Cabot Dividend Investor 820

These are uncertain times. Risks abound, yet the market forges to new all-time highs. With so many things we can’t know about the virus and the election, it’s a good time to focus on what we do know.

Certain powerful trends will continue regardless of what the economy does or who’s President. One such undeniable trend is the aging population. The population is older now than it has ever been before. And it’s getting still older, at warp speed. The aging population is an irrefutable fact. And older people will require more health care.

This mega trend is literally transforming the demographics of the human race. It will be a huge tailwind for the health care sector in the future. At the same time, many great health care stocks haven’t gotten nearly as pricey as the overall market. And they tend to hold up well if things turn south.

In this issue I highlight one of the very best health care companies in the world. The stock is defensive and barely budged when the market crashed. Yet there are huge growth opportunities ahead as it sells cutting-edge treatments and drugs for illnesses and diseases to a public that will demand them like never before.

Cabot Dividend Investor 820

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You Can Bank on an Aging Population
What a spectacular market. The pandemic and economic crash was apparently just a temporary diversion for the stock market. The indexes are right back to nosebleed territory.

The S&P 500 is now within bad breath distance of the all-time record high. You can’t fight the tape. The market wants to go higher. It sees a booming recovery in the quarters ahead supported by a friendly Fed. And the market usually gets it right. It’s good news. And I do believe the economy will come roaring back.

But the situation makes it tough to buy stocks. Sure, certain stocks and sectors are still cheap. But they aren’t going anywhere. If a 50% rally can’t get them moving, what will? I’d rather wait until those depressed stocks start to move, and then jump in.

At the same time, I’m reluctant to pay up for stocks after they were just so cheap. Plus, I’m not altogether comfortable with the market at these levels. We don’t know what the virus will do. We don’t know who will win the election, or how ugly a close election might get. We don’t know if the market will face an overdue correction or if it will soar to new highs in the weeks and months ahead.

At times like this, I like to focus on what we do know. It’s like the weather. I have no idea what the weather will be in 10 days. It could be sunny or a hurricane. It could be 70 degrees or over 100 degrees. I have no idea. But there is something I do know about the weather. I know it will trend cooler in the months ahead. That’s a certainty.

In a similar vein, we don’t know what the headlines will be in the next couple of weeks or how the market will react. But we know that there are certain major trends that will continue regardless. One such trend is the aging of the population.

The population is older now than it has ever been before. And it’s getting still older, at warp speed. The fastest growing segment of the population is 65 and older as an average of 10,000 baby boomers turn 65 every single day. The trend is even more exaggerated in other countries. The aging population is an irrefutable fact. And it will continue to age regardless of what the virus does or who’s President.

Older people require more health care. That’s a fact. It’s how we’re built. The overarching and undeniable trend will be a huge tailwind for the sector in the future. At the same time, many great health care stocks haven’t gotten nearly as pricey as the overall market. And they tend to hold up well if things turn south.

In this issue I highlight one of the very best health care companies in the world. The stock is defensive and barely budged when the market crashed. Yet there are huge growth opportunities ahead as it sells cutting-edge treatments and drugs for illnesses and diseases to a public that will demand them like never before.

What to Do Now
Don’t fight the tape. But don’t get drunk with it either.

The market wants to go higher. It was up on Monday on positive news about a coronavirus vaccine. It was up last week on news of a vaccine. It will probably rally next week on news of a vaccine. It smells an end to this misery and an economy that will flourish in its aftermath. Plus, money has no place else to go but stocks to fetch a decent return.

Most of the portfolio stocks are benefitting from the market’s march back to the highs. Let it ride. The rally could continue right into the fall. It wouldn’t surprise me. But most of the stocks have gotten too pricey to put new money into at this point. And there might be a much better entry point in the months ahead.

The portfolio is still only buying a handful of select stocks that have not gotten too expensive, can well endure a downturn, and should thrive when this pandemic is over (if that day ever comes). The more expensive portfolio stocks are still rated a HOLD because the momentum is still strong.

