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The Markets Have Broken To The Upside; Load Up Now On Dividend Stocks, Yields Up To 13%

Sep. 12, 2019 2:26 PM ET | Includes: MAC, VET

Rida Morwa - High Dividend Opportunities


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Summary

- The equity markets have been trading sideways for several weeks, but they have finally broken to the upside.

- With interest rates continuing to decline, high-dividend stocks are the best place to be today.

- The market currently offers many opportunities in the high-yield space. Income investors should grab them!

Market Update: The Stock Markets Have Broken To The Upside
The S&P 500 index has been trading in a very tight range between its 50-day moving average to the upside, and its 200-day moving average to the downside, for several weeks now. So the markets, although they were experiencing a high level of volatility, were trading in a very predictable manner.

Late last week, we finally had some good news. The S&P 500 index moved higher by 1.3% and closed above the 2,970 level. Why is this significant? It is because we finally broke out from this tight trading range referred to above, and closed above the 50-day moving average for all the major indexes, including for the Dow and the Nasdaq. The bulls should be quite pleased, as all the major indexes are higher and moving back above all key technical levels in unison. This is a very bullish sign.

On the technical side, we have a new trading range as both the support and resistance levels have gone higher. To the downside, the new support for the S&P 500 index is at the 2947, which is the 50-day moving average. To the upside, the 3027 level is the resistance level which represents the all-time-highs. But first the bulls will need to clear the 3000 level for the S&P 500 level in order for this market to continue to soar and reach new highs.

Why are the markets rallying?
There are several reasons the markets are rallying and why I am very bullish about the future outlook of equities:

1. China Trade War: The U.S. and China have decided to tap the brakes on the trade spat, and both sides agreed to continue negotiating in October. As I have been saying in previous market updates, a trade settlement will be negotiated sooner or later as both parties have a lot to gain by finding common ground. Note that it was a smart call from China to decide not to further escalate matters, as any retaliation would have only hurt their economy further. Remember, this trade has really hurt China, as it’s been forced to devalue its currency while the U.S. dollar continues to strengthen. Now that the U.S. and China prepare to work out the details of a trade agreement, we continue to focus on the best high-yield stocks that are set to outperform for the next 12 months.

2. Investors back from holidays: The month of August has been notoriously volatile due to thin trading as most investors were on holidays. This thin trading allowed moves to the downside on some stocks to be exaggerated, such as the downside moves that have strongly impacted the energy sector and the mortgage REIT sector in particular, just to give two examples. Another reason downside moves can be exaggerated when trading is thin is that automated computer algorithmic trading programs take over and start pushing the stocks even lower. Now that investors are back from holidays, we are seeing bargain hunting going on, and those stocks that got hammered for no fundamental reason are starting to rally again.

3. Interest rates are heading lower: Also, in the United States, the Federal Reserve released a very upbeat beige book implying that it is going to cut key interest rates at the upcoming Federal Open Market Committee (FOMC) meeting in September. The current interest rate environment is incredibly bullish for equities. Lower interest rates allow American companies to buy back their debt or refinance it at a much lower rate, thanks to multi-year low 10-year and 30-year Treasury yields. In fact, both the 30-year and the 10-year Treasury yields fell below the S&P 500 dividend yield last week. Last time this happened it was in 2009, the stock market saw massive gains and almost tripled in value. Given that September is a historically weak month for equities, the fact that we are seeing a rally in the markets is a very positive sign.

While the markets look bullish, please keep in mind that September is usually a volatile month, and we may see volatility pick up again. Please fill your positions slowly. Do not buy your full allocation at once.

Why We Remain Bullish on Equities and High-Dividend Stocks
One of the best and most reliable indicators for equity valuations is the dividend yield of equities relative to the yield of Treasury bills. As stated above, the S&P 500’s dividend yield is today at 1.9%, well above the 10-year Treasury yield of 1.56%. The S&P 500 index has only yielded more than the 10-year Treasury eight times in the past decade. Almost every single time, this has represented a great buying opportunity. This is because yield-hungry investors get more income by investing in equities, since equities yield more than Treasury bonds and bank deposits and CDs. When this has occurred in the past, flow of funds into equities has accelerated, and resulted in great gains.

In the current environment, stocks are once again grossly undervalued relative to Treasury yields-and as a result, the S&P 500 could see huge gains over the next decade. Lower interest rates globally and in the United States are a trend now and here to stay. We have touched on this subject several times before, and lower interest rates can be mainly attributed to both a slower population growth and an aging population, both of which result in a much-subdued inflation rate and lower economic growth.

