Monthly Archives: September 2018

REITS

7 REITs to Buy Now and Hold Forever

Real estate investment trusts (REITs) and their typically high dividend yields are a key part of a payout-powered retirement portfolio that’s built to dish out higher and higher dividends every single year.

The five REITs we’ll discuss today will pay you 4% to 7.3% per year in dividends alone. And this income stream will only grow as time passes, because these firms have growing cash flow streams they must pass on to shareholders in order to keep their privileged REIT status.

REITs may not get much mainstream coverage, but the academics are starting to catch on to these dividend machines. Last year, I pointed you to a study from Wilshire Research that showed “dramatic” results when REITs were added to a retirement portfolio.

Let’s also consider recent research from global benchmarking company CEM Benchmarking that shows publicly traded real estate has no equal in retirement-focused accounts:

Equity REITs Are the Best of the Best

Source: Alexander D. Beath, PhD & Chris Flynn, CFA CEM Benchmarking Inc.

Their important finding: “Listed equity REITs had the highest average net return over the period, averaging 11.4%.”

Ready to retire? Stick with REITs. They’re the best asset class for retirees who, ironically, aren’t invested in them! More from CEM Benchmarking (emphasis mine):

Although they had the highest arithmetic average annual net return of 11.4 percent over the period, listed equity REITs were the least used asset class covered in the study. Allocations to listed equity REITs averaged just 0.6 percent of total assets.

If you’re looking to live off of dividends in your retirement, you must consider REITs. Here are five candidates that pay 4% and up today:

MGM Growth Properties (MGP)
Dividend Yield: 5.8%

MGM Growth Properties (MGP) is a relatively new kid on the block in the REIT world, spun off of MGM Resorts International (MGM) in 2016. This REIT owns seven Las Vegas properties including Mandalay Bay, Luxor and the Mirage; a handful of regional resorts in places such as Atlantic City and Washington, D.C.; and a right-of-first-offer on an MGM property being built in Springfield, Massachusetts.

I like this regional coverage for two reasons:

  • It provides diversification against Las Vegas’ inevitable ups and downs.
  • It gives MGM and MGP exposure to the eventual boom that I expect to see across the rest of the U.S. as other states begin to legalize sports betting.

I also like what I see in examining MGP’s dividend: The REIT has hiked its payout four times in nine quarters, and the company has done so with a very reasonable payout ratio of just under 80%.

Just remember: The success of gaming stocks and REITs is heavily tied to a strong economy, so all bets are off if America’s current economic boom starts to peter out.

Until then, game on.

MGM Growth Properties’ (MGP) Price Should Follow Its Dividend Higher

Gaming and Leisure Properties (GLPI)
Dividend Yield: 7.3%

Speaking of the virtues of regional gaming, Gaming and Leisure Properties (GLPI) is intriguing for its “pop” potential.

GLPI is another spinoff, carved out from Penn National Gaming (PENN) back in 2013. The company owns a few dozen regional casino and gaming properties in 14 states and leases them out on a triple-net basis to the likes of Penn National and Pinnacle Entertainment (PNK). Their six Mississippi properties may get a lift from the state’s new legalized sports betting, too.

Management seems to believe in their own stock, too. Gaming and Leisure Properties enjoyed some aggressive insider buying earlier this year. And Wall Street analysts are high on its growth prospects, too, modeling 7% EPS growth this year followed by a 22% burst in 2019.

Pebblebrook Hotel Trust (PEB)
Dividend Yield: 4.1%

Pebblebrook Hotel Trust (PEB) is a play on another one of my favorite mega-trends: the “experience economy.”Americans increasingly seem to value experiences more than acquiring a mountain of stuff, and we’re especially seeing this trend play out in the ever-important (and affluent) Millennial generation.

Pebblebrook is a hotel REIT that targets the most important economic class: the rich. The United States’ middle class is shrinking rapidly, meaning you’re either chasing low-income Americans or the well-heeled – and you and I both know which route leads to fatter profits.

Pebblebrook has a tight portfolio of just 28 properties, but most of these house elite properties such as the LaPlaya Beach Resort & Club in Naples, Florida; the Hotel Monaco in Washington, D.C.; and the Hotel Palomar in Los Angeles. There’s some geographic diversity, though PEB’s properties are primarily crowded along the West Coast’s largest cities.

This is a potential turning point for Pebblebrook. This month, the company beat out Blackstone Group LP (BX) to buy up LaSalle Hotel Properties (LHO) for $5.2 billion, which will boost its portfolio of hotel properties to 66 – though the company’s expected to sell at least three LaSalle properties and execute other asset sales to tamp down debt.

This merger is a double-down on the strong U.S. economy. If America keeps it up, Pebblebrook stands to come out smelling like a rose.

Pebblebrook (PEB) Will Try to Spark Growth Through M&A 

CubeSmart (CUBE)
Dividend Yield: 4.0%

Self-storage REIT CubeSmart (CUBE) is a model operator that continues to grow like a weed. It also has been a serial dividend raiser for years, boosting its quarterly payout by 217% over the past five years.

CubeSmart (CUBE): 419% FFO Growth Since 2010

Unsurprisingly, Wall Street has priced it at a premium.

CubeSmart owns 981 self-storage properties across the U.S., providing not just traditional personal storage solutions, but also business, vehicle and boat storage options. That gives it reach.

Demand comes from the very nature of CubeSmart’s business. Self-storage is an “anytime” industry – economic expansions see a greater need for storage as people accumulate more stuff, and economic contractions usher in a greater need for storage as people need to find a place to store their things as they scale back into smaller living quarters.

But what makes CubeSmart the dynamo you see today is a brilliant set of proprietary systems that help manage inventory and maximize space efficiency, as well as a sophisticated rate-increase system to help squeeze out more profits from customers while still retaining them for the long-term.

That’s how the company has more than doubled FFO over the past five years alone, and why analysts continue to project high-single-digit top-line growth over the next few years. That in turn should keep CUBE chugging higher, rain or shine.

Welltower (WELL)
Dividend Yield: 5.2%

Baby Boomer plays will continue to be an investing gold mine for the next decade or more. America’s 65-plus population is expected to explode by 36% by 2025. In the REIT category, we can primarily play the boomers through either healthcare or senior living.

Welltower (WELL) gives us a little bit of both.

You might remember Welltower as Health Care REIT, but the company rebranded in 2015 (and changed its ticker from HCN in 2018), and has widened its focus over the past few years, too.

This monster of a real-estate company owns 1,502 properties. Importantly, 93% of NOI comes from private-pay sources, so Welltower’s success doesn’t hinge on what the government decides to do with programs such as Medicare and Medicaid.

The wild card to watch right now is a first-of-its-kind joint venture with top-15 U.S. health system Promedica, which includes a 15-year absolute triple-net master lease.

Under that system, Welltower is expected to generate 67% of net operating income coming from senior housing (under brands such as Sunrise Senior Living and Silverado), 16% from outpatient medical, 10% from long-term post-acute care and 7% from health systems.

Just keep an eye on the dividend: While the payout ratio is perfectly healthy at a little more than 80%, the payout didn’t come up at its normal time earlier this year. The company has one more quarter to keep up its streak of dividend hikes.

Income Investors Are Waiting on Welltower (WELL) 

My Top 2 REIT Buys: Recession and Rate-Proof Landlords for 7.5%+ Yields with 25% Upside

These five REITs are laudable, but they’re not quite elite – not like my two favorite REITs, which are comfortably positioned in recession-proof industries.

