Hey There Income Hunters,
Happy New Year!
As I turned the page on 2020, I started thinking …
Stocks actually may be a major beneficiary of the Federal Reserve’s commitment to purchase $120 billion in bonds every month.
By buying those bonds, the Fed is effectively fixing interest rates below their fair value…
This eliminates retirees or savers from earning a positive return after inflation.
Meanwhile, some great investment-grade dividend stocks are undervalued AND offer dividend distributions far higher than US Treasury Bonds.
That’s why it makes total sense for investors to swap out of bonds and add dividend stocks to their income portfolio.
But you have to know where to look…
Time to Hunt Income
The four sectors that ended up negative for the year are also the highest yielding and should do well as vaccines are distributed and we move past COVID.
Take a look at the year-to-date returns of the major US market sectors:
Energy, Real Estate, Financials and Utilities are normally all ideal income producers.
The sectors in general have taken a beating due to COVID lockdowns.
However, many stocks were able to continue paying their dividend and are now undervalued.
Looking forward to 2021, I expect the Fed to increase bond purchases making the dividend stocks appear that much more valuable …
On top of that, if inflation rises as expected then the inflation-adjusted returns of bonds will go further into negative territory and force savers to look elsewhere for returns.
When inflation goes negative like I show below then money HAS to start looking for a higher return elsewhere, even if its viewed as “risky.”
This is all positive for owning those sectors I mentioned so…
Let’s Make Some Money
I did some research for my Income Hunters and found a few excellent candidates in the energy sector…
Before we jump in to a specific stock, I want to share a helpful checklist I use when scanning for good dividend stocks:
- Consistent Dividend Growth. I will be a little flexible here depending on the potential for capital appreciation and also if there is room for earnings growth, which could increase the dividend.
- Solid Dividend Coverage by Both Net Income and Free Cash Flow. Here I like to see a ratio of dividend payment to net income of 80%, and it could be a little higher against free cash flow.
- Strong Balance Sheet (Interest Coverage and Debt/Equity). A debt-to-equity ratio above one is a red flag because during tough times it could force them to cut the dividend.
- See That They Generate a High Return on Invested Capital (ROIC). The golden rule is to find dividend stocks that return over 10% as a total when combining the dividend yield with the dividend growth rate. This can be an average total return of the entire portfolio.
So, here’s a pick that fits the bill…
Enterprise Products Partners L.P. (EPD) is one of the largest and most well-diversified midstream companies in the energy industry.
The company has suffered this year along with most in the sector, despite the fact that its business model is much safer than many of its peers.
How about this comparison …
- EPD is rated BBB+ and yields 9% versus the Fed index of BBB corporate bonds that only returns 2.05%.
It is also very important to see a consistently growing dividend and the company’s debt ratio below 1…
EPD’s dividend is currently growing at 3.5% a year and their long term debt-to-equity ratio is 51% so EPD is not over leveraged by any means.
Bottom line: EPD offers opportunities for growth and income.
I see tremendous opportunity in the first half of next year to build a portfolio of solid dividend stocks in the Energy, REIT and Utility spaces.
EPD is a great pick for a core long-term Power Income portfolio that can grow from $10,000 to $1 million.
That’s something I talk about in my free e-book Turn $10,000 Into $1 Million Without Breaking A Sweat. Grab a copy by clicking here.
It is very doable and in future letters I will introduce conservative option strategies that can further increase overall returns.
Live & Trade with Passion my Friends,
DISCLAIMER: FOR EDUCATIONAL AND INFORMATION PURPOSES ONLY; NOT INVESTMENT ADVICE. The materials presented from Option Pit LLC are for your informational and educational purposes only. Neither Option Pit LLC nor its employees offer investment, legal or tax advice of any kind, and the analysis displayed with various tools does not constitute investment, legal or tax advice and should not be interpreted as such. Using the data and analysis contained in the materials for reasons other than the informational and educational purposes intended is at the user’s own risk.
DISCLAIMER: OPTION PIT LLC IS NOT AN INVESTMENT ADVISOR OR REGISTERED BROKER. Option Pit LLC is not responsible for any losses that may occur from transactions effected based upon information or analysis contained in the presented materials. Specific trading ideas or strategies discussed in the presentations or materials are entirely illustrative and do not constitute the solicitation of a transaction (or transactions) or a recommendation to execute a particular transaction or implement a particular trading strategy.
DISCLAIMER: TRADE AT YOUR OWN RISK; TRADING INVOLVES RISK OF LOSS; SEEK PROFESSIONAL ADVICE. To the extent that you make use of the concepts with the presentation material, you are solely responsible for the applicable trading or investment decision. Trading activity, including options transactions, can involve the risk of loss, so use caution when entering any option transaction. You trade at your own risk, and it is recommended you consult with a financial advisor for investment, legal or tax advice relating to options transactions.