Dividends Plus: Building Wealth and Growing Income in Uncertain …aaiidcmetro.com/slides/(2019-01-19)conrad.pdf · 2019-01-21 · Why the drop: 1. Merger of parent and biggest customer

Dividends Plus: Building Wealth and Growing Income in Uncertain Times

Roger S. ConradConrad’s Utility Investor

Washington D.C. AAIIJanuary 2019

Briefing Objectives

• Income Investing: Still the Winner’s Game but…The Rules have Changed!

• Dividends Plus: Tactics and Strategies

• Sector by Sector Outlook for 2019

• Picks and Pans

• Q&A

Rates Rise, Then Retreat

Slowest Tightening Cycle…Ever?

Duration Magnitude

July 1954 - Oct 1957 0.8% - 3.5%

June 1958 - Nov 1959 0.63% - 4%

Aug 1961 - Nov 1966 1.77% - 5.76%

July 1967 - Aug 1969 3.79% - 9.19%

July 1971 - July 1974 4% - 13%

Aug 1977 - May 1981 4.75% - 20%

Dec 1986 - Dec 1988 5.66% - 9.75%

Feb 1994 - Feb 1995 3% - 6%

June 1999 - May 2000 4.75% - 6.5%

June 2004 - June 2006 1% - 5.25%

Dec 2015 - ??? 0% - 2.25%

The 10-Year This Cycle

Whither the Fed and Rates?

• Fed has indicated “Tightening” cycle is likely to slow even more this year

• Pressures on Global Growth: Impact of Trade Tariffs, Longest Government Shutdown in history (already), China, Brexit, Future Disruption

• Inflation still a no show

• But…the Fed wants to “normalize” by reducing balance sheet over time, better-than-expected growth would provide opportunity

Normal Means Higher

…But Growth Is What’s Key for Stocks

Year S5TELS DJUA BBREIT ALERIAN MLP S&P 500 TNX

2019 7.6 -1.7 4.6 10.7 4.1 1.2

2018 -12.5 2.0 -4.6 -12.4 -4.4 11.7

2017 -1.3 13.3 9.0 -6.5 21.8 -1.7

2016 23.4 18.2 9.0 18.3 12.0 7.8

2015 3.4 -3.1 3.2 -32.6 1.4 4.6

2014 3.0 30.7 29.1 4.8 13.7 -28.2

2013 11.5 12.7 2.4 27.6 32.3 72.3

2012 18.3 1.6 18.6 4.4 16.0 -6.1

2011 6.6 19.7 8.1 13.9 2.1 -43.4

2010 19.0 6.5 29.5 35.6 15.1 -14.0

2009 8.9 12.5 29.2 75.7 26.5 71.3

2008 -30.5 -27.8 -37.9 -37.1 -37.0 -44.4

…And Another View of That

Income Investing Outlook

• Focus on the economy first, the Fed and interest rates only as they relate to growth

• No Recession yet, full-on bear market is unlikely without one

• Myriad threats to growth to watch

• Expectations/Valuations are still high on an historical basis—some Q4’s will disappoint

• Expect wide momentum swings, even in so-called low Beta stocks

Don’t Ignore the fact that ETFs HAVE Changed the Market’s Structure

Time for a Fresh Approach

• Dividends Plus Is:

• An actively managed, broadly diversified weighted portfolio of income investments, designed to produce average annual returns of at least 10%--defined as yield plus dividend growth

Actively Managed Income Means…

• Focus on accumulating positions in high quality income generating investments

• Entry points based on “10% Strategy”

• Scaling in phased-in energy points, buy limit orders, “Dream” buy prices

• Weighting positions based on potential and confidence level

• Cash component protects and fuels growth.

• Being willing to sell when it’s needed

Utilities: Volatility Grows as Bull Ages

Actively Managed does NOT Mean…

• Frequent trading: You’ll only reward your broker and Uncle Sam, and you’ll miss out on the capital appreciation dividend growth always brings over the long haul

• Chasing the highest yield

• Chasing momentum

• Loading up on a single “hot” sector

• Not holding cash

IN QUALITY RATINGS WE TRUST

• Dividend Growth and Sustainability

• Revenue Reliability

• Regulatory/Legal Relations and Risks

• Refinancing/Financing: Need for and Access to Low Cost Capital

• Operating Efficiency

One hand washes the other….

Building the CUI Plus+ Portfolio

Company (Symbol) Initial Entry Price Shares Advice Yield

Arrow Financial Corp (NSDQ: AROW) 11/30/18 32.91 200 Buy<33 3.2

BHP Group (NYSE: BHP) 12/19/18 47.41 100 Buy<50 5.3

Brookfield Prp Pt (NYSE: BPY) 9/25/18 17.62 200 Buy<25 7.2

CenturyLink (NYSE: CTL) 9/25/18 16.15 300 Buy<17 13.4

China Gas (OTC: CGHLY) 9/25/18 85.74 50 Buy<80 0.6

Clearway En (NYSE: CWEN) 9/25/18 14.08 350 Buy<20 8.4

Dominion Energy (NYSE: D) 9/25/18 68.59 100 Buy<80 5.4

EQM Midstream (NYSE: EQM) 9/25/18 46.03 150 Buy<53 9.7

Sotherly Hotels (NSDQ: SOHO) 11/19/18 6.48 500 Buy<7 7.7

Cash and Hedges

Vanguard Int Tax-Ex (VWITX) 9/21/18 13.95 3826.7 Buy<14 2.9

Outlook: Utilities

Positives

• Valuations drop in 2018 as earnings rise, shares lag

• PG&E notwithstanding, underlying businesses are the healthiest in decades with several sustainable drivers of growth