They’ll have no problem continuing to raise their rents – and reward their shareholders – no matter what the Fed decides at its next meeting, what President Trump tweets or when the stock market finally takes a breather.

My favorite commercial real estate lender (a 7.7% yielder!) lets us play Monopoly from the convenience of our brokerage accounts. They do all the legwork, building a secure, diversified loan portfolio featuring offices, retail space, hotels and multifamily units.

Management then collects the monthly payments, deposits the checks, and then it sends most of the profits our way as dividends (a legal requirement to have REIT status).

Better still, this firm has also smartly eliminated interest rate risk because it uses floating rates. In fact, it’s actually set up to make more money as interest rates move higher:

More Income as Interest Rates Rise

Another REIT favorite of mine is a 7.5% payer backed by an unstoppable demographic trend that will deliver growing dividends for the next 30 years. Interest rates are no problem for this landlord because it will simply continue raising the rents on its “must have” facilities.

Its founder Ed admitted that, 14 years ago, he had “zero assets, a dream, and a business plan.” Well, his dream and plan were plenty – the visionary entrepreneur parlayed them into more than $6.7 billion in assets!

Right now is the best time yet to “bet on Ed” because his growing base of assets is generating higher and higher cash flows, powering an accelerating dividend:

I love dividend increases because they are proof that management is actually making more money, so it can afford to pay us shareholders more. And an accelerating payout is a flat-out cry for help!

These two REITs are both “best buys” in my 8% No Withdrawal Portfolio – an 8% dividend paying portfolio that lets retirees live on secure payouts alone. Now, as active recommendations for my premium subscribers, it wouldn’t be fair to reveal their names here.

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Source: Contrarian Outlook 

Market Preview

Market Preview: All Eyes on the Fed as Trade Takes a Back Seat, Earnings from Nike and Carnival

The Dow and S&P both hit record highs intraday on Friday thumbing their noses at trade concerns with China. The Nasdaq was off slightly. A sector change set to take place on Monday in which S&P telecom stocks will be combined with stocks like Amazon (AMZN) and Facebook (FB) into a new sector dubbed communications services drove some market volatility late in the day. There may be more trade barbs exchanged over the weekend, but the main focus for investors next week will be the Fed. While it is widely expected the Fed will raise interest rates next week, the commentary that accompanies their actions will drive the markets. The statement will be dissected and compared to their last release which lauded the strong economy.

Only two companies are scheduled to release earnings on Monday. Amalgamated Bank (AMAL) and Ascena Retail Group (ASNA). This will mark Amalgamated’s second earnings release after the bank joined the Nasdaq earlier this year. As the number of banks has diminished, investors have shown their appetite for the socially responsible lender pushing the stock higher since its IPO. Analysts will be interested to see how rising interest rates will benefit the bank. Ascena, the parent of retailers Justice and Lane Bryant, has been focusing on reducing cost as its low end brands, like Dressbarn, stumble. Investors will be itching to hear how CEO David Jaffe plans to continue the stocks upward momentum after a 75% gain so far in 2018.

The Fed meeting isn’t the only game in town next week. The economic calendar is brimming with data for everyone. Monday the Chicago and Dallas Feds release industrial activity reports. Tuesday kicks off the Fed meeting, but we’ll also get some retail and housing data. Redbook retail data will be released, and we’ll see the Case-Shiller Home Price Index as well as the FHFA House Price Index. The FHFA Index, which covers only Fannie Mae and Freddie Mac conforming loans, is expected to rise 6.5% year over year. Wednesday afternoon the Fed makes its announcement on interest rates, but earlier in the day mortgage applications and new home sales numbers will be released. Thursday will bring durable goods numbers, GDP and jobless claims. GDP is expected to hold at 4.2%. Friday will close down the week with personal income numbers and consumer sentiment.

The most interesting earnings news next week will be from Nike (NKE). The company has been under a microscope lately after hiring Colin Kaepernick for an advertising campaign. Joining Nike on Tuesday will be Cintas (CTAS) and Manchester United (MANU). Wednesday Bed, Bath & Beyond (BBBY) and CarMax (KMX) will release their quarterly earnings. On Thursday Accenture (ACN) and Carnival (CCL) will take to the earnings stage. After falling post-earnings last quarter the cruise line has rallied back and is now trading above the pre-earnings number. BlackBerry (BB) and Vail Resorts (MTN) will wrap up the week’s earnings on Friday.

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7 Stocks to Buy After the Drop

Is the stock market reasonably priced or expensive? That’s the question investors are asking themselves these days, leaving many to wonder if there are any stocks to buy at this point in the cycle.

A couple of metrics have investors scared about stock prices, suggests Jim Paulsen, the chief investment strategist at The Leuthold Group. According to Paulsen, the median U.S. stock has a P/E multiple today that is almost 50% more expensive than during the dot.com bubble of 2000.

The second metric that should make you think twice is the value of U.S. stocks relative to foreign stocks. Paulsen suggests that U.S. stocks are 17% more expensive than foreign stocks, the highest spread since 2002. Also, the price-to-sales ratio hasn’t been this high since the end of World War II. Marijuana stocks are definitely contributing to this third metric.

So, what’s an investor to do?

Ben Graham used to talk about a margin of safety to protect against the potential downside of owning a stock. That’s especially true when a re-evaluation of stock prices will eventually take place.

In the past, I’ve followed stocks that have dipped by more than 10% in a certain period — a week, a month, a quarter — and what I’ve found is that they often recover over a period of months. Shortly after that, they often test 52-week or all-time highs.

It’s not a strategy I’d pursue if you’re an anxious investor, but for those people who can handle a little volatile, here are seven stocks to buy that are down 20% or more over the past three months.

The Stars Group (TSG)

The Stars Group (TSG)

Source: Shutterstock

3-Month Performance: -31%

It’s hard to believe that The Stars Group (NASDAQ:TSG) stock is still up over 9% year to date despite a 31% rout over the past three months.

If you bought TSG stock in July, I feel your pain, because your position is seriously upside down.

Not to fear, it will soon be back over $30. Here’s why.

In July, it completed its $4.7 billion acquisition of Sky Betting & Gaming, one of the leading gaming and sportsbook operators in the UK. The purchase not only gives it a bigger foothold in Europe, but it also cements its position within the lucrative sports betting market that’s ready to take off in the U.S.

Yes, the deal required the company to leverage itself to the hilt while also diluting shareholders to pay for Sky Betting & Gaming, but I believe this is this kind of transformational move that separates the professionals from the amateurs.

The future of online gaming is tremendous. Any correction like the one over the past three months is an opportunity to buy TSG stock at a reasonable price.

Zillow Group (ZG)

Zillow Group (ZG)

Source: Shutterstock

3-Month Performance: -31%

In early August, Zillow Group (NASDAQ:ZG) stock dropped 16%, its worst single-day performance since November 2011.

What sparked the selloff?

The company reported its Q2 2018 earnings. The top-line missed slightly while the bottom-line beat expectations by three cents. That wasn’t it.

It did, however, lower its guidance for the full-year from at least $1.43 billion in revenue to $1.32 billion, a drop of $110 million. Add to that its entry into the mortgage lending market through the acquisition of Mortgage Lenders of America, which prompted a downgrade from Merrill Lynch because of the stress it will put on profits, was enough to send the stock spiraling lower.

Zillow Group is moving away from its traditional areas of strength — Advertising and technology applications — into the buying and selling of homes through Zillow Offers, hence the need for a mortgage lender.

