Cabot Dividend Investor 920

For the first time since the summer began, the market is faltering. The rally that thrust the S&P 500 60% higher in little more than five months is cracking.

The end of summer is being greeted by cranky investors who see a market that has run up to new all time highs despite the risks of Covid and the election. Of course, a huge rally of this magnitude needed a breather. The pullback is normal, healthy and overdue.

It is impossible to say how far stocks will fall. But, unless there is some very bad news, I don’t expect a prolonged or deep selloff. The market is still looking ahead to a positive environment where the pandemic is fading away and the economy is quickly recovering.

In this uncertain environment, I found a rare stock. It is a company that benefits from the undeniable trend toward technological proliferation. It has solid earnings growth and stock performance. But it provides these benefits with remarkably low volatility.

The stock is off the high after a rare pullback and selling at a cheap price. Historically, it has less than a quarter of the volatility of the overall market. It’s a great forward-looking investment for this uncertain environment.

Cabot Dividend Investor 920

[premium_html_toc post_id="214695"]

A High Growth/Low Volatility Stock for an Uncertain Market
Here we are. The cold Labor Day slap in the face has arrived.

For several weeks I have warned that investors could change their attitudes when the rubber hit the road after Labor Day. As people shake off the malaise of late summer and refocus, they see a market that had run up to new all-time highs despite Covid and the hobbled economy.

But the selloff started last Thursday, a few days early. So far, the S&P 500 has fallen over 6% from the high. And the selling might not be over. That’s okay. A shakeout had become increasingly likely, and frankly long overdue.

The S&P 500 rallied 60% in a little over five months and rose above pre-pandemic prices. That’s an enormous rally in a short time. Every rally needs a breather, especially one of such unprecedented magnitude. It’s normal and it’s healthy.

No one can say for sure how much farther the market will fall. But when the fear wanes, and it always does, investors will again realize that money has no place else to go to fetch a decent return besides stocks. In the absence of really bad news, I don’t see a deep or prolonged selloff at this point.

Sure, there are risks out there with the virus and the election. But there are also some hugely positive forces. Looking ahead, we are likely to see the end of this pandemic and an economy that is roaring back. The virus cases continue to wane and a vaccine is becoming increasingly likely in the months ahead. Economic growth is already shattering expectations and should really take off once the virus is gone.

There’s an old Wall Street adage that’s worth repeating at this point. No one ever knows in which direction the next 10% move in the market will be, but the next 100% move will surely be higher. Even if the market does have a major selloff, it will surely come back. Look what happened this year.

With stock prices lower, it’s a good time to start to position ourselves for the next leg higher. In an uncertain environment, I like to focus on things we actually know and can predict. For example, it’s a safe bet that technology will continue to grow in prominence regardless of what happens with the virus or the election.

This month’s “Featured Buy” is a REIT that invests in essential technology infrastructure. The stock has vastly outperformed the market with far less risk and will continue to benefit as technology continues to grow in the future.

What to Do Now
Despite recent action in the market, I haven’t made any ratings changes this week. The main reason is that positions were trimmed and profits were taken already this past June, as the market appeared frothy back then. The moves turned out to be premature but safety measures were put in place back then nevertheless.

After there is a better indication of how things will shake out in the market in near term, I will likely add back to some of those positions. The portfolio is well positioned with stocks that should weather the volatility and come back strong when the market rally resumes.

The current “BUY” rated stocks including B&G Foods (BGS), Brookfield Infrastructure Partners (BIP), Verizon (VZ), AbbVie (ABBV), Altria (MO), and Eli Lilly (LLY) all have good value, good momentum or both. And all have held up very well during the selloff.

Featured STOCK

Digital Realty Trust (DLR)
Digital Realty is a REIT that specializes in technology related real estate. Specifically, it owns and operates over 270 data centers in 44 metropolitan areas across the world. It is the fifth largest REIT on the U.S. market with $3.4 in annual revenues. Its largest customers include dominant industry players including Facebook (FB), Verizon (VZ) and Oracle (ORCL).

Data center is one of those terms we never heard of just a few years ago. Let me explain.

A data center is a facility used to house computer systems and related components. We now live in an age when large (and small) institutions operate massive technology systems that require specialized infrastructure. Companies like Facebook (FB) and AT&T (T) can’t house the core of their operations just any old place.

They need a top notch facility with the proper temperature systems for the equipment, a dependable power supply with adequate backup systems, fire suppression and various security devices. Large data centers often require as much electricity as a small town. The operational integrity of some of today’s most prominent companies depends on such facilities.

Digital Realty is one of the largest players in this new and growing type of crucial property. In addition to the property itself, Digital also offers crucial co-location and interconnectivity services. Co-location refers to servers and other equipment from many different companies that are “co-located” in one date center. Interconnectivity is a crucial service that provides access to multiple ISPs (internet service providers) that enables a strong presence both domestically and worldwide.

It may sound complicated but the thing to realize is that these properties provide crucial services to companies involved in cloud and information technology services, communications and social networking, financial services, manufacturing, energy and healthcare.