In the absence of a lot of good buying opportunities with the market forging ever higher, it’s a time to hold on and enjoy the bounty.

Featured STOCK

Eli Lilly and Company (LLY)
Founded in 1876, Indianapolis-based Eli Lilly is a global pharmaceutical giant with $23 billion in annual revenues, 34,000 employees and sales in 120 countries. It stands out from the rest of the large pharmaceutical companies in that it invests much more heavily in Research and Development and its new drugs and pipeline reflect that fact.

The stock has been in the news lately for having one of the leading Covid-19 drug candidates. The drug, for both treatment and prevention of Covid-19, is in late-stage trials and is the very first candidate to be tested for the National Institute for Health study. But that’s not why I’m buying it.

I have no idea what will happen with this Covid drug. And I learned long ago with these companies never to bet on the fortunes of one potential drug. That’s why I like Lilly. It’s got lots and lots of potential new drugs.

The company spends 25% of sales on R&D every year. The segment employs 23% of the company’s workforce and spends $5.5 to $6.0 billion annually. That’s a significantly larger commitment than its peers. But the pipeline is the key to this business. New drugs are how these companies succeed and grow. And Lilly has been spectacular.

I actually purchased the stock before, back in 2012. It was selling at a depressed price ahead of a huge patent cliff in 2014 (when a large number of existing drugs would lose patent protection and would see falling revenues as generic competitors took market share). But I had faith that Lilly’s R&D and pipeline could make up for the lost revenue. It did. Now over 60% of revenues are generated from drugs launched since 2014. The stock has also returned about 400% since my purchase.

Lilly specializes in developing drugs and treatments for unmet medial indications, where there is a higher chance of FDA approval and higher market share and profit margins. The drug company has a very strong presence in Diabetes (Trulicity, Basaglar, Jardiance), Oncology (Alimta, Cyramza, Vezenio) and new drugs in Immunology (Taltz and Olumiant).

Of particular note, Diabetes treatment Trulicity reported 29% sales growth in the first half of this year, with revenues of $2.5 billion. Retevmo recently received FDA approval for treatment of lung cancer but also reported very positive Phase 3 results in preventing the recurrence of breast cancer—a huge problem that could make the drug a blockbuster if it succeeds. The stock popped over 15% on news of the Phase 3 study.

However, the market was disappointed with second-quarter earnings as revenues fell 2.4% from last year’s quarter. The lower sales resulted from the pandemic as stockpiling in the first quarter as well as reduced doctor and hospital visits reduced drug sales. The stock fell about 5% after the report.

But those sales will come right back as lockdowns ease. Lilly also beat earnings forecasts with 26% growth over last year’s quarter and raised 2020 guidance by 11% to reflect anticipated 21% earnings growth over 2019.

The dividend still yields a measly 1.93%. But there are no significant patent expirations in the years ahead and the company will be able to focus on growing the dividend from here. Admittedly, there are a couple of other big pharma companies with sexy stories that some analysts like better right now. But those companies always tend to foul things up. Lilly is the best run of its peer and I trust it.

Eli Lilly (LLY)
Security type: Common Stock
Industry: Healthcare (Pharmaceutical)
Price: 150
52-week range: 101.36 - 170.75
Yield: 1.9%
Profile: Eli Lilly is a global pharmaceutical company specializing in drugs and treatments for Diabetes, Oncology and Immunology..

Positives

• The company overcame a huge patent cliff.
• It has one of the best newly launched drugs and pipelines in the industry.
• Lilly has been the best-performing large pharmaceutical company.
• It has strong growth prospects but should hold up in a down market.

Risks

• The fortunes of drug companies rise and fall with trial success, which is difficult to predict.
• Competition is fierce and earnings are hard to predict.
• The stock has already risen 35% in the last year.

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.