“It allows us to monetize the Zillow Offers business a second way,” Zillow CEO Spencer Rascoff said in August on CNBC. “First, we can make money from buying and selling. Second, we can make money from mortgage origination. Third, we can make money by passing the homeseller, who doesn’t want to sell their home to us, off to a premier agent.”

Personally, I’ve been a fan of Zillow stock since 2013. I like what Zillow Offers does for the house seller.

I think the market’s got it wrong. Those willing to experience a little volatility through the remainder of 2018 should be rewarded with a higher stock price.

Noah Holdings (NOAH)

Noah Holdings (NOAH)

Source: Maher Najm via Flickr

3-Month Performance: -27%

I first recommended Noah Holdings (NYSE:NOAH), a Chinese wealth management company, back in June 2013 when it was trading around $13; it’s now over $40 despite the 27% haircut in the past three months.

“The most compelling reason for investing in Noah Holdings is its revenue structure, which has evolved over time since its inception,” I wrote June 6, 2013. “Three years ago it earned 77.2% of its revenue from one-time commissions from the third-party firms it represented, with the remainder in recurring service fees. Today, it earns almost 46% of its revenue from recurring service fees.” 

Fast forward to 2018.

NOAH earns about 41% from recurring service fees, 41% from commissions, about 6% from performance fees and the rest (12%) from its online brokerage and education business.

Investors likely weren’t impressed with the company’s drop in earnings in the second quarter.

However, as a glass-half-full type of person, I look at its online brokerage and education business’s results in the second quarter — revenues were 73% higher with half the operating losses year over year — and see a stock that’s ready to rebound.

At less than $40, it’s a steal.

Ultrapar (UGP)

Ultrapar (UGP)

Source: Shutterstock

3-Month Performance: -25%

A year ago, Ultrapar (NYSE:UGP) was trading above $25. Today, it’s below $10.

What the heck is going on at the Brazilian conglomerate?

Well, Brazil and the rest of South America haven’t exactly been a beacon of stability in recent months. However, the issues that prevent Brazil’s economy from really taking off — low productivity, political corruption and too much spending by governments — have been around for years, making it very difficult for businesses to grow there.

However, a quick look at Ultrapar’s Q2 2018 report suggests business is just fine at most of its operating segments.

If not for a strike by truck drivers across Brazil in May, making it impossible to get fuel to its gas stations, the company’s adjusted EBITDA would have increased by 18% in the second quarter, and revenues likely would have been up more than the 19% year over year increase.

Ultrapar runs gas stations, convenience stores, pharmacies, liquified petroleum gas, specialty chemicals and a liquid bulk storage business.

It has been around for almost 80 years and will probably be around for another 80 years.

Mastec (MTZ)

Mastec (MTZ)

Source: Shutterstock

3-Month Performance: -21%

New Jersey-based CressCap Investment Research provides independent analysis of over 7,000 stocks using statistics and data to help separate the winners from the losers. In May, CressCap CEO Steven Cress suggested Mastec (NYSE:MTZ) would be a big beneficiary of U.S. President Donald Trump’s push to rebuild America’s infrastructure.

Like much of the president’s economic agenda, it relies more on style than substance. The odds of a trillion-dollar-plus infrastructure bill getting passed anytime soon is fair at best.

That said, I do agree with Cress that the infrastructure construction firm is ideally positioned to benefit from any large infrastructure projects initiated by the federal government.

The company’s Q2 2018 results show a business that’s experiencing declining revenue and EBITDA, a big no-no in an economy that’s booming and corporate earnings are at a record level.

However, look more closely at its earnings and revenue, and you’ll see a business that’s doing just fine. With a $7.7 billion backlog at the end of June, Mastec has plenty of work ahead of it without the assistance of the president.

Down 21% over the past three months, now is an excellent time to consider MTZ stock. 

Tata Motors (TTM)

Tata Motors (TTM)

Source: Shutterstock

3-Month Performance: -23%

The year-to-date price chart for Tata Motors (NYSE:TTM) stock looks a lot like a ski run in that it’s downhill all the way. The maker of Jaguars and Land Rovers started the year at $35 and now it trades for half that.

It seems like the turnaround job Tata Motors executives performed on Jaguar Land Rover (JLR) between 2008 and 2015 has been forgotten by investors; an amazing thought considering all of the beautiful cars it has released over the past two years.

I believe JLR makes the perfect spinoff stock for investors to bet on; the news that Aston Martin’s looking to go public with a $6.7 billion valuation suggests the investor appetite for luxury cars is high at the moment.

That said, it better not wait too long, or Volvo might reconsider shelving its plans for an IPO.

The other fly in the ointment for Tata Motors: As it ramps up spending at JLR, Fitch is concerned that Tata’s free cash flow will turn negative, putting a damper on future profits.

I think the risk-to-reward ratio is good at prices under $20.

Acadia Healthcare (ACHC)

Acadia Healthcare (ACHC)

Source: Shutterstock

3-Month Performance: -19%

If there’s a company whose services are needed in America, Acadia Healthcare (NASDAQ:ACHC) has got to be at the top of the list. Acadia provides inpatient and outpatient behavioral health services to people in the U.S. and UK. Whether it’s anxiety, an opioid addiction, PTSD or something else, Acadia is there to help. 

Not only does Acadia provide the care, but it also owns many of the facilities where this care takes place.

As you can imagine, Acadia’s biggest expense is wages. After all, you can’t help people without providing professional care, and that costs money.

Its revenues grow at a reasonable pace and deliver about 7 cents to the bottom line for every dollar of revenue. It’s not a tech company to be sure, but it serves a vital service whose need won’t go away anytime soon.

Its stock dropped in July after the company’s CEO reduced its revenue and earnings guidance for 2018 as a result of higher interest rates and foreign exchange.

Those two items are a natural part of doing business. I see the company’s stock rebounding from this latest concern in the final months of 2018 and into 2019.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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This Blue-Chip Firm Is Showing Us the “Fast Lane” to Cannabis Billions

The cannabis market is starting to soar.

The United States is a huge market opportunity, with market projections growing from an estimated $8.5 billion last year to $23.4 billion in 2022, if only a few additional states legalize recreational use. And we’re talking about as much as $50 billion if most states follow the trend.

But the biggest opportunity of all could come in a form people hadn’t been talking about as much…

It’s an opportunity that runs counter to the recreational market trend and the obsession with the cannabinoid THC – the one that causes users to get “high.”

I’m talking about some of the other highly prized cannabinoids present in marijuana – one in particular that one of the world’s biggest, most well-known companies has taken a sudden interest in…

There’s Much More Than THC at Work in Marijuana

My colleagues, friends, and readers have all heard me talk (or seen me write) about cannabidiol (CBD) in terms of its health impact.

It’s just one of the non-psychoactive cannabinoids in cannabis.

Renegade Investment Expert: “It’s time to double down – or even triple down – on your cannabis investments!” Read more…

CBD helps relax people, reduces inflammation, eases pain, and can potentially treat many diseases, including chronic traumatic encephalopathy (CTE), as we discussed earlier this month.

With all those effects, it’s no wonder that it’s also being explored as a potential general health ingredient.

If the health effects of CBD and other cannabinoids prove out, the regulated pharmaceutical market will be unimaginably large – $50 billion, $100 billion, or more.

This past week, an explosive new projection and the rumored participation of a very surprising company both advanced the idea that CBD will be even bigger than THC – even if you don’t count the pharmaceutical market.

The company we’re talking about is one of the largest brands in the world.