Obviously, this kind of technology and support is a growing business. Digital also has a strong and growing presence across the world with 103 data centers in 11 countries. Since 2005, Digital has grown earnings at a compound annual growth rate of 12% and the dividend has grown 11% per year over the same period.

Since the IPO in 2004, the stock has returned 2223% compared to a 300% return for the S&P 500 over the same period. A $10,000 investment at the IPO would have grown to $232,000. The stock has consistently outperformed both the REIT sector and the overall market. It has also returned over 20% YTD.

But the future is what matters. And there is good reason to believe the company can continue to grow strongly going forward. Technology begets more technology. The more it advances, the higher the propensity for further advancement. Companies involved will continue to need the proper facilities and more and more companies will need them.

Here are some estimates for annual growth rates in certain emerging technologies; artificial intelligence (45% 2016-2025), internet of things (34% 2016-2020), autonomous vehicles (37% 2018-2025) and virtual reality (78% 2016-2022).

Digital continues to grow through expansions and acquisitions. In fact, it recently acquired European data center company Interxion, which offers collocation and interconnectivity services. It has a strong balance sheet with an investment grade rating that supports the dividend, currently yield 3%.

The stock has been a good performer and provides a conservative way of investing in technology. Sure, the company has had impressive growth and strong stock returns, but there is something that makes DLR truly standout.

It has very low volatility with a beta of just 0.21. That means it has less than a quarter of the volatility of the overall market. You get high growth at low risk. That is a big reason why I’m comfortable buying it in this uncertain market. It’s also a good buy at about 15% below the 52-week high.

Digital Realty Trust (NYSE: DLR)
Security type: Real Estate Investment Trust
Industry: Technology infrastructure
Price: $144.27
52-week range: $105.99 - $165.49
Yield: 3.1%
Profile: Digital is a REIT specializing in data center technology properties.

Positives

• Demand for data centers and services will continue to grow.
• The rollout of 5G and accompanying technologies should accelerate growth.
• The stock has a remarkably low beta for performance.

Risks

• Competition in the industry is fierce and could result in lower rents and revenues.
• Shifting technology could result in decreased need for data centers.

Next ex-div date: September 14th, 2020

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 6.3%) – This formerly stodgy, slow growth packaged food company has been made into something better by Covid. Not only are people eating at home a lot more during the pandemic, but the trend toward more at-home dining will continue. The addition of a higher growth rate transforms BGS to a solid growth stock with a high and sustainable dividend. The market has noticed and the stock has returned over 70% YTD. But the stock is still selling well below its five year average valuation. BUY

Brookfield Infrastructure Partners (BIP – yield 4.3%) – The global infrastructure giant had good news last week. It made a huge purchase of cell phone towers in India from telecom giant Reliance Jio. It is the second largest telecom company in the world that just got huge investments from the likes of Facebook (FB), Alphabet (GOOG) and Qualcomm (QCOM). The market loves the deal and the stock jumped almost 5% on the day of the announcement. The stock just made a new post pandemic high and still has an intact uptrend. BUY

Next ex-div date: November 28, 2020 est.

Enterprise Product Partners (EPD – yield 10.3%) – Despite offering great value and a massive payout yield that is rock solid and safe, the market still shows no interest in this midstream energy giant. Everything points to a higher price in the future. It is weathering the pandemic much better than the market is giving it credit for and business is rebounding quickly. The business isn’t tied to oil and gas prices; it just collects fees for piping and storage. The main thing is the huge 10% distribution. As long as that’s safe (and it is) EPD is a great high income stock. Maybe someday the market will warm up to it. HOLD

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

STAG Industrial (STAG – 4.5%) – The stock recently pulled back from the all-time high but it still looks great. The industrial REIT has a lot of things going for it. It has 43% of its properties in E-commerce related warehouses and distribution centers. The demand for these properties is growing along with E-commerce and should continue indefinitely. Industrial properties are a fragmented market with the top 20% of property owners owning only 15%. There is a huge opportunity for acquisitions growth in market estimated to be about $1 trillion. The stock has consistently outperformed the market and it pays a high dividend on a monthly basis. HOLD

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

Verizon Communications (VZ – 4.1%) – The stock has been in a solid uptrend since late June. During the market selloff last week, VZ was one of the few stocks that actually went higher. The dividend was also just raised by 2%. At some point during the summer the market started liking this stock again. It has a stable business and high dividend with a growth catalyst ahead with the rollout of 5G. It’s a great stock to own ahead of the election uncertainty. It’s a strong down market stock and the business is unlikely to be affected regardless of who wins the election. BUY

Next ex-div date: October 8, 2020

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 – 5.1%) – This biopharmaceutical stock is in a funk lately. It topped out at a 52-week high of just over 100 in mid July and is now floundering in the low 90’s. There isn’t really a fundamental reason for the slight pullback. The feverish rally in ABBV since the March lows just sort of ran out of gas, temporarily. This is a good entry point if you don’t own the stock already. New drugs along with the Allergan merger are overcoming the concern about the loss of patent exclusivity on Humira in 2023. Meanwhile the stock is still dirt cheap and 10 times forward earnings and pays a remarkably fat 5.1% yield for a stock of this caliber. BUY