• Dividends plus dividend growth of 10%

Negatives

• High Valuations for top quality stocks means easy to disappoint expectations

• ETFs dominate many names increasing volatility, momentum has impact

• Misconceptions about interest rate sensitivity are headwinds

Solar Power: Driver and Threat

Dominion Energy (NYSE: D)—Multiple Earnings Drivers for RecoveryYield = 5.34% Dividend growth rate 10% for next several years2018 YTD Return: -7.6%Why the underperformance:1. Company acquired SCANA using its stock,

market skeptical of deal and method of purchase from day 1

2. FERC decision on regulated pipeline rates sank Dominion Midstream, plan to finance Cove Point LNG

3. Atlantic Coast Pipeline encounters regulatory related delays to planned late 2019 startup

Why a recovery:1. SCANA purchased cheaply, will boost

earnings2. Cove Point LNG financed alternatively,

DM to consolidate3. Band aid is off with Atlantic Coast

Pipeline news as company guides to later startup

4. Solar and Gas5. Management sticks to sector beating

earnings and dividend growth projections

Outlook: REITs

Positive

• REIT-ification of America means structure now encompasses a wide range of niche areas with expansive growth

• Growing economy is good for business

• Dividends plus dividend growth of 10%

Negative

• Traditional REITs (office, apartment, retail) are still trading at high valuations, disappointment likely

• ETFs dominate many names increasing volatility

• Interest rate worries still persist as headwind

• Many are exposed should economy weaken in 2019

REITs: Volatility Grows as Bull Ages

Sotherly Hotels Inc (NSDQ: SOHO)—Small REIT in a unique niche.Yield: 7.8%

12-Mo Dividend Growth: 13.6%

Market capitalization $91.7 mil, no credit rating, just 2 analysts following

Insiders own 13% with Chairman and CEO Andrew Sims at 9.45%, generally buyers though no recent trades

Key Growth Drivers:

1. Demonstrated record of success turning older hotel properties into destination sites

2. Consistent, strong growth in RevPAR and occupancy rates at upgraded properties

3. Demonstrated ability to access capital with conservative financing strategy

4. Well covered distribution with 54.3% 9-mo payout ratio.

5. Shares trade -40% below Dec 2004 IPO price

Outlook: MLPs

Positives

• Sector is broadly unloved with investors doubting even established names

• 4 years of de-risking and cutting debt has dramatically improved business quality

• Oil strengthens again.

• 10% yield plus growth is abundant

Negatives

• Still some adjustments left as companies seek to self-fund CAPEX

• Fear level is still very high and capital markets are therefore hostile even to investing in projects with demonstrated need (i.e. contracts)

• Still have exposure to commodity price cycle

Volatile Oil and Gas

MLPs: 2016 Prices But Far Less Risk

EQM Midstream (NYSE: EQM)—Cheap and Growing in GasYield = 9.69%

12-Mo dividend growth: 13.8%, management guides to sustainable rate of 6-8% in 2019, beyond

12-Mo Return: -35.2%

Why the drop:

1. Merger of parent and biggest customer EQT with former Rice has not met expectations so far

2. Roll-up of EQGP by Equitransdisappointed some who wanted MLP to be acquired

3. MLPs not a popular asset class the past few years, even before oil selloff in late 2018

Why a recovery:

1. Management’s new guidance for distribution growth is sustainable and a compelling value proposition as well

2. Potential upside from shareholder activism at EQT from former Rice executives

3. Mountain Valley Pipeline is still likely to be built this year and would provide a big lift

4. MLPs showing signs they’ve hit a major bottom, MLP is 3.54% of Alerian Index

Other Sectors of Interest…Or Not

Where Value Lies

• Yieldcos—PG&E Debacle a buying opportunity for income and growth

• Selected Financials—Regionals Least Risk

• Selected Canadian REITs—Watch out for Alberta

• Natural Resources—Bigger is usually better

Tricks and Traps

• Long-term bonds: Little additional reward for extended maturities

• Passive investing strategies that allocate based on cookie cutter rules

• Most BDCs

• Most stocks yielding more than 10%

Now About those ETFs…

ETFs: Pros and Cons

Pros

• Broad diversification in sectors, ability to trade commodities, currencies and markets make them ideal trading vehicles

• Fees continue to decline, products becoming more innovative

• Low cost makes them accessible for small accounts

Cons

• Stock sector ETFs always hold the bad and ugly of a sector, as well as the good. Performance reflects that

• ETF owners give up control of how much income they earn, as amount depends on what all holdings make

• Many ETFs are dominated by passive strategies

I like this ETF…

Though I like what’s in it more…

YOUR TURN

• PLEASE TYPE IN YOUR QUESTIONS

CALL SHERRY: 1-877-302-0749 9-5 ET, M-F

[email protected]

Conrad’s Utility Investor, CUI Plus+, EIA, DDI,PVB