It makes perfect sense for this company to be looking at CBD as a health ingredient, since it’s been diversifying away from the product that made it famous for years.

This company owns coffee drinks.

This company owns bottled water brands.

This company owns fruit juice.

This company owns vitamin-infused water.

And in what could play out as a blockbuster, it looks for all the world like it wants to own a cannabis-infused beverage…

Look Who’s “Kicking the Tires” with the Cannabis Industry

Coca Cola Co. (NYSE: KO) is rumored to be seeking a joint venture or other arrangement to make CBD-only beverage products. BNN Bloomberg had the scoop, saying that Coke is looking to make CBD-infused health or “recovery” drinks, which would be positioned similarly to energy drinks or Gatorade.

The shock is how early and quickly Coca-Cola is ready to get into the CBD beverage business.

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Most market observers believe that the association of CBD with cannabis would have kept companies out of that market until consumer understanding of the difference between CBD and THC increased over time.

For Coke to have its wholesome image associated with cannabis products is a critical endorsement of the changing consumer perception of cannabis and of the potential opportunity a plunge into the CBD business presents.

But the best way to make money on this monumental rise in the CBD market that’s coming isn’t buying Coke’s stock. It’s not even necessarily in grabbing shares of cannabis giant with which Coke is negotiating, either.

The smartest, most lucrative plays are still off the mainstream radar… for now.

Here’s what I mean…

CBD Is a $22 Billion Sub-Industry in the Waiting

The current rumor is that Coca-Cola is talking to Aurora Cannabis Inc. (OTC: ACBFF), one of the four biggest cannabis companies in the world. And because CBD is legal across the United States, there’s no reason it could not also seek a separate domestic deal.

For its part, Aurora – which itself has been involved in a binge of cannabis-related takeovers in the last year – emphasized Tuesday in a carefully worded statement that it has no deal with any beverage company… yet.

First, that can change tomorrow. That’s often how it goes.

Second, it doesn’t matter whether Coke strikes a deal with Aurora or some other cannabis company.

This is a flag in the ground about how serious, how potentially lucrative the legal cannabis market will grow to be.

So, how large is the CBD industry that it’s pushed the largest soft drink company in the world to act?

Brightview, a respected cannabis industry analysis firm, now believes that the CBD-only market worldwide will grow to $22 billion by 2022. That’s in the United States alone. From under $600 million this year, that represents a growth of 132% per year for four years.

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Brightview thinks of CBD as the future vanguard of an “anti-pharma” health movement, with people taking daily supplements of CBD, using it to substitute for pharmacological disease treatments, adding it to their food, and as Coca-Cola probably foresees, taking it in their beverages.

In this landscape, CBD supplements would become much more widely available. Consumers will be buying them at big-box discounters like Costco, grocery stores, health food stores, drug stores, and more.

If Brightview’s projection is even partially right, the cannabis companies that can execute on sharp, CBD-focused business plans will make vast fortunes for their investors.

And that’s why we’re here, continuing this conversation about cannabis investing… and why I’m so excited about CBD.

But as I said, the owners of Coca-Cola stock – or even Aurora, for that matter – aren’t going to be the beneficiaries of this market sea change when we look back a few years from now.

It’s going to be in the smaller companies that are just finding market penetration because of constantly improving consumer sentiment and education.

It’s going to be the companies that aren’t yet on the radars of big beverage, big pharma, or big alcohol yet… some of which not even publicly traded.

It’s going to be the companies that resemble penny stocks in price… but not in know-how, experience, and leadership in an industry space that outsiders like Coca-Cola still know far less about.

These winners aren’t easy to find without rolling up one’s sleeves and doing hours and hours of the right kind of research. And not all CBD companies are created even close to equal.

And that’s why we’re going to keep this conversation about cannabis – and specifically, the CBD market – going here in the coming days and weeks. I can’t wait to share more of my research and predictions on this with you.

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Want Dividends and Price Upside? 7 Stocks for 162% Returns

If you’re not yet as rich as you hoped you’d be by now, don’t worry – we still have plenty of time to get you there.

And I’m not talking about investing your “growth capital” into risky fly-by-night names like Tesla (TSLA) and Snap (SNAP).

We can scale our money more securely – but just as spectacularly – by purchasing sound dividend payers that happen to be growing their payouts rapidly. Here’s why.

The Most Lucrative Way Shareholders Get Paid

There are three – and only three – ways a company’s stock can pay us:

  1. A cash dividend.
  2. A dividend hike.
  3. By repurchasing its own shares.

Everyone loves the dividend, but investors usually don’t give enough love to the dividend hike. Not only do these raises increase the yield on your initial capital, but also they often are reflected in a price increase for the stock.

For example, if a stock pays a 3% current yield and then hikes its payout by 10%, it’s unlikely that its stock price will stagnate for long. Investors will see the new 3.3% yield, and buy more shares.

They’ll drive the price up, and the yield back down – eventually towards 3%. This is why your favorite dividend “aristocrat” – a company everyone knows and has paid dividends forever – never pays a high current yield. Its stock price rises too fast!

If you don’t believe me, consider 3M (MMM), a “stodgy” company with a ho-hum 2.6% yield. So once inflation bites, you’re left with almost no actual income!

But don’t forget that 3M is a charter member of the Dividend Aristocrats, having hiked its payout for 60 straight years. The connection between its rising dividend and its rising share price is unmistakable.

Check out how the payout drives up the share price at almost exactly the same rate over just about any time period you can imagine, starting with 3 years:

Dividend Up 33%, Shares Up 36%

And then 5 years:

Dividend Up 114%, Shares Up 109%

10 years:

Dividend Up 172%, Shares Up 173%

Since share prices move higher with their payouts, there’s a simple way to maximize our returns: Buy the dividends that are growing the fastest.

The Path to Fast 162% Gains From Safe Blue Chips

Have you always wanted to buy a safe blue chip stock like Coca-Cola (KO) and get rich from it like Warren Buffett?

It’s doable. But most investors “live in the past” and fixate on dividend track records rather than a payout’s forward prospects. And looking ahead is the key to yearly gains of 12%, 27.1% or even 54% or more with blue chip stocks.

(Yes, that’s no exaggeration. It is possible to make 54% annualized gains on a safe blue chip stock. I’ll share an example in a moment.)

Let’s first consider the case of Coke, which achieved its dividend royalty status in 1987 (its 25th straight year with a dividend hike). The firm hit its coronation with a head of steam, rewarding investors with a 362% payout hike in just five years (from 1986 to 1991). Its stock price raced to keep up with its dividend, rising 234% over the same time period:

Great Dividend Growth, Great Returns

It didn’t really matter if you bought shares before or after the company was officially a dividend aristocrat. The driving factor for profits was the dividend’s velocity – it was moving higher quickly, so its stock price followed.

Fast forward to the last five years, and we see that Coke’s youthful exuberance has slowed considerably. The firm still hikes its payout every year, but it’s a slower climb – totaling 45% over the past five years. Which means its stock price merely plods along too (+25% in five years):

Average Dividend Growth, Average Returns

Why is Coke’s dividend slowing down? Simple – just look at the top line.

Shrinking Business is Bad for Payouts

It sounds obvious, but income investors often wade so deep into the dividend weeds that they ignore obvious cues – such as shrinking sales.

Let’s add Coke’s top line into the last chart, and we’ll see that the fact that the payout is growing at all is an act of financial wizardry:

Shrinking Sales Slow the Dividend

Coke’s top line has shrunk by 22% over the last five years. Which makes its dividend growth quite the feat!