B&G Foods (BGS – yield 6.4%) – Since being added to the portfolio in last month’s issue this stock is up over 17%. It had solid momentum but also announced very positive earnings. Net sales climbed 38% and earnings per share soared 87%. Not bad for a stodgy food stock. The pandemic is bringing boom times for this packaged food company. The company didn’t give full-year guidance but expects earnings to “materially exceed” previous estimates. Business will likely stay strong after the pandemic as trends are expected to continue. Although the stock has had a great run already, it is still relatively cheap. BUY

Next ex-div date: September 29, 2020

Brookfield Infrastructure Partners (BIP – yield 4.5%) – After a strong rebound from the March lows, this infrastructure company has been wallowing in the low 40s for two months now. The rest of the market recovery left it behind. That’s okay. Technology stocks were on fire and driving the market but it looks like market leadership is shifting. Utilities were actually a top performing sector over the past month after lagging for a long time. Brookfield continues to be resilient and grow earnings during the pandemic. I expect the relative performance of this stock to improve in the months ahead. BUY

Next ex-div date: August 28, 2020

Enterprise Product Partners (EPD – yield 9.7%) – This is a great company and that massive yield is rock solid. The stock just runs with the wrong crowd. The market still has no appetite for anything having anything to do with energy. The already beaten-down sector took it on the chin during the lockdowns as demand and commodity prices fell like a rock. But in one of the worst economic quarters ever, Enterprise’s earnings fell less than 10%. As well, the business of piping and storing of oil and gas will come back quickly as the economy recovers. Eventually the market will have to warm up to this stock. In the meantime, enjoy the huge payout. HOLD

Next ex-div date: October 29, 2020 est.

STAG Industrial (STAG – yield 4.3%) – This monthly dividend-paying industrial REIT has returned over 31% in the past three months, twice that of the S&P and its REIT peers over the same period. The stock also has great momentum and just made a new all-time high. Earnings were solid and the company is benefitting from high demand for its warehouse properties as online shopping explodes during the pandemic. HOLD

Next ex-div date: August 30, 2020 est.

Verizon Communications (VZ – yield 4.2%) – The wireless giant has gained some momentum recently. It’s up about 10% in the past month and it just made a new post-pandemic high of 59. While the stock isn’t exactly lighting the world on fire it did remain relatively stable during the tumult of March. It’s a good defensive stock to own heading into the uncertainty of the fall. It also has a solid growth catalyst in the years ahead as 5G becomes widely used. Hopefully, 5G will do to VZ what the pandemic did for BGS. BUY

Next ex-div date: October 9, 2020 est.

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 5.1%) – The drug maker had a great run, going from a low of 62.55 in the heat of the selloff in March right back up to a new 52-week high of over 100 in July. But the stock has since cooled off and pulled back a little, to about 92. There is no fundamental reason why. Earnings were solid. But stocks don’t just go higher forever. They tend to periodically consolidate. That’s okay. ABBV is still a good value at about 10 times forward earnings with a fantastic dividend. I suspect the stock is catching its breath before another run higher in the months ahead. BUY

Next ex-div date: October 14, 2020 est.

Altria (MO – yield 8.2%) – The cigarette maker has become a top value stock. The trouble with its new acquisitions JUUL and Cronos (CRON) are already priced into the stock. It now pays a massive dividend yield that is easily covered by free cash flow. And the stock is actually waking up a little bit. MO has been in an uptrend since late June, albeit a slow one. As this market forges ever higher ahead of virus and election uncertainty, this low-priced and high-yielding stock is something you can feel comfortable owning. BUY

Next ex-div date: Sept. 14, 2020

Crown Castle International (CCI – yield 2.9%) – This cell tower REIT has returned about 20% YTD. Crown Castle remains in the right place at the right time as demand for internet is soaring during the lockdowns and the rollout of 5G is continuing in haste. It’s been a strong pandemic performer but good days should lie ahead as well. When this whole virus mess finally blows over, 5G will likely gain traction as a big story in the market and CCI should be a beneficiary. It’s a good holding for both now and later. HOLD