High-Dividend Stocks are the Best Place to Be
Given that interest rates are at multiyear lows and expected to continue declining, high-dividend stocks are in the sweetest spot. Income investors around the globe will be chasing solid high-yielding products, including stocks, preferred stocks, bonds and CEFs. This is set to push the prices higher. Note that U.S. dividend stocks tend to offer the highest yield on the globe, and with interest rates going negative in Europe and several Asian countries, international investors will continue to shift their investments to the United States to get more yield. This is one of the main reason our recommended portfolio has the vast majority of our recommendations in U.S. stocks and bonds. Today, U.S. equities are the best place to be. Furthermore we have been focused on lower-growth high-yielding "value" stocks for two main reasons:

Growth stocks have had a big run in the past two years and are currently trading at lofty valuations. As a result of investors chasing growth stocks, many high-yield sectors have been left trading at their lowest valuations in years.

Furthermore, with a slowing global economy, growth stocks are not attractive and likely to take a big hit in case of a slower economy. This makes a lot of sense, as the high valuations assigned to growth stocks factor in enormous growth.

Our recommendation to income investors today is to get exposure to high-yield value stocks with emphasis on low valuation and recession resiliency, which means more upside potential.

One of the most beautiful aspects of investing in solid high-dividend stocks is that you get to collect income no matter how the markets are doing!

Our Favorite Picks in Today's Market
Today I will highlight two of my personal favorite high-yield picks. Some of our very favorite picks are in sectors that have been out of favor for a very long time, and have seen significant price declines that are mostly unjustified. These sectors include energy and mall REITs, among others.

Two of our favorite picks in these two sectors today are Vermilion Energy (VET), with a yield of 13%+, Macerich Company (MAC), with a yield of 10%. Both stocks have pulled back over 50% in the past few months due to irrational fears, even though each company has very solid fundamentals. Today, we are seeing strong upside momentum for these two stocks, and there is plenty of money to be made. It is not too late to buy these two stocks today and lock in the high yields for the long term. Our readers who followed our recommendation on VET last week locked in a yield of 14.5% and saw the stock price higher by 12%+.



Income investors should note that VET is not the only energy stock that is seeing a strong recovery. The entire sector has probably seen a bottom, and the momentum is picking up.



We previously highlighted how VET has been increasing production with less capital expenditures. As the price of oil has decreased, VET has improved its efficiency and management estimates that sustaining capex breaks even around $33/barrel WTI, while the dividend is sustainable around $40/barrel. As oil prices continue to increase, VET will be well positioned to experience even more substantial gains.

For our recent report on VET, please click here.

In the mall REIT space, MAC is also seeing strong upside momentum, with the stock up 11.3% in the past five trading sessions. It finally seems that the irrational selloff in the mall REIT sector is over, and a big rally is just getting started!



MAC sold off along with several other mall REITs amid fears of the “retail apocalypse”. While other investors were running away, we see an opportunity. Despite the decline in the share price, MAC continued to see increases in its key metrics of sales per square foot and average base rent.



Additionally, its occupancy remained strong, despite numerous tenant bankruptcies. While there has been more churn with tenants leaving, MAC has had no difficulty finding new tenants. The disruption is a short-term one and at the end, MAC will replace the old tenants and will be collecting higher rent. That will translate to a return of rising FFO, which will lead to dividend increases.

Conclusion
Income investors should keep in mind that many sectors go out of favor from time to time, and the Energy and Mall REIT sectors are not the only ones offering some unique opportunities today. Another good sector to consider is the mortgage REIT sector, for example, which today offers some great bargains. Just recently many high-yield opportunities have made it to our portfolio, boosting our overall yield to over 10.7%. One key feature to successful investing in the high-yield space is to watch for these opportunities and buy when there is panic, especially when fundamentals tell a different story. Don't miss the rally in oversold dividend stocks. It is time to act now and pick the highest and safest dividend yielders!

JP Morgan’s market guru says his ‘once in a decade’ trade is upon us

KEY POINTS
- Marko Kolanovic, head quant at J.P. Morgan, says extreme divergences in the market have led to the move in value stocks and that trend should continue.
- The strategist also says there is an extreme divergence between small and large cap stocks, seen only one other time during the tech bubble, in February, 1999.
- Given the rotation trade, Kolanovic expects more upside potential in small caps, cyclicals, value, and emerging market stocks than the broad S&P 500.
- In July, the strategist said the rotation into value stocks was setting up for a ‘once in a decade’ opportunity.


Marko Kolanovic

I have TIAA Cref, and I have no choice, it is what my company uses. I can pick options within TIAA, but I stay "standard" mix. Anyway I have about 3/4 in stock - fortune 100 stock, and 1/4 in safe funds, bonds mutual funds, etc. I took a hit last fall, but this calendar year combined growth from Jan is 11.33%. Probably about 7% 12 month due to fall's re correction.
I have an annuity at a Slovak credit union, and it just paid 4.625% for a year.