Contrast this with the 1986 to 1991 period, when the company was younger and still growing. It boosted its sales by 30% over that time period.

Of course it’s possible to grow payouts faster than profits and sales. In fact, this is what often happens with dividend payers. But even the most gifted managers can only squeeze so much in payouts from a shrinking pie. It’s better to focus on businesses with the winds at their backs.

And That Can Include Spry Blue Chips, Too

Two-and-a-half years ago I told my Hidden Yields subscribers to buy Boeing (BA) because:

  • Its business was booming,
  • Its stock was quite cheap with respect to cash flow, and most importantly
  • Management was plowing profits into payout growth.

Boeing wasn’t a dividend aristocrat like Coke. But it was a much better buy. Here was the tale of the tape in December 2015 (pay special attention to the last column, because it’s the most important):

Boeing vs. Coke (December 2015)

If you want to make real money with stocks, you should always put your money with the faster dividend grower. Boeing was no exception – its two massive dividend raises in the last two years have sent the stock soaring to 150% total returns:

Boeing Soars With Its Payout

Our secret, as usual, is we purchased the payout that was growing the fastest. We enjoyed a 57% cumulative “raise” from Boeing, which in turn rocketed its stock price higher.

Since share prices move higher with their payouts, there’s a simple way to maximize our returns: Buy the dividends that are growing the fastest.

7 Dividend Growers to Buy Now (for 162%+ Upside)

How much money should you allocate to dividend growth?

As you can see – as much as possible. This strategy is such a “slam dunk” for investing returns that there’s no reason to collect more current yields than you need right now. If you can “forego” some amount of income today, I would encourage you to consider investing that capital into dividend growers.

It’s a simple three-step process:

Step 1. You invest a set amount of money into one of these “hidden yield” stocks and immediately start getting regular returns on the order of 3%, 4%, or maybe more.

That alone is better than you can get from just about any other conservative investment right now.

Step 2. Over time, your dividend payments go up so you’re eventually earning 8%, 9%, or 10% a year on your original investment.

That should not only keep pace with inflation or rising interest rates, it should stay ahead of them.

Step 3. As your income is rising, other investors are also bidding up the price of your shares to keep pace with the increasing yields.

This combination of rising dividends and capital appreciation is what gives you the potential to earn 12% or more on average with almost no effort or active investing at all.

Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!
Growth Stocks, Technology

The Clear Winning Investment from Apple’s New iPhone Strategy

Last week, Apple (Nasdaq: AAPL) unveiled a trio of new phones that followed in line with its corporate strategy. That is, get buyers to pay higher prices for the phones while hopefully gobbling up more services (such as entertainment) as growth in the global smartphone market slows to a crawl.

The iPhone Xs (starting at $999) updates last year’s flagship model with updated cameras and a faster A12 processor. The iPhone Xs Max is the higher-end version and has a 6.5 inch OLED screen, with pricing that starts at $1,099. And for the first time, there are 512 gigabit storage options.

The third phone is Apple’s biggest bet in the sector – the iPhone Xr. Like the iPhone X, it has facial recognition and an edge-to-edge display, but is priced starting at only $749 because Apple used older LCD screen technology and aluminum instead of stainless steel. This phone is expected to be the real driver of volume for Apple with annual sales expected to be in the 100 million units range.

Apple, of course, hopes this year’s line-up will be as successful as last year’s. Apple’s iPhone revenues increased 15% year on year in the nine months to June, despite unit sales of iPhones being flat over the same time period.

The Watch That Is a Health Monitor

Apple also unveiled an Apple Watch with a larger screen and a faster dual-core processor called the S4. It also has a lot more health capabilities, making it the most significant upgrade to the Watch since it first went on sale in 2015, turning it into much more of a health monitoring device. This move into health is a major emphasis for Apple, as I’ve discussed in previous articles.

This new version – the Apple Watch Series 4 – has new health sensor and apps such as an ECG (electrocardiogram) monitor. Apple got clearance for the app from the Food and Drug Administration.

Related: 3 Tech Stocks to Buy as Apple Moves Into Healthcare

The Watch’s powerful sensors can detect when someone has a fall and will deliver an alert and call emergency services if the user does not move for a minute after the fall. The ECG capability will be available later this year and is supposed to have the capability to sense atrial fibrillation. FDA Commissioner Scott Gottlieb said, “The FDA worked closely with the company as they developed and tested these software products, which may help millions of users identify health concerns more quickly.”

As someone with a unique heart condition, I wonder though how many false readings the watch will produce, causing unnecessary trips to the doctor.

Even though the Watch is not a runaway hot seller like the iPhone, it is the world’s best-selling smartwatch and is helping Apple expand into health, which is a plus. The new Watch line start at $399.

The Investment Message

One takeaway I had from the recent Apple event is that Apple is facing growing challenges in the smartphone market. This is particularly true if you look outside the U.S. market. More on that in an article in the not too distant future.

But I also had other takeaways… and found a winner and a loser from the Apple event.

The Winner – Taiwan Semiconductor

The winner has to be Taiwan Semiconductor (NYSE: TSM), also known as TSMC, which is the world’s largest contract semiconductor manufacturer with a 56% market share. And it dominates Apple’s chip production ever since Apple became Taiwan Semiconductor’s biggest client in 2015.

TSMC is also at the forefront of the next phase in the evolution of the smartphone.

Apple’s latest phones are the first devices anywhere to include a chip (A12 Bionic) made with 7 nanometer process technology. That means the width of the features etched on to the silicon has reached a new level of miniaturization, down from the previous 10 nanometers. The chips are designed by Apple but manufactured by TSMC. Getting to the 7 nanometer level has been much tougher for the industry than previous moves down in size, and a sign of how Moore’s Law — which predicted regular advances in the number of transistors that can be squeezed on to a chip — is running out of steam.

But there is much more involved here than just size. Apple’s chip includes a specialized accelerator for machine learning known as a neural processing unit. With the promise of applications that can learn from masses of data, this is where much of the effort in new hardware design is now focused.

Last month, GlobalFoundries – the world’s number two semiconductor contract manufacturer – put off its own plans for 7 nanometer chips indefinitely. And Intel, whose long leadership of the chip industry is now in question, continues to struggle. After several delays, products containing comparable chips will not be available until late next year at the earliest.

This leaves TSMC in the catbird seat with production of the most advanced processors now left to just two companies – TSMC and Samsung. TSMC will be the likely the primary beneficiary as advanced technology investment grows too expensive for all but the leading industry players, as advanced technology becomes more of a ‘winner takes all’ business. By the way, GlobalFoundries’ withdrawal followed a similar move last year by United Microelectronics, the third-biggest player.

The Loser – Fitbit

With Apple moving into the healthcare sector in such a big way with its new Watch, a likely loser is Fitbit (NYSE: FIT). On the day Apple unveiled its Watch plans, Fitibit stock fell more than 5%, bringing its loss over the past year to 16.5%.

Outside, the U.S., it is facing similar competition from China’s Xiaomi, where after years of maintaining its leading position in the wearables market, Fitbit is now losing ground to the Chinese company.

It seems inevitable that Fitbit’s growth will continue to slow as smartwatches outshine the fitness wearable category. Despite the broad range of devices Fitbit provides at different price points, it faces tough competition at both the high- and low-end products. At the high end, there is Apple’s multi-functional Apple Watch, which renders Fitbit devices useless. And at the lower end, the company’s biggest competitors are Xiaomi and also Garmin.