Innovative Industrial Properties (IIPR – yield 4.7%) – This beast has broken out. The marijuana farm REIT is on fire as it has risen 25% since late July, and has returned a staggering 57% YTD. It’s not just market silliness either. In the recently announced second-quarter earnings release, revenue grew 183% and adjusted funds from operations (AFFOs) soared a remarkable 263%. That’s serious growth. The niche REIT continues to buy new properties at a break-neck pace, providing unheard-of growth for a REIT. I also believe that IIPR can still go a lot higher from here. The only caveat is that it is volatile with the overall market. If the market corrects, so will IIPR. But it has the fundamentals to back up a much higher price and will likely get there one way or another in the quarters ahead. HOLD

Next ex-div date: Sept. 30, 2020 est.

Qualcomm Inc. (QCOM – yield 2.4%) – This 5G chip maker has broken out as well. After a positive earnings report, the stock flew over 20% higher in just a few days. Chip sales were better than expected at this point and the company announced a huge settlement with Chinese Technology company Huawei that should provide an extra $1 billion in income going forward. QCOM had been a market outperformer through the pandemic as investors anticipated a huge benefit from 5G royalties in the future. But the recent quarter indicates that business will be a whole lot better sooner than previously expected. HOLD

Next ex-div date: September 2, 2020

Valero Energy Corp. (VLO – yield 7.3%) – This beaten-to-a-pulp energy sector refining stock had disappointing second-quarter earnings. Everybody knew that the second quarter was going to be ugly but that conditions were improving. But the earnings were even worse than expected and conditions may not improve as quickly as hoped. While demand for gasoline and diesel is indeed coming back very strongly, Valero reported that inventories have built up so high during the pandemic that they will probably take another quarter to work through. That said, the economy will recover. And conditions are bound to get much, much better for Valero in the quarters ahead. Meanwhile, the stock is dirt cheap. HOLD

Next ex-div date: November 3, 2020 est.

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 2.4%) – There isn’t much to say about this stock, and that’s the beauty of it. Business continues to be solid for this life science and research lab landlord. The stock never surges; instead, it forges relentlessly ahead at a slow pace. Quietly, ARE has risen to a new all-time high. And business should remain steady regardless of what happens in the economy or the election. HOLD

Next ex-div date: Sept. 29, 2020 est.

Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – This is a fund of short-term bonds that mature at the end of 2021. There isn’t much interest-rate risk this close in maturity. And there isn’t much default risk as the bonds are investment grade-rated. It’s a good safe way to get a decent yield while diversifying away from the stock market. BUY

Next ex-div date; August 20, 2020 est.

Invesco Preferred ETF (PGX – yield 5.5%) – After a very short-lived but steep selloff in the dark days of March, PGX has continue to trend ever higher and is now within less than one dollar per share of the pre pandemic high. It is also a great way to get a high yield while diversifying away from both the stock and bond markets. HOLD

Next ex-div date: August 22, 2019 est.

NextEra Energy (NEE – yield 2.0%) – This regulated and alternative energy utility has soared 24% in the last three months and has returned over 33% over the past year. That’s what it has done through the pandemic and crashing economy. The market loves that this stock enables them to have their cake and eat it too. You get the reliable earnings and cash flow of a great regulated utility along with much better earnings growth from the alternative energy side. It’s a little pricey here but the momentum is still great. HOLD

Xcel Energy (XEL – yield 2.5%) – Alternative, or clean, energy isn’t going away. It will continue to grow in prominence and perhaps at a faster rate in the future. It also continue to become cheaper to produce and deliver all the time. And Xcel is a leader in the industry. The stock has outperformed the S&P 500 in every measurable period over the last 15 years. It has also blown away the performance of its utility peers. As good as past performance has been, there is good reason to believe it will be even better in the future. XEL is also somewhat expensive at this price but the momentum is solid. HOLD

Next ex-div date: Sept. 12, 2020 est.

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 September 9, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
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