V . 30, N . 6 June 2019 Buy American for Safer Growth & Income
[Pages:12]A Profitable Way Around
the Trade Wars
Growth in the US economy remains strong. The first quarter's gain was an impressive 3.20%. Inflation for the quarter, as measured by the core personal consumption expenditure (PCE) index, was a meager 1.30%. US GDP should continue to advance for the year in at least the mid-2% range, with expectations for inflation remaining low.
The Federal Reserve is neutral, with the potential to ease as we progress further into 2019. And while Fed Chairman Jerome Powell has made some cautionary comments about rising corporate debt in the US, he was not warning of trouble.
Simply put, the economy and markets are in good shape.
The best illustration of this is how well the corporate credit markets are doing. Demand remains strong, and corporations continue to benefit from growth resulting in rising revenues, which bolster credit conditions.
Then there is the consumer. In the latest survey, which includes the recent time of trade conflict news, the Bloomberg Consumer Comfort (Comfy) Index picked up further to 60.30. Additionally, business leaders of major corporations just told the Federal Reserve Bank of New York that their plans for major capital investment climbed for May by 20.66%.
All of this is good, but with trade war troubles, the markets are being jostled. I expect this will be settled sooner rather than later. But the safest way through this environment is to continue to buy and own US-based, domesticfocused stocks, bonds and funds that are more insulated from US-China tensions.
Vol. 30, No. 6
June 2019
Buy American for Safer Growth
& Income
Dear Friend, The markets are facing a number of challenges right now, even though economic
growth remains robust in the US and inflation remains low. The Federal Reserve is on hold and is leaning towards cutting rates, not raising them. And there still is ample confidence from average consumers and corporate leadership.
Despite increased volatility, the markets continue to perform well. The S&P 500 Index is up 12.59% year to date. Bonds are up 3.54%. And the US dollar is up 2.33%.
The world's investors are noticing, too. The US Treasury Department reports that private foreign investment in US stocks and bonds saw a massive $202.20 billion inflow for the first quarter.
Yet, the increasing trade war tensions between the US and China are hitting the markets lately. Threatened tariff increases and US Commerce Department directives to US tech firms to cut ties with Chinese customers have stoked concerns in the stock market. While there is a temporary stay on these actions, we need to be vigilant and remain prepared.
In this issue, I'll focus on the vast majority of my top stocks, bonds and funds that are America-focused. US real estate investment trusts (REITs) and utilities, municipal and corporate bonds and other domestic investments are all doing very well, as they're insulated from trade tirades.
In addition, I'll continue to show how select companies are capitalizing on solving major problems that know no borders, including livestock health in light of the growing threats of viruses like African Swine Fever (ASF).
If you're looking for safer growth and income choices, you've come to the right place.
Growth Strategies
Is Trade Risk Impacting Underlying Fundamentals?
US stocks are up well for the year. So too is the overall bond market, particularly the corporate and municipal bond markets. The US dollar is also strong, adding to last year's gains against the leading financial and commercial currencies of the world.
The underlying economy continues to be conducive for stocks. Consumer comfort is firmly higher. This supports the view that households' personal financial conditions and outlooks are still bright. This should support further spending, which drives revenues for successful US companies.
With consumers comfy, this slow, steady economic growth is also an incentive for companies to plan for major capital expenditures, like expanding their businesses. The recent gains in the US Business Leaders Future Capital Spending Survey, conducted by the Federal Reserve Bank of New York, is evidence of that.
This is all very good for the stock market moving forward, especially for companies that derive most of their revenue from the US.
This also shows up in the results of the first-quarter reports from the S&P 500 Index stocks. With nearly all of the companies reporting, average revenues
(continued)
expanded 4.45%, and earnings grew an average of 1.48%.
But it gets better. Estimates for the current quarter and into the last two quarters of 2019 are projecting even higher readings.
What's more compelling is to look at the domestic-focused US companies. Real estate investment trusts saw earnings gains of 6.94%, while utilities reported earnings gains of 5.37% and healthcare companies reported earnings gains of 9.09%. All of these are much greater than the average first-quarter earnings gain for the S&P 500.
Trade Risk and Support
That said, the S&P 500 has been jostled by trade tensions despite the underlying domestic economic tailwinds and performance of America-focused stocks. The key threat to look at would be a rout like we saw in the fourth quarter of last year, when selling begat selling as "hot money" left the stock market.
I still don't think a rout is inevitable. Money flows into US stocks have been negative year to date, hitting an outflow level of $13.9 billion in the most recent weekly report. This suggests that there is less cash that has piled into stocks as prices have ballooned. That means there's less hot money to potentially exit.