Fitbit would also be affected adversely by tariffs on China since it uses China-based contract manufacturers. This will only add to the pressure on it from well-funded competitors, Apple and Xiaomi. Despite the optimism from some Wall Street firms, it is likely headed toward becoming a footnote in the history of wearable health devices, which is still in its infancy.

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Market Preview

Market Preview: Tariff Fears Can’t Hold Back the Dow, Earnings from Micron and Darden Restaurants

Increasingly heated trade rhetoric between the U.S. and China did not dissuade the DJIA from a .61% rally on Wednesday. Pressure from Amazon (AMZN) held back the Nasdaq. Financials drove the Dow higher, even with financial analysts from companies like JP Morgan and BofA beginning to sharpen their knives when it comes to the bull market. Financials offset the increasingly negative outlook for utility stocks as rates have begun rising. While trade remains the main focus of market pundits, strong fundamentals continue to shine through in price action.  

Micron (MU) headlines Thursday’s earnings calendar. Investors in the stock have been on a wild ride in 2018. The company twice breached the $60 level only to fall back into the low $40s where it began the year. Analysts will be looking for a cheerier outlook from the company than the one it presented last quarter. Cautious management comments about the future sent the stock reeling. Also reporting on Thursday is Darden Restaurants (DRI). The Olive Garden owner has been on a roll with positive same store sales increasing quarter after quarter. Cheddar’s, Darden’s newest acquisition, was the lone black sheep last quarter. Analysts will be anxious to hear how the chain has improved.

Finally, Thor Industries (THO) will report on Thursday as well. The announced acquisition this week of Erwin Hymer, a European RV maker, gave the stock a small lift after falling throughout most of 2018. The company hopes growth in Europe will lift it out of the doldrums. Analysts will be looking for a report of integration plans and what the outlook is for the newly purchased company. The Friday earnings calendar is clear at this time.

The Thursday economic numbers will provide investors with a range of items from which to pick. The news includes jobless claims, the Philly Fed Business Outlook Survey, existing home sales, and leading economic indicators. After four months of slowing, existing home sales are expected to rise slightly from 5.34M to 5.36M in August. Economists are keeping a close eye on the housing market for signs of deterioration they fear may spill over into the general economy. Friday is a quadruple witching day with market index futures, market index options, stock options, and stock futures all expiring. These days are often more volatile than usual. Economic numbers Friday include PMI composite flash numbers and the Baker-Hughes rig count. Composite PMI is expected to come in at 55.1 almost unchanged from last month’s 55 level.

Pay Your Bills for LIFE with These Dividend Stocks

Get your hands on my most comprehensive, step-by-step dividend plan yet. In just a few minutes, you will have a 36-month road map that could generate $4,804 (or more!) per month for life. It's the perfect supplement to Social Security and works even if the stock market tanks. Over 6,500 retirement investors have already followed the recommendations I've laid out.

Click here for complete details to start your plan today.
Dividends

3 Shocking Ways to Get a Double-Digit Dividend From Amazon

Brett Owens, Chief Investment Strategist 

Amazon.com (AMZN) blatantly defies all of my investing rules, and gets away with it every time.

It drives me crazy! But instead of staying mad, we’re going to “get even” by banking some backdoor payouts the firm’s landlords dish out.

Of course Jeff Bezos’ company pays no dividend, nor does it buy back shares (and as I’ve written before, growing dividends and well-timed buybacks are sacred cows to me—and 2 keys to a rising share price).

In fact, the e-commerce giant has done the opposite, thumbing its nose at repurchases—busily adding to its share count since the late ’90s!

Amazon Waters Down Its Shares …

But just to show you what an incredible business this is, you can see that even though Amazon has diluted investors’ holdings with these share issues, that’s done zilch to crimp its massive per-share earnings and cash-flow growth:

… and Banks Huge Profits Anyway

To top it off, this stock is the definition of pricey: it’s never traded below 25 times earnings in its history—and today it trades at an absurd 158 times!

It’s infuriating for a value-focused, dividend-growth investors like us, but the numbers don’t lie: if you steered clear of Amazon, you missed one of history’s greatest stocks, with an unimaginable 101,000% gain in the since its IPO.

Too Expensive? Think Again

Tapping Amazon’s “Hidden” Dividend

So am I pounding the table on Amazon stock today?

Nope.

As much as I admire what Bezos has done here, I’m a dyed-in-the-wool dividend investor, and I still can’t make the leap.

So instead, we’re going to take a different tack, tapping big cash dividends from Amazon indirectly.

We’ll do it by buying smartly run high yielders that profit from the same megatrends Amazon is riding (and in many cases, the same megatrends the mavens at Amazon’s Seattle headquarters invented in the first place).

Think of it as a back-door way of wringing a dividend from a company that refuses to pay us one on its own.

Our first pick is about as close as you can get to doing just that. It literally is Amazon’s landlord: it rents space to the e-tail colossus and drops them straight into our accounts as dividends!

Amazon’s “Hidden” Dividend: Pick No. 1

I’m talking about Duke Realty (DRE), a 46-year-old real estate investment trust (REIT) with 499 warehouses in 20 markets.

Amazon is Duke’s No. 1 tenant, and Duke knows its best customer well, having teamed up with it for more than a decade:

A “Prime” E-Commerce Play

Source: Duke Realty NAREIT REIT Week Presentation

The e-commerce leader isn’t the only online-shopping play on that list, either.

Web-based furniture retailer Wayfair.com (W)—whose revenue surged 47% in the second quarter—has a spot, too, as do brick-and-mortar plays with growing online divisions, like Home Depot (HD) and Target (TGT). And courier XPO Logistics is another strong play on the online-shopping boom.

It is true that you’re only getting a 2.8% dividend yield here, but Duke has been goosing its payout in recent years and even handed shareholders a gaudy $0.85 special dividend last December, after unloading its medical-office business.

That was a canny move that frees up management to smoke out more opportunities in its core warehouse operation.

This was also the second special dividend in three years—and Duke can afford another, with the regular dividend eating up just 52% of funds from operations (FFO, the REIT equivalent of earnings per share), a very low ratio for a REIT.

Finally, Duke trades at 21.6-times the midpoint of management’s just-boosted 2018 FFO forecast of $1.33. That’s still a good level for a company that truly is Amazon’s landlord—and way cheaper than buying Amazon itself!

Amazon’s “Hidden” Dividend: Pick No. 2

I know American Tower (AMT) doesn’t seem like an online-shopping play, but it’s a no-brainer that as we move more of our lives online (including shopping), we’ll gobble up more mobile data.

And the cell-tower operator is cashing in through its 170,000 towers. Check out the chart below, which compares growth in the number of cellular subscriptions in the US with rising e-commerce sales:

2 Tech Megatrends With Huge Growth Ahead

Two things stand out here: first, while cell subscriptions grew more slowly, they didn’t miss a beat during the Great Recession, while e-commerce stalled out. That shows you just how durable this business is.

And keep in mind that this chart just focuses on the US. With the rollout of 5G technology, breakneck growth of the Internet of Things and ballooning middle classes in developing countries, there’s plenty of runway for AMT, which has 76% of its towers outside America’s borders.


Source: Digital Realty Trust August 2018 investor presentation

Management agrees: in fact, it’s so confident that it hikes AMT’s dividend every quarter. That’s paid off handsomely for shareholders, whose payouts have surged 182% in just the last five years.

