCI is king in this area. A small cell is basically an antenna placed on structures such as streetlights, the sides of building, or poles that supplements a main cell tower. It is typically about the size of a pizza box. The purpose is to increase the range covered by a main cell tower and relieve congestion. Small cells are a huge deal in the 5G buildout because the new ultrafast connectivity has a very limited range. Small cells are crucial infrastructure for delivering service to a wider area and allowing more users. The country is going to need a ton of these things and CCI leases them out.

The dividend is also important. As a REIT, which CCI converted to in 2014, Crown Castle pays no income tax at the corporate level provided it pays the bulk of earnings to shareholders in the form of dividends. The yield is currently a respectable 3.58%, much higher than AMT’s 1.84%—and SBA pays no dividend at all.

The dividend is also incredibly well supported by the company’s operations. The company leases out its towers and cables with long-term contracts with sizable payment increases built in. The average remaining length of the contracts is over five years with guaranteed payments of five times current annual revenues over the period. That means that it has already booked the current level of revenue for five years. Everything else it generates from here is growth.

Given the scope of the opportunity ahead, CCI has rather modest aspirations. Management is targeting 7% to 8% annual dividend growth going forward. It’s worth noting that this is not an investment designed to knock the cover off the ball and double or triple your money in a short time. Growth in the sector associated with the 5G rollout will simply make this a rock solid income generating investment.

The stock has provided an average annual return of over 15% per year for the last five years and over 20% for the last ten years. Given the current opportunity and the targeted 7% to 8% annual dividend hikes I am expecting the stock to generate at least similar returns going forward.

It is also highly likely that the 5G rollout will be achieved rapidly regardless of the economy, which makes CCI not only a growth story but a defensive one as well. It’s also not only immune from the China trade situation but it might actually benefit as competition in technology increases between China and the U.S.

The stock will be added to the Dividend Growth Tier with a rating of “BUY”.

Crown Castle International Corp. (CCI)

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Crown Castle International Corp. (NYSE: CCI)

Security type: REIT
Industry: Technology/Infrastructure
Price: $127.69
52-week range: $99.99 - $130.60
Yield: 3.58%
Profile: Crown Castle is a large REIT that leases out cellular mobile technology infrastructure such as cell towers, small cells, and fiber optic cable.

Positives
• Cellular service providers and regulators are highly motivated to roll out new 5G infrastructure in haste.
• The company has long-term leases without automatic increases built in.
• The 5G infrastructure is highly dependent on small cells which Crown Castle specializes in.
• Earnings should remain consistent and growing in any economy and Crown doesn’t have international exposure.

Risks
• The stock is already relatively high priced.
• A merger between Sprint and T-Mobile could eliminate business with redundancy.
• The REIT payout structure limits the company’s ability to grow.

Portfolio at a Glance

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Portfolio Updates

High Yield Tier

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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.

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BUY – Brookfield Infrastructure Partners (BIP 43 – yield 4.9%) – The company describes itself as “one of the largest owners and operators of critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers and data.” It owns some of the most defensive, non-cyclical assets in the world that generate a reliable cash flow. But it also offers growth as new and higher returning assets should come online over the next quarters and years. It’s a great place to be in a turbulent market with a 4.9% yield and a strong technical chart.

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HOLD – Community Health Trust (CHCT 39 – yield 4.5%) – It looks like this small and growing healthcare REIT is getting a boost as defensive stocks come more into vogue with investors and the market gets more volatile. It offers the safety of a REIT with more growth potential than its peers. You can hide from the market volatility and get upside at the same time. CHCT continues to make new all time highs. The stock is up more than 37% year-to-date. It’s getting expensive but it still seems to want to go higher.

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BUY – Enterprise Product Partners (EPD 28 – yield 5.9%) – There’s a lot to like about this energy infrastructure company. First there’s the 6.1% dividend. That may sound too high but it’s well supported by fee-based contracts that guarantee about 85% of revenue, a peer low 60% payout ratio and investment grade credit ratings. The company has also raised the payout for 20 consecutive years. The company has about $3.5 billion in new projects coming on line this year that should boost earnings and it’s selling at a very cheap valuation of about 10.5 times cash flow. Technically, the stock has been hovering near a breakout level for a while now. Hopefully, it will move higher in the near future.

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HOLD – STAG Industrial (STAG 30 – 4.8%) – This industrial REIT is in a good subsector of the business. Industrial space is in short supply and high demand. The economy is strong and the proliferation of online retail demand for warehouse space gets even stronger. Everything looks sound from an operational standpoint. In the first quarter revenue was up 15%, from the year ago quarter, and adjusted funds from operations soared 21%. The stock recently made a new all time high and it still has positive momentum.

Dividend Growth Tier

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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.

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BUY – AbbVie (ABBV 78 – 5.3%) – This is a great biopharmaceutical company. But the stock’s momentum stinks. That said, it seems to have little downside from here because it’s already absurdly cheap as the market seems to be pricing in a very ugly scenario going forward. Its blockbuster, world sales-leading drug is facing increased competition. The company is more than capable of replacing the falling revenue but the market won’t believe it until it sees it, and that could take a while. I believe the story will work out longer term and in the meantime you get 5.4% in a stock with little downside in a volatile market.