Meanwhile, the opposite has been the case for bonds this year. Bloomberg's weekly tallies hit a weekly inflow record of $10.6 billion recently. This suggests that there is further confidence in the credit conditions of the bond market as well as for low to no inflation risks. And, in turn, this supports lower corporate borrowing costs, which helps earnings and provides incentives for companies to borrow to further invest in their companies.
One more thing: With lower yields in bonds, it makes the risk/reward calculation between bonds and stocks more compelling for stocks, as stock
dividend yields are closer in line with, if not higher than, many sectors of the bond market.
But my overall call is that we should expect the potential for further volatility and some down days because of the blustering of the world's two largest economic powers. And to be defensive, you need to focus on the more insulated Americafocused market sectors for stocks, bonds and funds.
Proven Growth & Income
Buy American
For me, the slogan "Buy American" represents the best opportunities in the stock and bond markets right now, particularly in light of the escalating trade tensions between the US and China.
The rhetoric coming out of Washington and Beijing is being ratcheted up, and US companies are being directed not to do business with their customers in the opposing nation.
This is very bad news. Huawei, a privately held company that is one of the leading makers of smart phones and telecom equipment, is the first target of the US government, which is unsuccessfully campaigning to force nations around the globe to ban the company's telecom equipment.
But then came news that Alphabet's (GOOGL) Google was instructed to cease doing business in providing support and some access to its opensource Android operating system to Huawei. And similar reports are coming from Intel (INTC), which is on Hold in the Niche Investments portfolio, as well as Qualcomm (QCOM), which among other US tech companies was told to stop working with Chinese customers and suppliers.
The stock market didn't like this at all. The S&P 500 Index is down 3.04% from the high this year on April 30 through this writing, and the S&P Information Technology Index is off by 5.54% for the same period.
When the folks at 1600 Pennsylvania Avenue heard, they quickly issued a 90-day reprieve. But this is not a solution to the trade war.
I see more volatility on the horizon, as the precedent of instructing US companies to cut off vital customers and suppliers and getting their cooperation is truly frightening for investors.
I'm neck-deep into evaluating how this may play out, since we have exposure to the best of the US technology companies. My original view was that China was going to cut a deal because Beijing feared further economic challenges that could lead to instability. But it also has no interest in losing face and caving to the US.
The president knows both of these risks, as well as his own if the markets slide and the US economy slows as the 2020 election heats up.
For now, besides Intel, which is on Hold for its challenges beyond China, I'm not issuing any further Holds or Sells for our technology stocks and funds, which I discuss in the Model Portfolio sections in this issue.
But I am directing your attention to "Buy American" in domestic income and growth plays that are separate from the trade war.
Municipal Bonds
Yes, "munis" are a great source of both domestic income and growth. The market has generated a total return over the trailing year of 6.54%, including plenty of tax-free income.
The muni market is gaining steam from several factors, too. The US economy is growing, resulting in more tax revenues. And the cap on tax deductions from payments of state and local taxes (SALT) is bringing in
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Profitable Investing | June 2019 | profitableinvesting.
Bloomberg US REITs S&P 500 Utilities Total Return Index
25
S&P 500 Utilities Total Return Index
15
20
10
15
5 10
50
0-5
Jun Jul Jun Jul
Aug Sep Oct 2018
Aug Sep Oct 2018
Nov Dec Jan Nov Dec Jan
Feb Mar Apr 2019
May -5
Feb Mar Apr May 2019
Source: Bloomberg Finance, L.P.
Bloomberg Barclays Municipal Bond Total Return Index
7.00
BlooVmabnegrugarBdarHcilgahysDMiviudneincidpaYileBldonEdTFIndex Total Return Index Value Unhedged USD
30
Vanguard Real Estate ETF
6.00
Vanguard Utilities ETF
25
Vanguard Information Technology ETF
5.00
Energy Select Sector SPDR Fund
20
Vanguard Health Care ETF
4.00
15
3.00 10
2.00 5
1.00 0
0.00
-5
Jun Jan Jul
Aug FSebep2018 Oct
NovMar Dec Jan 2019
FeAbpr
Mar Apr 2019
MaMy ay
Source: Bloomberg Finance, L.P.
even more state and local tax revenues, Buy BLE under $14.58, NVG under
thanks to changes in the Tax Cuts and $15.80 (raised) and NZF under
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$15.80 (raised)--all in taxable accounts.