More payout growth is dialed in: AMT’s adjusted per-share FFO surged 13.1% in the second quarter, and the company sent just 39% of its last 12 months of adjusted FFO out the door as dividends—ridiculously low for a REIT.

Finally, this stock’s a screaming bargain at 19.7 times the midpoint of management’s 2018 adjusted FFO forecast of $7.52 per share (which in itself is up a nice 12% from 2017).

So don’t be thrown off by AMT’s meager 2.1% dividend yield. It’s a smokescreen for a company whose dividend—and share price—have lots of jump left.

Amazon’s “Hidden” Dividend: Pick No. 3

Now that we’ve covered bursting warehouses and soaring data use—both of which we can directly tie to Amazon—let’s get into the guts of any e-commerce setup: the places they store the computer hardware that makes it all happen.

Enter Digital Realty Trust (DLR), which houses this gear for 2,300 customers at its 198 data centers across the globe.

As you probably know, demand for these facilities is exploding, due in no small part to booming e-commerce. Because every online purchase, Google search or Facebook “Like” on the planet is processed through a data center somewhere.

DLR buys and develops these facilities, then leases them to its clients, which include some of the biggest names in e-commerce, telecom, finance and media, including serial disrupters like Uber.

This top-quality tenant list is dropping a rising tide of cash into DLR’s coffers; in Q2 alone, FFO jumped 35%—and management is dutifully handing that cash to investors in the form of a dividend whose growth is accelerating:

An “Accelerating” Dividend—With Plenty More to Come

The best news? You can expect another big hike this March, when DLR usually rolls out payout hikes.

Why do I say that?

Because the company’s state-of-the art portfolio continues to draw in tech’s elite, which are in full-on expansion mode. That’s driving management’s bullish FFO forecast: the midpoint of its 2018 range is $7.51, up a nice 7% from 2017.

But we’re not just counting on FFO to backstop our payout growth. DLR also boasts a payout ratio of 61% of FFO—again, ridiculously low for REIT-land, where these ratios regularly top 80% and are still rock solid thanks to the predictable rent checks REITs collect.

And here’s something else that’s ridiculously low: DLR’s valuation, at just 18.8 times the midpoint of management’s 2018 FFO estimate of $6.55 a share. That’s a steal for a company that’s riding e-commerce, data usage, cloud computing and pretty well every other tech megatrend there is.

Forget Amazon: These “Hidden” Dividends Will Double Your Money FAST

Unless you’ve got a time machine and can go back and buy Amazon 10 years ago, or even better in 1997, you’re stillbetter off buying rapid dividend growers—especially accelerating dividends like DLR’s runaway payout.

Because I know I don’t have to tell you that you can only spot megatrend winners like Amazon in hindsight.

Back in 1997, if someone told you that you needed to put your nest egg in a tiny company selling books on something called the Internet, you probably would have thought they were nuts!

Dividend growth, on the other hand, is a slam-dunk strategy that’s proven itself over and over and over again throughout history.

It’s a simple 3-step process:

Step 1. You invest a set amount of money in a “dividend accelerator” like DLR and immediately start getting regular returns on the order of 3%, 4% or maybe more.

That alone is better than you can get from most other conservative investments now!

Step 2. Over time, your dividend payments go up, increasing the yield on your original buy as they do—so you’re eventually earning 8%, 9% or 10% a year on your upfront investment.

That should not only keep pace with inflation and rising interest rates, it should stay ahead of them.

Step 3. As your income is rising, other investors are also bidding up the price of your shares to keep pace with the increasing yields.

This combination of rising dividends and capital appreciation sets you up to earn 21.1% or more a year, on average, with almost no effort or active investing at all.

So which “dividend accelerators” should you buy today?

Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!
Bonds

Avoid These 3 Bond Funds When Interest Rates Rise

Are bond funds a safe haven if the stock market crashes?

With interest rates about to rise, is it a good time to invest in a bond fund?

These are questions investors may be asking themselves as the stock market may be peaking and the Fed keeps jacking up interest rates. If you are fearful of what may happen in the stock market, you may also be considering putting money into one of the popular bond ETFs. Read further to understand that a bond fund comes with its own set of risks, ones that the financial services industry won’t tell you about.

Let’s start with the basics of bonds.

When you buy an individual bond, you are in effect making a loan to the issuer. You will receive a fixed rate of interest until the bond matures. At that time, you will receive the face amount of the bond. For example, if you buy a $10,000 face value bond with a 4% coupon yield, you will earn $400 per year in interest and get the $10,000 back when the bond matures.

Bonds are marketable securities, which makes current yields and prices more interesting. Interest payments from bonds are fixed, so the market adjusts for changing interest rates by moving bond prices. Using the example bonds, if current interest rates were greater than the 4% coupon, the bond would sell at a discounted price, below the $10,000 face value. If current rates for comparable bonds are lower than 4%, the bond would be priced at a premium, or higher than the $10,000 face amount. If you think about it for a while, this makes sense. Changing bond prices allow bonds to reflect current rates.

When you buy a bond at a discount or premium price, the dealer will quote you a yield-to-maturity. This is the actual annual return you will earn, accounting for the discount or premium and coupon payments if you hold the bond until maturity.

Now you know more about bonds that the majority of bond fund owning investors.

The next step is to understand how a bond fund or ETF differs from owing individual bonds. The fact that bond fund investors don’t grasp is that a bond fund does not have a maturity date when a face value will be paid. A fund is constantly buying and selling bonds as investors buy and sell shares of the fund. Many funds also have a target duration or time to average maturity. This means they will sell bonds as their maturity shortens to buy longer term bonds. Because of the open-end maturity of a bond ETF, when interest rates go up, bond prices and the fund’s share price will go down and that price will not recover. The only thing that will cash a bond fund’s price to increase is declining interest rates. This means in an extended period of rising rates; bond fund investors will see their principal decline without the possibility of a recovery.

Here are three examples of popular bond funds and what could go wrong with an investment in each.

As a defensive move against rising interest rates you will often see financial advisor recommend a short-term bond fund such as the Vanguard Short-Term Bond ETF (NYSE: BSV), which $25 billion in investor money.

This fund has an average portfolio duration of 2.7 years. A rough rule of thumb is that a bond portfolio will decline by the duration for every one percent increase in interest rates. This means the BSV share price will drop by about 3% for each one percent increase in rates. Not exactly a safety of principal investment. For all of that “safety” you get a current SEC yield of 2.84%.

Bottom line: Short-term bond funds are not as safe as advertised.

High yield bond funds such as the $16 billion in assets iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG) pay a more attractive current yield, but with added danger to your invested principal. High-yield is the term for non-investment grade bonds. These are also called junk bonds.

The low credit ratings of high yield issuers mean the companies behind the bonds are more at risk of default. High yield bonds can be a good investment if the economy is doing well. However, when a recession hits, defaults in the high-yield universe sky rocket.

A fund like HYG will lose significant value as investors run for the exits and the fund managers must sell their best bonds to pay off redemptions.

It could get very ugly and not worth the current 5.7% SEC yield.

The iShares Core U.S. Aggregate Bond ETF (NYSE: AGG) is the largest bond ETF with $56 billion in investor money. The fund is touted as a diversified way to cover the full range of investment grade bonds.

Total bond funds like AGG are the less well informed financial advisors’ recommendation to get bond exposure in an investment portfolio. Unfortunately, this fund has a weighted average maturity (very similar to duration) of over eight years and an SEC yield of just 3.1%. A one percent rise in average rates would cause the fund share price to drop by about 8% a 2% increase would be a mid-teens loss of principal.

