Daily Archives: November 13, 2018

Dividends

Buy These 3 High-Yield Stocks to Survive Split Government

The midterm elections left the U.S. with the House of Representatives controlled by the Democrats, Republicans tightened their hold on the Senate, and President Trump has the bully pulpit and veto power. That is a formula for real bi-partisan compromise or a government that will have trouble just passing a budget. I will be a skeptic until proven otherwise.

On the stock market front, a deadlocked government means that stocks will be evaluated more on their fundamentals, and not on whether new government policies will help or hurt. It will be a good time to be a dividend focused investor.

Here are three ongoing economic trends and an income stock that is a way to play each trend.

The Federal Reserve Board will continue to increase short term interest rates. The Fed’s primary goal is to keep the economy from overheating and bring on a high level of inflation. Higher rates will also give the Fed the tool of rate cuts to soften the next recession.

Out in the real world, higher interest rates mean that the recent trend of the preference to rent housing vs. buying a house will continue. Among those that rent, 78% of tenants believe that renting is more affordable than owning, up significantly this year.

AvalonBay Communities, Inc. (NYSE: AVB) is a large-cap apartment REIT. The company develops, owns and manages apartment communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California.

As of the end of September Avalon had direct or indirect ownership interest in 290 apartment communities containing 84,490 apartment homes in 12 states and the District of Columbia. Another 34 communities were in development or redevelopment.

For the 2019 third quarter, the company reported same store net operating income growth of 3.1%. Average blended rent growth was 3.2%. These are strong, sustainable numbers.

The AVB dividend has a five-year average annual growth rate of 8.0%. The current yield is 3.3%.

Growing energy production from renewable sources is supported across the political spectrum. Another factor is that the cost of development of wind or solar power facilities has declined to a level where they are competitive with construction of new traditional fuel power plants.

This means that new renewable energy projects do not need government subsidies to compete. Yieldco types of companies are the final owners of many renewable energy projects. These are great income stocks with built in growth prospects.

Clearway Energy (NYSE: CWEN) is a renewable energy Yieldco where the controlling party recently changed. Clearway was founded as NRG Yield by utility company NRG Energy (NYSE: NRG) and the utility developed renewable projects to sell to the Yieldco.

In August 2018 NRG sold its sponsor interest in NRG Yield to Global Infrastructure Partners (GIP), a private investment company that makes equity investments in a range of infrastructure assets. The change of control does not affect Clearways prospects to continue annual 5% to 8% dividend growth.

Current yield is 6.7%.

Renewable energy is growing, but so is U.S. onshore crude oil production. The growth in oil production from the Permian Basin is truly amazing, going from one million barrels per day in 2011 to 3.5 million bpd in 2018 and a forecast 3.9 mbd in 2019. I have seen forecasts of 7 mbd by the middle of the next decade.

The limiting factor to this oil gusher is pipeline take away capacity to refiners and the Gulf Coast export terminals. The region needs over one million barrels per day of new pipeline capacity – which will come on line in late 2019. By then more pipeline capacity will be needed.

Plains All American Pipelines LP (NYSE: PAA) is the largest independent owner of crude oil gathering assets, pipelines and storage terminals. The company just announced its newly commissioned Sunrise Pipeline is transporting 300 to 350 thousand barrels per day of crude oil out of the Permian to the Texas Gulf Coast.

The Plains business model lets it often collect several fees from a barrel of oil. These can be gathering charges, pipeline fees on more than one pipeline, and storage fees.

This MLP has gone through significant restructuring since the energy market crash of 2015-2016 included a pair of distribution reductions. The 2018 third quarter earnings report shows the company is back on a growth trajectory and should start growing dividends in 2019.

PAA currently yields 5.0%.

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Pot Stocks

Aurora Cannabis Stock Hasn’t Reached Its Peak Yet

marijuana stock

Source: Shutterstock

The marijuana stocks have been smoking hot in 2018. Some of the wildest trades of the year happened in Tilray (NASDA:TLRY) for example. This is a sector that exploded on to the market and has immediately amassed a die-hard fan base. But trading pot stocks has not been for the faint of heart. These are momentum stocks and they move even faster than Amazon(Nasdaq:AMZN) and Netflix (NASDAQ:NFLX). Aurora Cannabis (NYSE:ACB) is no different. ACB stock as seen several moves over 50% in either direction. So it’s never going to give investors an easy point of entries or exits.

For decades, pot was taboo, so it has never was a topic of conversation on Wall Street. But now that legalization of marijuana is becoming more ubiquitous, the concept of commercializing its uses is a valid thesis. There are several companies that have attracted mainstream investments like Constellation Brands (NYSE:STZ) did with Canopy Growth (NYSE:CGC). They invested $4 billion dollars so they can tap into the market.

Canada has been at the forefront of this movement. Some states in the U.S. have also been there but the big one would be at the federal level. Until that happens the risk in those stocks is still high. Therefore, I would only consider investing in ACB as a speculative thesis within a conservative portfolio.

From an evaluation perspective, the company sells at an 82 price-earnings ratio, which is almost Amazon territory. But unlike Amazon, its future is not as set in stone yet. But therein lies the opportunity.

This Canadian-based company is a legitimate competitor in the field. They are well diversified within it and already are in 20 countries. So it’s a matter of time as the legalization expands before they grow into their potential.

There’s not much expert opinion out on these companies, and in any case, I don’t think there are too many experts yet as the field is still too young for Wall Street to entirely grasp. So it’s a matter of picking a few of the potential winners and holding them for the long term.

In lieu of picking winners, one can invest in an ETF like the ETFMG Alternative Harvest ETF (NYSEARCA:MJ). But sometimes a targeted investment in one company or two is perhaps a smarter decision than a blunderbuss approach.

Technically, ACB stock failed at $12 per share but has so far found hard support around $4.5 dollars per share. This is a wide range of short-term pricing. However, the bulk of the action has been around $7 per share with supports the concept that somewhere in the middle of two extremes lies the truth.

When committing to a long-term thesis, I don’t worry about pennies in order to snipe the perfect entry point. I learned long ago that I don’t aim to pick the very best point of entry in momentum stocks. As long as my thesis is correct over the long-term the goal will come.

So if the marijuana trade is a viable one, and if ACB stock market does not crash in the mid-term, Aurora Cannabis stock should be higher in 2019. For now, investors will have to contend with the headline threats that loom.

We have a tariff war between the U.S. and China, we also have a U.S. Fed that’s in a tightening phase, which could hamper equity investments into 2019. But still, the macroeconomic environment looks conducive for more upside.

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