Utility Players Perform
95
9880.90.04 85
In the Total Return Portfolio, we have three closed-end muni funds that are working very well for us. I added the BlackRock Municipal
Another domestic US market tha86t0.00 is insulated from trade tensions is the utility market. Utilities continu7e5
to be strong performers during bot74h0.00
Income Trust II (BLE), the Nuveen the buoyant general market and 65
AMT-Free Municipal Credit
particularly during times of strife, 2.00
Income Fund (NVG) and the Nuveen like we're in now.
60
Municipal Credit Income Fund
Over the trailing year, US
505.00
(NZF) in April 2018. Since then, the
three hJaJaavnne generated gFaFeeibbns ranging MMaarr from 12.20% to as high as 17.69%. 2019
utilities have been very dependable
pUetrilf2io0tr1ie9mseTros,AtapwArlpriRthettuhrenSI&ndPeMx5Ma0yay0
50
The three still trade at discounts to
generating a return of 23.39%. The
their underlying muni bond portfolios, mix of dependable regulated services
and they pay a taxable equivalent
revenues and profit margins as well
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7.69%. for more
as unregulated regional and nation1.a6lB power generation and distribution
income and further gains with or without more troubles with China.
remains a great combination for 1.5B15
further income and growth.
1.46B
1.4B10
Profitable Investing | June 2019 | profitableinvesting.
1.3B 5
There are several utilities in the model portfolios, including the Incredible Dividend Machine where they fit nicely into the plan for dependable dividend streams each month of the year. And inside the Total Return Portfolio, I have two positions that should be bought or added to right now as a defensive play while trade tensions flare.
They start in the Indexed Equities segment with the Vanguard Utilities ETF (VPU). This provides synthetic broad exposure to the US utility companies. The ETF has generated a return over the trailing year of 22.33%, including its 2.86% dividend. Buy VPU now under a raised buy price of $135.00 in a tax-free account.
NextEra Energy (NEE) in the Growth and Income Plays segment has a combination of dependable regulated power business in Florida and the growth engine of its unregulated wind and solar businesses around the US, Canada and some additional cooperative assets in Spain. But the core of its business is firmly in America.
It keeps coming through, with a trailing year's return of 29.34%, including a modest dividend yielding 2.48%. NEE is a Buy under a raised price of $203.00 in a tax-free account.
REITs Rule
Real estate investment trusts (REITs) have been a foundation of the model portfolios of Profitable Investing, which I have been building upon over the past year. The combination of quality real assets with ample cash flows and higher tax-advantaged dividend payments continue to make for dependable growth and income, particularly during periods of strife in the general stock market.
And it isn't just about defense--the returns have been bountiful.
The general US REITs market, as tracked by the Bloomberg US REITs Index, has generated a trailing year return of 16.45%, which is multiples of the 5.44% return for the S&P 500 Index.
And with global trade tensions, focusing on US-based REITs should continue to provide a defensive source for further growth and income. In the Total Return Portfolio, the most
3
Jan
Feb
Mar
Apr
May
2019
American of REIT property companies, American Campus Communities (ACC), owns and leases US campus housing and other properties.
This is a very dependable market, and we have seen private equity firms buy out publicly listed REITs in this market in recent years. ACC is the remaining pure REIT in this space. And it keeps delivering, with a trailing year's return of 25.60%, including its dividend of 4.08%. Buy ACC under $47.00 in a taxable account.
Life Storage (LSI) is focused on US temporary storage properties. Storage is a dependable property segment, as it benefits from storage needs during good economic times and even more so in recessions, as households often downsize for cost savings or move for new opportunities.
Life Storage has generated a trailing year's return of 10.89%, including its dividend yielding 4.13%. LSI is a Buy under $102.00 in a taxable account.
The last of the REITs I want to highlight is Medical Properties Trust (MPW). This company does triple-net-leases on medical facilities around the US and a handful of countries in Europe as well as Australia. This means that its tenants are responsible for taxes, insurance and general upkeep, which frees the company from the risks of cost increases. None of its properties are affected by the trade war.
Medical Properties continues to perform, with a trailing year's return of a whopping 45.33%, including its dividend yielding 5.50%. MPW is Buy under $19.50 in a taxable account.
More Growth & Income
Food Security Solution Maker
In your May issue, I detailed the threats to global food supplies and the rapidly rising demand for crop security. Consumable crops for humans and livestock need to increase by 60% or more by 2050 just to meet population growth estimates as calculated by the Consultative Group for International Agricultural Research (CGIAR).