Someone stated that TIAA are weasels, and I get that feel. They do what is good for their commission, not the customer. If I followed my advisors recommendation I would have lost over 100K compared to today's statement. He wanted me to move my stock to "safe funds" when it was crashed. He actually said it does not matter when you move funds. He is a weasel first class.

The important thing Terry is you have been saving and investing and your double digit return this year is really good. It will pay off in the long run, come retirement time. The outfit I'm plugged into allows me to pick and choose which stocks I add to my portfolio, after reading their deep dive articles and utilizing my own experiences and personal rules. I really feel like I'm in control, as much as possible, with an uncontrollable stock market. ha ha

Just saw this. Thanks for the reply, Dutch.

I will look into this. Thanks, man.

terry,
sent you a private message

I just checked my self directed 401k for the span of aug 31 2018 to today. I was at a 6% return.

YTD = 17.65

Quick Market Update


Rida Morwa - 13 Sep 2019
High Dividend Opportunities

We will start with the market update. The markets have broken again to the upside with the S&P 500 index finally closing above the 3000 level, a level of high resistance. This opens the door for the markets to go much higher from here, and likely to reach new all time highs. I am very bullish on equities, especially value stocks and value dividend stocks. Currently investors are dumping momentum and technology stocks in favor of cheap stocks, the kind that HDO targets. Our high yield picks are very well positioned to own in the current environment. With a slowing economy, growth stocks are likely to take the biggest hits, while many high dividend stocks are still trading at very cheap valuations. These stock are back in favor by investors as we have been witnessing the past few weeks. I expect to see tremendous gains coming from our portfolio from for the next 12 months. Couple this with lower interest rates across the globe, dividend stock are going to be very much in high demand by U.S. and international investors.

Note that while the short term market situation may remain a bit volatile for the general markets, the medium term and long term outlook is very bullish. Any pullback in the markets is likely to be short lived and represents a buying opportunity. We have to keep in mind too that we are at the latest stages of this bull market, and this is where large amount of gains can be achieved in a very short period of time. When will this end? Not before we have an asset bubble and irrational exuberance by investors. The last stage of the bull market can last several years. Today we have neither which indicates that this bull market is set go to much higher.

The best course of action for our members

For our members who are fully invested, it is best to remain so and keep collecting the high dividends.

For our members that still have dry powder, is is a good time to start filling your positions. Remembers to add slowly to take advantage of any short term pullback we may see. Even if you buy at the current levels, you are likely to make some very nice returns.

As usual, I keep a close eye on the markets and on the macro-economic picture. In case of a change of views, members will be notified immediately.

It is a great time to be invested in this market!

The Best 9% Yielding Stock With A 1.8X Distribution Coverage: Energy Transfer Partners

We are pleased to provide an update on Energy Transfer Partners (ET), a midstream stock we currently hold in our Core Portfolio. ET is a very strong buy at the current price. Note that ET issues K-1 tax forms. If you wish to avoid receiving K-1 tax forms, we advise to invest in Cohen & Steers MLP Income and Energy Opportunity Fund (MIE) instead. You get exposure to ET in addition to instant diversification. MIE currently yields 10.3% and is one of my largest positions in my retirement portfolio.

For U.S. investors, ET is better placed in a taxable account because most of the dividend is tax deferred!

For our international investors, we recommend to avoid K-1s because withholding taxes on dividends tend to go as high as 40% (MIE is taxed at a much lower rate at 15% only in most cases, depending on your country of residence). MIE is a much better option in your case.

Below is our full report on ET. . .

Market Commentary


by Rida Morwa
High Dividend Opportunities

As projected in many of my previous "market updates," all the market indices have closed at their all-time highs this week, with the S&P 500 index closing at the 3067 level on Friday.

What is behind the market rally?

Investors have been very pessimistic about the outlook on the economy, and they were clearly wrong. I have been projecting that the coordinated actions by global central bankers to lower interest rates would reduce recession risks. This is exactly what is happening today. Just this week, we got economic data from the United States that was strong and exceeded all expectations. On Friday, data showed that the economy added 128,000 jobs for the month, well above the tepid 85,000 gains expected. Importantly, the housing market and consumer spending remains healthy, supporting the U.S. economy. Consumer spending represents 70% of the US economy, so it makes sense that the market should continue to find plenty of reason to go higher, at least in the short term.