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

Altria (MO – 7.9%) – MO isn’t exactly soaring but it is in an uptrend that has been in place since early July. It’s more like a slow gravitational pull higher. Many investors simply can’t pass up the phenomenal dividend (which is safe) and the dirt-cheap valuation. It has held up like a rock in the recent market selloff. Things are much better for the company than the current share price reflects. With a massive 7.9% yield, a bargain valuation and upward momentum; MO is a stock that income investors simply should not pass up at the current price BUY

Next ex-div date: Sept. 14, 2020

Crown Castle International (CCI – yield 3.0%) – This cell tower REIT took off like a rocket after the Covid selloff in March but it has trending sideways to slightly down since the beginning of June. The stock basically reached its fair value and couldn’t really justify a run much past 180. But given the reliability of the cell tower business and the growth offered by the 5G rollout, this is still a solid stock to own amidst the current Covid and election uncertainty. The choppy behavior of the stock is somewhat normal for CCI and it is still in a longer term uptrend. HOLD

Next ex-div date: Sept. 14, 2020

Eli Lilly and Company (LLY - yield 2.0%) – The stock of this drug company held remarkably strong during the market selloff in March and was one of the quickest to move higher afterwards. The stellar recent down-market performance is a comfort ahead of the uncertainty of a high priced market and the risks that abound this fall. But despite sporting a beta of just 0.18, the company still has a lot going on. It has a tremendous array of drugs and a fantastic pipeline that should continue to power the stock higher in any environment. You get both a strong defense and predictable growth in a sector that will surely benefit from the aging population. BUY

Next ex-div date: November 13th, 2020 est.

Innovative Industrial Properties (IIPR – yield 3.6%) – The torrid ascent of this marijuana farm REIT has finally been interrupted by the recent market pullback. IIPR skyrocketed from 93 in late July to 126 recently. It has since pulled back below 120 as the market moved lower. This is a great money-making REIT with astounding growth in a high growth business. The stock is, however, volatile with the market and I expect the pullback in the stock to last as long as the current market funk. But it should move even higher on a longer term basis. HOLD

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

Qualcomm Inc. (QCOM – yield 2.2%) – The stock of this chip maker is pulling back along with the market. The move isn’t surprising considering the stock soared 15.8% in July and then another 12.1% in August. The stock is now a little over 10 below the high if 123. I would expect the stock to continue to move lower as long as the market pullback lasts. However, I also expect it to bounce back very quickly when the market recovers. Business is very good. 5G phones are about to hit the market. The settlement with Huawei removes a big uncertainty, and the problems at Intel are likely to boost competing chip makers for months to come. HOLD

Next ex-div date: December 2, 2020 est.

Valero Energy Corp. (VLO yield 7.4%) – Yeah, VLO has been an awful stock. As a cyclical company, it took it on the chin during the recession. But, even as the economy regains traction, the stock continues to flounder. And although it’s priced at a dirt-cheap level, it isn’t holding up well in this market selloff. That’s the bad news. The good news is that VLO is a highly leveraged play on a strong economic recovery, which I believe will unfold beyond expectations in the months and quarters ahead. It may be one of the darkest hours for this stock, but I believe it is approaching the launch pad. 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 2.6%) – Not you ARE! Even this model of consistent performance and defense is selling off with the market. That’s okay. It’s consistent with the stock pattern actually. It tends to spike higher and then pull back time after time on a long-term trend ever higher. I don’t expect much more downside for the stock even if the market stays ugly and it will likely rebound from the latest pullback very quickly. The research lab and life science niche is just what the doctor ordered, literally. The current pandemic is making this solid performer sexy too. HOLD

Next ex-div date: Sept. 29, 2020

Invesco BulletShares 2021 Corporate Bond ETF (BSCL – yield 2.6%) – What market selloff? The outside world could be going to hell in a handbasket but you would never know it looking at the performance of this short term bond fund. It also has a rather decent yield for a safe haven investment these days. BUY

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

Invesco Preferred ETF (PGX – yield 5.5%) – This preferred stock ETF is a very steady performer than enables you to diversify beyond stocks and bonds while earning a great yield. It is holding up very well in recent tumultuous days. It tends not to budge unless the selloff becomes truly ugly. It should ride through the latest volatility in style. HOLD

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

NextEra Energy (NEE – yield 2.5%) – Will you marry me NEE? What’s not to like about this utility superhero? The regulated business in Florida, where they blast those air conditioners all year long, may be the best in the country. It is also one of the biggest producers of alternative energy in the world. And clean energy seems to get more widely used and cheaper to produce by the day. The stock has leveled off but it is likely forming a base from which to climb higher. If the market does take a hit so significant that NEE has any kind of a meaningful pullback, I will raise it to a BUY. HOLD

Next ex-div date: November 27, 2020 est.

Xcel Energy (XEL – yield 2.5%) – Despite have moved down slightly of late, this smaller alternative energy utility is still very much in a uptrend. XEL is a fantastic way to conservatively play the explosive growth of clean energy. The stock has blown away the S&P 500 performance over the long term and there is no reason not to expect that outperformance to continue in the future. HOLD

Next ex-div date: Sept. 14, 2020

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 October 14, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.