4
Bloomberg US REITs Index Total Return
7.00 BBlloooommbbeerrgg BUaSrcRlaEyITssMunicipal Bond Index Total Return Index Value Unhedged USD
6.00
15 5.00
4.0100 3.00
5 2.00
Jun Jul Jun Jul
1.000
0.00
-5
Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Aug Sep2018 Oct Nov Dec Jan Feb M2a0r 19 Apr May
2018
2019
Source: Bloomberg Finance, L.P.
US Lean Hogs Spot Price
Last Price
89.4
HABvilgoehoramognbee0r5g/1B7a/r1c9lays97M20..u47nicipal Bond Index Total Return Index Value Unhedged USD
Low on 02/20/19 53.0
95 98709..040 865.00
850.00
745.00
Jan Jun Jul
Feb Aug Sep Oct
2018
Mar No2v019 Dec
730.00
65 2.00
60 1.00
55
0.00 50
Apr
May
Jan Feb Mar Apr May Source2: 0B1lo9omberg Finance, L.P.
And one of the leaders in protecting pockets of Sub-Saharan Africa. But
harvests as well as enhancing yields the epicenter of the crisis is in Asia
isZFTSMUSCEquCityo1r.4p6oB ration (FMC), which I added to the Growth & Income Plays seLHcaigtsihtoPonrnic0eo5f/17th/1e9 T98o29..t44al Return Portfolio lasAvtemragoenth. 70.7
and, specifically, in China.
1.6B
This is resulting in culling pig 95
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to food security that's impacting food supplies right now--not just over the coming years. Livestock and, in
(USDA) is confirming that Chinese80 pig production will continue fall i1n.3B 2019 and beyond by 20% or more. 75
particular, pigs are dropping dead
Outbreaks have been reported in 31.2720B
around the globe as they fall victim to African Swine Fever (ASF). This
provinces in China, which raised a6t5 least half of the global pork suppl1y..1B
disease isn't contagious to humans but is deadly for pigs that contract it easily
Year of the Pig
60 1B55
in pens and open fields. It results in
Ironically, 2019 in the Chinese
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days upon contraction.
2019 while many in the US might be
The United Nations' World
ignoring this crisis, as it isn't largely
Organization for Animal Health has impacting US farms, it's resulting
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in record sales of pork from US producers to China. In the most re1c.6e2B5n0t weekly customs data, China imported
1.52B00
Profitable Investing | June 2019 | profitableinvesting.investorplace1.c.4o6mB
1.41B50
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Zoetis Revenue Gains
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Source: Bloomberg Finance, L.P.
Zoetis Total Return Compared to S&P 500 and S&P 500 Health Indexes
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31,160 tons of US pork, which was the greatest weekly sum since April's hoimvigLLHLHLAAIepaaoovviinhggrsswweeohhttrraalaorooPPooiggnntrrdnnfveeiiicc11d00neee70033sig//7//t11t00,i66o337ro////ec11011n66ck990,oghtr64646565odei21210303v........na13133939etlsotn.hn,tnhCaeghceiononafcibesreanelsfsofor a hungry nation.
This is resulting in soaring pig wholesale prices in the US market. Since the year began, prices are up by 74.37%.
That's a bull market for pigs. There are two companies that I am proposing to tackle this market problem. The first is Hormel Foods (PHo22r00Rt11f66Lo)l,iow. hHicohrmiselinis22t00hp1177eroTdoutcaelrR, eturn processor and packager of pork products as well as other meats. The only caveat is, while the company does benefit from higher prices for its pigs, it also has to pay more for its overall pork production.
00
22001177
22001188
22001199
Source: Bloomberg Finance, L.P.
In turn, as for other consumer
products, Hormel can only raise
end prices so high before facing
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benefit from export sales of pig and
pork products at higher prices as 5555 demand from China remains robust
despite rising prices. The stock is trading at a mere 2.551006
times trailing sales--down from
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should benefit from increased export
sales to offset price challenges in 4400
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HRL tax-free
account.
Healthier Pigs in a Poke
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animal health medicines and vaccines. Zoetis Incorporated (ZTS) is a Parsippany, New Jersey-based company that has more than 300 products that are in rising demand in more than 100 countries, including China.
And before you question whether China might impose tariffs or restrictions on Zoetis, remember that China is in crisis mode when it comes to its livestock production.
Just last year, Zoetis received two patents from the US Patent and Trademark Office to exclusively develop African Swine Flu vaccines. And the company is well on its way with needed products. With a strong history of vaccine development and sales, it's on the front line for heavy revenue growth over time.