Optimism over progress in a Phase One U.S.-China trade deal added to sentiment. The Office of the U.S. Trade Representative said on Friday that Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin held a “constructive call” with China’s Vice Premier Liu He about the first portion of a China trade deal. He added that “they made progress in a variety of areas and are in the process of resolving outstanding issues.” Also as stated in previous market updates, a partial solution with China is likely to take place soon which would reduce future tensions and restore investor confidence.

The Federal Reserve cut its benchmark interest rate for the third time this year to a target range of between 1.5% and 1.75%. At HDO, we have been projecting and preparing for lower interest rates since late 2018 when other investors were still expecting interest rates to go higher. My projections were at 2 to 3 rate cuts and we got three of them so far this year.
This week, we had a wave-after-wave of positive earnings surprises. In fact, of the 23 S&P 500 companies that posted earnings results this week, 17 topped analysts’ estimates by an average of 8%. Corporate earnings remain strong.

In conclusion, the economic data this week indicated that the US economy is on better-footing than once thought and supported with low interest rates creating a continuation of the “Goldilocks” conditions for the equity markets to continue to move higher.

Where do we go from here?

As a reminder, we are in the last phase of this bull market whereby equities tend to rally at their fastest pace, faster than any other time during the secular bull market. This is where most of the gains tend to happen in a short period of time. My views have not changed, and I expect this bull market to continue for another two years at least.

Now that the markets have broken out to the upside, it looks as if the market is going to continue going higher, driving to much higher levels over the longer term. Ultimately, new highs should continue to be seen not only based on economic figures, but also the technical analysis we have seen over the last several weeks. We have formed an ascending triangle, and that ascending triangle measures for a move towards the 3200 level in the medium term. Ultimately, I believe that the S&P 500 index should reach the 4000 level over the next 24 months. I think that short-term pullbacks should continue to be thought of as value opportunities, as the market is obviously very bullish. Please keep in mind that the markets will not go up in a straight line, and that we are likely to continue to see market corrections, and sometimes scary ones in the medium term. But they should happen at a higher level from here, so being fully invested makes a lot of sense. However, the long term picture is very constructive and patient investors are set to be very well rewarded.

The Best Course of Action

We recommend that our members remain fully invested in the stocks and securities that we recommend. As a reminder, please keep well diversified across all the stocks and sectors as per our recommended allocation, with 40% exposure to fixed income. This is key to keep the volatility of your portfolio low. Another reminder is that HDO targets mainly solid "value stocks" trading at low prices. By definition, "value stocks" tend to be in sectors that are out of favor. Therefore it is difficult to time a bottom each time we send a "Buy Alert". However, this is a great strategy knowing that we are invested into these stocks at cheap valuations, and that time is on our side. Eventually, fundamentals almost always prevail, and we tend to see strong gains for the vast majority of our picks. The key is to be patient and add positions slowly. In the meantime, we are collecting hefty dividends.

A Quick Note on the Energy Sector

While the general markets are at their all-time highs, most stocks from the Energy sector, including the Midstream Sector, are trading at their all-time lows. While the Energy sector remains mired in a long-term downtrend, it is interesting to note that it is showing some early signs of a double-bottom following its recent sell-off. My views are that any positive news should provide a big boost for this sector. Today, a recent report from BoA Merrill showed that overall asset allocation towards the Energy sector is well below its historical average than any other sector/asset class. This makes this sector a deep value one and we are happy to have exposure to it, mainly through our midstream picks and our only upstream pick which is Vermillion Energy (VET). We will be releasing soon a detailed report on our views the midstream sector and why this sector is set to soar.

I made more in my 403B since September than I make annually. I'm at 17.4% for the year 2019.

NASDAQ is up 35% for the year.... Yowza!

I pity all the folks who were too scared to get back into the stock market. They have really missed a once in a lifetime opportunity to create wealth for their family. If they were scared eight years ago, they have to be mortified by now, thinking the bottom could fall out any day now. I believe we are going to have five more years (under Donaldus Magnus) of plenty, before we get a crack in the dike.

Indeed.

You'll never know that. You'd be better off seeking the Holy Grail.

The last I looked, my 401k return was 25.14 % for the year. A coworker said he was over 26%. That is crazy.

The real tragedy is that those people will finally get over their fear, and jump in right at the last run-up in the market, and then bail after it takes it's (predictable) slide.

And then incessantly bleat to anyone who will hear how the stock market made them lose all their money.......

Yup. Time in the market beats market timing.

Don't forget, a lot of the gain came after the Christmas low of last year. There was no Christmas/Santa Claus rally last year like this year.

Funny how a discussion about the stock market will pull guys out of the woodwork for 21 pages. Yet, real estate, the proven investment that beats the stock market hands down, with less volatility, over any period of time you want to look at, never gets a whisper...
except from dummies like me.