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BUY – Altria (MO 50 – 5.6%) – The cigarette maker got knocked back again this week as another report of more severe than expected cigarette volume slippage is floating around. Like AbbVie, Altria has a longer-term to overcome this as it replaces falling cigarette sales with growth in e-cigarette and marijuana sales. And this company has the best track record I’ve ever seen at overcoming obstacles. As well, Altria still has strong pricing power in its flagship Marlboro brand that can offset volume declines. Wells Fargo recently made the case for the stock and issued a price target of $65 with 10% per year earnings growth longer term. In the meantime, the stock pays a massive 6.5% yield with limited downside from here.

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HOLD – American Express (AXP 118 – yield 1.4%) – Operational performance at the company is looking solid. The credit card giant is one of Warren Buffett’s favorites because it collects massive fees and an increasing number of global patrons are opting for cashless transactions. Business is strong and the company is expecting another 8% to 10% in revenue growth in 2019. The stock has also shown strength in a market that has been weak for several weeks now. The stock is still worth holding here but I wouldn’t initiate a position at the current lofty price in a market that seems to want to go lower in the near term. I’m moving AXP from a “BUY” to a “HOLD”.

Safe Income Tier

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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.

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BUY – Invesco BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 2.2%)
BUY – Invesco BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.7%)
Boring can be beautiful. Every week I update the price and yield on all the portfolio positions in the write up. But I have never had to change either one on these two positions because the performance is remarkably steady and predictable. That can seem like a bummer in an up market. But when things turn south you’re happy to have these two safe, short-term bond ETFs.

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HOLD – Consolidated Edison (ED 87 – yield 3.5%) – Sometimes you may wonder why you own a stodgy old utility stock like this. Ten years into a bull market this stock tends to lose popularity. But its performance over the last year beautifully exemplifies why this stock is a great holding. Over the past year ED has returned almost 20% while the S&P 500 has returned just 4.4%. It’s even beating the returns of the market year-to-date. And it’s a position you don’t have to worry about when the market gets ugly. You just got a dividend and you’ll get another one in August.

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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 any day of the week. As well, the recent market turbulence could give investors a renewed appreciation for an investment like this.

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HOLD – McCormick & Co (MKC 153 - yield 1.5%) – The food sector is a popular one in markets like this. That’s why MKC has returned 50% over the past year. The stock is getting a little pricey as it flirts with the 52-week high but investors tend to gravitate toward stocks like this when the market is volatile. It’s resilient in down markets and it could very well have more upside in the weeks ahead. I like the current momentum.

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HOLD – NextEra Energy (NEE 201 – yield 2.6%) – The only thing better than owning a utility in this volatile market is owning a superstar utility. Not only does it generate steady, defensive and predictable returns and income; but it also offers a higher level of earnings growth than its peers from its alternative energy business. In a market where dividend income is highly coveted, this utility has already raised the dividend 12.6% this year and expects the dividend to further increase as much as 14% in 2020. The stock is pulling back a little after surging to new all time highs this past week as the market struggled.

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HOLD – Xcel Energy (XEL 58 – yield 2.9%) – Sure, the stock is expensive here, but for good reason. This is one of the very best utilities in the market. It has a growing alternative energy business and is a darling of the regulators. The company anticipates earnings growth of 5% to 7% this year and dividend growth of 5% to 7%. The momentum is still good as geopolitical tensions continue to roil the market. This is still a good stock to be in.


Last price as of mid-afternoon on May 28, 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.

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About IRIS

This portfolio uses the Individualized Retirement Income System as part of the consideration for any stock in the portfolio. The system is designed to check and measure both dividend safety and dividend growth. Here’s why that’s so important.

Dividend stocks are the place to be whether you need to supplement your income or grow wealth. Over time, dividends account for a significant portion of overall market returns. In fact, from 1930 to 2018 dividend account for an astounding 43% of the total return of the S&P 500.

But that’s just the dividends themselves. From 1972 through 2015, the S&P 500 returned an average of 7.42% per year. But during that period, dividend-paying stocks on the index averaged about a 9% annual return while non-dividend payers returned just 2.45% on average. And those returns were accomplished with significantly lower volatility than the overall market.

While the long-term returns of dividend stocks are clearly superior, it matters which ones you own. Over the same period, stocks that cut their dividend averaged a negative annual return and stocks that grew their dividend averaged an even higher annual return of about 10% per year. History shows that dividend stocks are big time long term winners provided they don’t cut the dividend and even bigger winners if they grow the dividend.

Thus, every pick in this portfolio is screened for dividend safety and growth. The dividend safety rating primarily considers the strength and longevity of a company’s dividend history as well as the payout ratio, which measures a company’s ability to maintain the dividend. The growth rating measures the track record of past dividend hikes as well as the earnings growth projections going forward.

There is no completely foolproof method of screening a company or a stock, but reducing the primary risks will likely improve success over time.

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