Not a good trade off to earn 3% per year.

Pay Your Bills for LIFE with These Dividend Stocks

Get your hands on my most comprehensive, step-by-step dividend plan yet. In just a few minutes, you will have a 36-month road map that could generate $4,804 (or more!) per month for life. It's the perfect supplement to Social Security and works even if the stock market tanks. Over 6,500 retirement investors have already followed the recommendations I've laid out.

Click here for complete details to start your plan today.
Growth Stocks

Capitalize On The Growing Worldwide Airplane Pilot Shortage

I’m a great believer in looking at areas that few on Wall Street do for growth opportunities. I like to find a major positive change happening in the global macroeconomic environment that will benefit a sector or industry and then uncover a company that should benefit from this change in the long term.

I’ve recently discovered such a change and want to bring it to your attention… the growing worldwide airplane pilot shortage.

All of the world’s largest countries, both in the developed and developing world, cannot find enough pilots to fly their planes. This will affect you as a consumer because if airlines cannot find enough pilots, they will reduce service or even drop many routes entirely. But it could affect you more as an investor because of the profit opportunity it offers.

The Boeing and the ICAO Studies

Last summer, Boeing (NYSE: BA) released a study that estimated the world’s airlines will need about 637,000 new pilots over the next two decades to meet demand. That works out to be 87 new pilots entering the commercial ranks every day for the next 20 years!

About 40% of that number will be needed just to replace the pilots globally who will be retiring over the next 20 years. This is a similar problem that I described in the May issue of Growth Stock Advisor with regard to U.S. healthcare staffing as the baby boom generation retires.

The remaining 60% will be needed to cover all the additional flying that airlines are expected to do over the next 20 years, especially in the ultra-fast-growing Asian air markets. That’s one of those positive macroeconomic trends I mentioned earlier – rising incomes in places like China and India are leading to an unprecedented tourist boom emanating from Asia. More on that later.

But even here in the slower growing U.S. market, more pilots will be desperately needed. Boeing said the U.S. market will need about 117,000 new pilots over the next two decades. That’s roughly 5,800 pilots a year or, over three years, it’s the equivalent of the current number of pilots that American Airlines has.

Think about that for a second: imagine if a major airline, like American Airlines, had to replace every pilot every year for the next 20 years. That’s where we are right now and where one of my newest finds fills that niche.

A similar study was conducted by the International Civil Aviation Organization. Its study found that the global airline industry will need 980,000 pilots in 2030, more than double the level of 2010. That will require the training of 50,000 pilots annually.

Just Put More People into Pilot Training, Right?

Bottom line – a lot more pilots will be needed globally. But why aren’t more people pursuing an aviation career?

In simple terms, it isn’t easy to become a pilot.

Even ignoring the physical requirements, it’s darn expensive to become a pilot. Here in the U.S., it costs about $125,000 (on top of whatever you spend for a four-year college degree which is usually required) to get the necessary ground and flight training you need. And thanks to a Congressional mandate, you need to have at least 1,500 flight hours before any passenger airline will hire you.

A Leading Trainer for Professional Pilots

CAE (NYSE: CAE) has been in business since 1947 and offers you a “pure play” training company driven by the long-term growth in civil aviation around the world. That is in contrast to some of its competitors such as L3 Technologies (NYSE: LLL), which are involved in other businesses. The company also is riding the wave of simulation-based training in areas with critical tasks including defense and security as well as healthcare.

It continues to define global training standards with its innovative virtual-to-live training solutions to make flying safer, maintain defense force readiness and enhance patient safety.

CAE has the broadest global presence in the industry, with over 160 sites and training locations in over 35 countries that includes the world’s largest civil aviation network with over 50 training locations, more than 250 full flight simulators, over 2000 instructors and more than 160 aircraft. Each year, CAE trains more than 120,000 civil and defense crew members and thousands of healthcare professionals worldwide.

Source: company investor presentation.

One reason I like CAE is that the company is the leader in these markets, but still with lots of room for growth thanks to the significant, untapped market opportunities that exist in its three core businesses.

While CAE is a market leader in civil aviation training, it addresses less than a third of what the company estimates to be a $3.5 billion training market. Company management is well aware of the incredible growth opportunities here. It says that 50% of the commercial pilots that will be active in 2027 have not begun training yet. CAE predicts there will be a need for 180,000 new captains and 250,000 new first officers over the next decade.

In defense and security, CAE has a 7% share of the approximately $15 billion training systems integrator (TSI) market. In addition to contracts with all the U.S. military branches, CAE also trains people for the U.K. and Swedish militaries as well as NATO.

In healthcare, it is an innovation leader in the simulation-based healthcare education and training market. The company sees significant opportunities for long-term growth as the healthcare market increasingly adopts simulation as a means of training. CAE Healthcare was the first company to bring a commercial Microsoft HoloLens mixed-reality application to the medical simulation market.

By using the HoloLens, the CAE Vimedix AR ultrasound simulator integrates real-time interactive holograms of the human anatomy. If you think back to last month’s issue and the critical need for more healthcare personnel, you realize how much this type of training is needed.

Another reason I like CAE is that much of its revenues are recurring due to long-term agreements with many airlines as well as military services. In 2017, 60% of its revenues were recurring, up from 43% in 2008 and just 15% in 2001.

In addition, of its $2.7 billion in 2017 revenue, 58% came from civil aviation training solutions and 38% from defense and security training programs. The remainder came from its small, but rapidly growing, healthcare business.

CAE’s revenue base has what I like too – a broad geographic mix with 36% of 2017 revenue coming from the U.S., 28% from Europe and the remaining 36% from the rest of the world. It is the latter area that is growing the quickest thanks to the aforementioned rapid growth in Asian airline travel.

The macrotrends I have been telling you about are already coming together to boost CAE. The evidence can be seen in its latest fourth quarter and full fiscal year results, which sent the stock up 5% immediately afterwards. Let me fill you in on some the details…

Annual fiscal 2018 revenue was C$2.8 billion, up 5% from the prior year. Annual net income attributable to equity holders from continuing operations was C$347.0 million (C$1.29 per share). This includes an income tax recovery related to the U.S. tax reform, and net gains on strategic transactions relating to CAE’s Asian joint ventures: Asian Aviation Center of Excellence and Zhuhai Flight Training Center.

Marc Parent, the company’s president and CEO, summed up the company’s performance:

“CAE’s training strategy is proving successful as evidenced by our strong performance in the fourth quarter and fiscal year 2018 and our delivery on our growth outlook across all segments. I am especially pleased with our increased momentum to be the recognized global training partner of choice, as underscored by a record $3.9 billion annual order intake and $7.8 billion backlog. We grew earnings per share by 8% this year and increased return on capital to 12.3% on higher training demand and the deployment of accretive growth capital. In Civil, we grew segment operating income by 12% and booked a record $2.3 billion in orders, and in Defense, we grew segment operating income by 6% and booked a record $1.4 billion in orders. In Healthcare, we resumed growth with the launch of innovative products and a broader market reach. Our core markets benefit from strong fundamentals and secular tailwinds, and as we look to the year ahead, we expect CAE to exceed the underlying rate of growth in these markets.”

I especially like his last statement saying that CAE would exceed the underlying rate of growth in markets that are experiencing accelerating rates of growth themselves. But keep in mind CAE is a company with solid fundamentals behind it and not some company that adds blockchain to its name, sending the stock soaring.

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Source: Investors Alley