Zoetis is already a strong performer. Over the past five years, the stock has turned in a return of 247.30%, as compared to the S&P 500 Index's 63.82% return and the S&P 500 Health Index's return of 63.87%.
Beyond livestock healthcare and vaccines, Zoetis is also a leader in pet health and medications. And with rising demand for domestic pets, the company has been gaining market share and growing earnings.
Revenues are up over the trailing year by 9.80%. Operating margins are very fat at 31.10%. This results in a whopping return on shareholder's equity at 64.90%. It retains the bulk of its profits at a rate of 81.70%, which, in turn, is channeled into drug, vaccine and other animal health products to support a robust pipeline of new revenue sources.
This sort of company doesn't come cheap--its price to trailing sales is a heady 8.30. But the underlying revenue continues to rise, year after year, providing proof that it's worth the money.
Buy ZTS under $107.00 in the Growth & Income Plays section of the Total Return Portfolio in a tax-free account. The dividend yield is currently 0.64% because it keeps a good chunk of profits to fund development. But its dividend has actually been increasing in distribution amounts by 16.18% on average over the past five years.
Profitable Investing | June 2019 | profitableinvesting.
5
30
Total Return Portfolio
I have some good news and some bad news. The good news is that Buckeye Partners (BPL) in the Toll Takers segment is being bought out by IFM Global Infrastructure Fund.
The price is set at $41.50 in cash, and it's expected to close by yearend. That price represents a 1.22% premium to Buckeye's current market price of $41.00. And at the market price, this brings the year-to-date return for the stock to 46.94%. This also means that the overall total return since it was added to the portfolio in August 2006 is 141.14%. Sell Buckeye Partners (BPL).
The stock just went ex-dividend on May 17, and the market price is just 1.22% below the buyout price. By selling now, you'll reap the gain and take out the risk of a challenge to the deal as well as the time value between now and the closing of the transaction.
This will also free up cash to deploy to my newest recommendation, Zoetis (ZTS), as well as focusing further on my "Buy American" recommendations for real estate investment trusts (REITs), utilities and municipal bond funds inside the Total Return Portfolio.
Now for the "bad" news. While the deal is lucrative for us, it does mean that one more company is being taken out of the public market by private equity (PE). That's one more company we can't invest in.
In addition, the energy infrastructure market is such a great cash generator that it's possible that other PE firms will seek out other transactions. This makes our remaining Toll Takers--Enterprise Products Partners (EPD), Plains GP Holdings (PAGP), Kinder Morgan (KMI) and Pembina Pipeline (PBA)--all the more valuable.
Technology Trembling
The US-China trade tensions will initially hit the tech sector the hardest. While the US has deployed a temporary reprieve in additional tariffs and restrictions on doing business with Chinese companies, it appears
6
that companies in the tech industry, particularly those in the hardware and chip sectors, will see dramatic challenges as customers and suppliers deal with higher costs or being cut off.
The S&P Information Technology Index is up 20.79% year to date (including dividends) despite dropping from its recent high on April 23. Our direct exposure inside the Total Return Portfolio is limited to the sector.
In the Indexed Equities, we have the Vanguard Information Technology ETF (VGT), which provides exposure to this growth engine of the general market. We also have Microsoft (MSFT) in the Growth & Income Plays.
It's premature to pull the plug on this sector. While there may well be near-term damage with market price volatility as the news ebbs and flows, the sector remains in a growth mode, particularly in the services portion, including cloud computing related businesses. The Vanguard Information Technology ETF (VGT) remains a Buy under $210.00, and Microsoft (MSFT) remains a Buy under a raised price of $127.50-- both in tax-free accounts.
Buy American
In this issue, I make the case that the defensive investment strategy for the trade war is to look to stocks that are domestically focused. This starts with the REITs inside the portfolio, including American Campus Communities (ACC), with its focus on US campus properties, and Digital Realty Trust (DLR), with its US data center properties.
Digital also has some global properties, which may be excellent alternatives for its customers rather than Mainland China data centers. However, it does have one center in Hong Kong that could be in jeopardy of local government data processing controls.
The REITs continue with Life Storage (LSI) in the temporary storage market and Medical Properties Trust (MPW), which is focused on US medical properties but does have some facilities in Europe and Australia that are separate from any trade tensions.
MFA Financial (MFA) is a US mortgage portfolio management company, also independent from conflict. Rounding out the collection is W.P. Carey (WPC). While it is focused in the US real estate market, it's one of the more globally diversified property portfolio owners. But like other REITs, I see minimal risk to WPC from US-China trade troubles.
