Dividends Plus: Building Wealth and Growing Income in Uncertain - - PowerPoint PPT Presentation

Dividends Plus: Building Wealth and Growing Income in Uncertain Times

Roger S. Conrad Conrad’s Utility Investor Washington D.C. AAII January 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
• rders, “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 Recovery

Yield = 5.34% Dividend growth rate 10% for next several years 2018 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 earnings 2. Cove Point LNG financed alternatively, DM to consolidate 3. Band aid is off with Atlantic Coast Pipeline news as company guides to later startup 4. Solar and Gas 5. Management sticks to sector beating earnings and dividend growth projections

Outlook: REITs

Positive

• REIT-ification of America

means structure now encompasses a wide range

• f 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 Gas

Yield = 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 Equitrans disappointed 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
• f how much income they

earn, as amount depends

• n 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 SERVICE@CAPITALISTTIMES.COM Conrad’s Utility Investor, CUI Plus+, EIA, DDI,PVB