Given the tax deduction on dividends, all REITs should be bought in taxable accounts under the recommended prices in the portfolio table.
As for utilities, we have two positions inside the Total Return Portfolio, with the Indexed Equities segment having the Vanguard Utilities ETF (VPU). The ETF shows the prosperity of the domestic utilities, with a year-to-date return of 13.08%. Buy VPU under a raised price of $135.00 in a tax-free account.
In the Growth & Income section, NextEra Energy (NEE) continues to generate reliable cash from its regulated power business and further growth from its unregulated national renewables energy businesses.
The renewables market continues to gain further support from state and local authorities. Growing numbers of them are mandating more renewable energy as a percentage of their power consumption.
For example, Maryland just passed legislation requiring 50% of its power to come from renewables by 2030. NextEra has turned in a return year to date of 16.95% and is a Buy under a raised price of $203.00 in a tax-free account.
Fixed Income Fix
Beyond domestic-focused stocks, one of the other market solutions for trade tensions is the domestic bond market.
Municipal bonds remain firmly on the ascent due to the economic growth driving more tax revenues and less supply of muni bonds, while demand remains brisk. This is driving up prices and continues to support my three closed-end muni bond funds-- BlackRock Municipal Income Trust II (BLE), which remains a Buy
(continued on p. 8)
Profitable Investing | June 2019 | profitableinvesting.
Stocks (56%)
TOTAL RETURN PORTFOLIO
Indexed Equities (18%)
Entry Symbol T/TF Date
Fwd. Buy Yield Under Comments
Energy Select SPDR ETF
XLE
TF 5/21/18 3.23% $70.00 US domestic oil supplies up with more production keep a short-term lid on prices
Vanguard Health
VHT TF 3/16/16 2.63% $174.00 Healthcare stocks are bargains right now in a big growth market
Vanguard High Dividend
VYM TF 6/21/16 3.03% $88.00 The more conservative way to have exposure to the S&P 500 Index with income
Vanguard Info Tech ETF
VGT
TF 8/20/18 1.18% $210.00 Technology is most vulnerable to trade war actions; still source for further growth
Vanguard Utilities ETF
VPU TF 9/24/18 2.86% $135.00 Buy US-based utilities as a haven during trade negotiations
Growth & Income Plays (18%)
Alliance Bernstein
AB
T 11/19/18 6.84% $33.00 Asset manager with good fee-generating assets under management for fee income
Citizens Financial
CFG TF 9/8/17 3.67% $39.50 US-based domestic regional bank with continued improving performance
Compass Diversified Holdings CODI TF 5/21/18 8.76% $17.00 Good non-index member company with ample defended dividend
Covanta Holdings
CVA
TF 3/26/19 5.72% $18.00 This company turns trash and non-recycled waste into cash from power generation
FMC Corporation
FMC TF 4/25/19 2.18% $81.50 A leader in crop protection and farm yield enhancement
Hormel
HRL TF 4/17/17 2.13% $42.25 Pigs around the globe are at risk; this company has healthy pigs but faces price pressures
Microsoft
MSFT TF 11/30/12 1.44% $127.50 Company at risk from trade risks but has off-setting businesses beyond China
Nestle
NSRGY T 12/17/08 2.45% $99.00 European markets remain in turmoil; yet company makes the most of rest of globe
NextEra Energy
NEE TF 9/8/08 2.48% $203.00 US-based utility is a haven; plus reliable cashflows and growth in renewable power
Procter & Gamble
PG
TF 12/17/08 2.80% $102.00 The stock price has run up; watch for a pullback to buy
Regions Financial
RF
T 4/23/18 3.89% $17.50 US domestic regional bank is insulated from trade risk with improving performance
Hercules Capital
HTGC T 6/25/18 9.60% $14.50 Invests in smaller, developing and emerging tech companies more insulated from China
Viper Energy
VNOM TF 7/23/18 5.27% $38.00 US petroleum property landlord keeps benefitting from petrol royalty income
Zoetis Incorporated
ZTS
TF
0.64% $107.00 Company is on the front line of protecting livestock and pets from viruses and disease
Real Estate Investment Trusts (8%)
American Campus Communities ACC
T 7/12/18 4.08% $47.00 US based and focused REIT in valuable student housing market
Digital Realty Trust
DLR
T 2/9/18 3.65% $125.00 Expanding with new properties in Amazon's new backyard in Virginia
Life Storage
LSI
T 12/26/18 4.13% $102.00 US-focused REIT provides opportunities in good market and defense during challenges
Medical Properties Trust
MPW T 2/26/19 5.50% $19.50 US-centric REIT with good cash-generating properties
W.P. Carey Inc.
WPC T 1/3/14 5.04% $82.00 One of the best major diversified REITs for income and growth; but pricey for now
MFA Financial
MFA
T 6/25/18 11.00% $8.00 Don't be scared of the big dividend; portfolio aided by mortgage market fundamentals
World Class Franchises (6%)
Starbucks
SBUX TF 2/8/18 1.86% $69.00 Stock is still way ahead of the company; only buy on pullbacks for now
United Technologies
UTX TF 8/6/14 2.17% $137.00 Some concerns with US China trade dispute; yet break-up value still pending
Walgreens Boots Alliance
WBA TF 4/7/17 3.32% $65.00 Stock valued at discount to sales; still working on merger integrations and cost controls
Toll Takers (6%)
Buckeye Partners
BPL
T 8/21/06 7.34% SELL Buyout from private equity fund; take profits now and redeploy cash in other holdings
Enterprise Products Partners
EPD
T 2/22/05 6.11% $30.00 The proven leader in running an expanding pipeline network and related assets
Kinder Morgan Inc.
KMI
TF 11/28/14 4.92% $20.00 Great collection of pipeline and related assets set to cash in further from US petrol
Pembina Pipeline
PBA
T 8/14/12 4.69% $37.00 Canadian government is pushing to get more gas and oil flowing for more business
Plains GP Holdings
PAGP T 3/10/17 5.95% $26.65 Great Permian Basin pipe that will be expanding for more tax-shielded distributions
Fixed Income (44%)
Cash (11%)
Synchrony Bank high-yield savings account
7/31/15 2.25% Market 2.25% yield--Call 866/226-5638 to order
Intermediate Credit Bonds (7%)
DoubleLine Total Return Bond Fund DLTNX TF 7/22/14 3.39% $10.55 Bonds keep rallying with more upside in the US market
SPDR Interm-Term Corp. Bond ETF SPIB TF 4/21/17 3.27% $34.50 This bond ETF provides great opportunity for further gains and income
Multisector Bonds (8%)
Osterweis Strategic Income Fund OSTIX TF 4/19/18 4.38% $11.67 One of the best open-ended strategic bond funds with a corporate focus
Preferred Shares (7%)
Seaspan 7.875%
SSW.PH TF 1/22/19 7.95% $25.00 CUSIP# 81254U304
Teekay LNG Partners 9.00%
TGP.PA TF 1/22/19 8.80% $25.50 ISIN# MHY8564M1131
NuStar Energy 8.50%
NS.PA TF 1/22/19 8.87% $25.00 CUSIP# 67058H201
iShares US Preferred Stock ETF PFF
TF 3/9/17 5.64% $38.00 Preferred stocks should be a go-to for all portfolios
Falherty & Crumrine Preferred Opp. Fund PFO TF 7/23/18 6.48% $11.51 Great closed-end fund from good management team; watch buy price
Minibonds (3%)
JMP Group 7.25% 11/15/27
JMPD TF 1/22/19 7.55% $25.50 CUSIP# 466273109
Cowen Inc. 7.75% 06/15/33
COWNL TF 1/22/19 7.91% $26.00 CUSIP# 223622804
US Cellular 6.95% 05/15/60
UZA TF 1/22/19 7.15% $25.00 CUSIP# 911684405
Municipal Bonds (4%)
Blackrock Municipal Income
BLE
T 4/23/18 7.49% $14.58 Discount to NAV narrowing to 3.39% with great tax-free yield and bonus dividend
Nuveen AMT-Free Credit
NVG
T 4/23/18 7.75% $15.80 Discount to NAV dropping to 6.02% with monthly tax-free dividends
Nuveen Municipal Credit
NZF
T 4/23/18 7.83% $15.80 Discount dropping to 4.25% as investors are buying and portfolio performs
Treasury Bonds (4%)
Two-year Treasury bond
T 12/24/18
Market Buy US Treasury with current coupon (interest rate) near 2.38% at market price
At least 10% below buy-below price as of the publication of this issue T: Buy in taxable account for best results TF: Buy in tax-advantaged account (IRA, etc.) for best results *Taxable-equivalent yield
Profitable Investing | June 2019 | profitableinvesting.
7
under $14.58; Nuveen AMT-Free Municipal Credit Income Fund (NVG), which is a Buy under $15.80; and the Nuveen Municipal Credit Income Fund (NZF), which is a Buy under $15.80.
These three funds are still trading below their net asset values (you're buying them for pennies on the dollar), making for great bargains. And with taxable equivalent yields running at an average of 7.68%, they remain a great source of tax-free income. They should all be bought in taxable accounts.
Then there are corporate bonds and preferred stocks. The demand for corporate credit remains firm by both domestic investment funds and from abroad, as the US remains a safe haven in "risk off" markets.
Inside the Fixed Income allocation, we have a collection of corporate bond funds, including the DoubleLine Total Return Bond Fund (DLTNX), SPDR Intermediate-Term Corporate Bond ETF (SPIB) and the Osterweis Strategic Income Fund (OSTIX). All should ideally be bought in tax-free accounts under their recommended buy prices.
The preferred stock selections bring more yield from both the funds and the individual holdings, along with significant promise for the rest of the year.
Rounding out Fixed Income's corporate bonds are the minibonds. Buy JMP Group 7.25% Series D (JMPD) under $25.50 (raised), Cowen Inc. 7.75% Series L (COWNL) under $26.00 (raised) and US Cellular 6.95% Series A (UZA) under $25.00. Note that I have raised the buy prices to reflect their yield to their next call price. This means that while the buy prices are above the call prices, the effective yield is still very attractive.
Incredible Dividend Machine
The stocks inside the Incredible Dividend Machine's three payment cycles largely continue to perform in line with its goal of producing reliable monthly dividend payouts throughout
the year with growth in value over time. This month, there are a few that need some specific attention, including two positions that I am placing on hold.
First up is Cisco Systems (CSCO) in Cycle A. This technology hardware and related software and services company is performing well, with the stock generating a year-to-date total return of 30.38%, including its modest dividend yielding 2.51%, which has been increasing in the distribution amount by 11.67% over the past year. I see that the company is working to focus more on recurring revenues from subscription sales and other services. But there is concern with the US-China trade mess, which might lead to challenges for its customers and suppliers in China. For now, CSCO remains a Buy under $56.00 in a tax-free account.
Next is Realty Income Corporation (O) in Cycle B. This real estate investment trust (REIT) is doing well for us with a year-to-date return of 12.02%, including its dividend yielding 3.89%, which is up in its distribution over the past year by 3.66%. The company did an additional share issue priced at $69.25 on May 6, successfully raising $876 million for additional investment. Many times, when additional shares are sold, existing shareholders can see a pause in the share price. But with the company and the REIT market going strong, the sale went well. O remains a Buy under $73.00 in a taxable account.
Now I come to Northern Trust (NTRS) in Cycle A. This banking and fund management company has seen positive developments recently, including the shares' year-to-date return of 12.43%. But that hasn't made up for the challenges of last year, as its return since it was added to our portfolio last July is a loss of 14.81%. The positive developments for US banks and fund managers aren't coming through as well for Northern Trust, with narrower net interest margins (the difference between what it pays for money and what it earns) and a less-than-improved efficiency ratio, which measures its profitability. I am placing NTRS on Hold for now. I will either make my call to buy it again in the future or have
a replacement soon. Then there is Marathon Petroleum
(MPC) in Cycle C. This refiner came into the portfolio with its purchase of Andeavor (ANDV) last year. I saw that demand for refined products, including gasoline and jet fuel, was buoyant. And having a national network with the combined companies meant that it could reduce its feedstock costs (crude oil and other liquids) from lower-priced US and Canadian shale fields. Revenues are up, margins are good for a refiner and the return on shareholders' equity is positive. But the stock market isn't caring about it, and the shares are down so far in May. I am placing MPC on Hold for now. I will either recommend buying it again if the situation improves or have a replacement soon.
Model Mutual Fund Portfolios
In the May issue of Profitable Investing, I did a major revamp of the mutual fund model portfolios. The goal was to get them more closely aligned to the market sectors represented in the Total Return Portfolio and optimize their conservative growth and income performance.
This didn't come without some teething, as I know that having to make changes in your mutual fund portfolios isn't without issues in dealing with the fund companies or your brokerage or other accounts. And the changes were not done without a great deal of thought. I went through the key themes that I have been focusing on in Profitable Investing and how they would best fit into our mutual fund portfolios.
The resulting themes and respective funds should remain set to do well for some time to follow, and I don't expect to have to make significant further changes for a while.
The results include a collection of six themed funds in the stock allocations for each portfolio. They include the general stock market (with a focus on dividends), real estate investment trusts (REITs), utilities, information technology companies,
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Profitable Investing | June 2019 | profitableinvesting.
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