Investors Alley

As earnings season winds down, a review of the stocks recommended through my newsletters that my subscribers received a lot of excellent dividend news. Dividend growth generates annual total returns that work through the market cycles—no timing required.

A couple of recent examples illustrate my point – and show how you can get in on this great strategy, too…

A dividend growth strategy involves buying shares of stocks where the company regularly—usually annually—increases the dividends it pays to shareholders. If you calculate the average annual total returns of dividend growth stocks, you will find that over the long term, you get a compound annual growth rate that comes very close to the average dividend yield plus the average dividend growth.

Dividend increases can also help a stock price in the shorter term. Last week we saw a dramatic example.

On Tuesday, March 7, the Dow Jones Industrial Average closed down 575 points, and the S&P 500 dropped by 1.5% for the day. That day, Dick’s Sporting Goods (DKS) gained over 11%. Dick’s released fourth-quarter earnings showing excellent results. A significant factor for the share performance was the fact that the company more than doubled the quarterly dividend going from $0.4875 per share to $1.00. The boost also doubled the yield to 3.0%.

Before the big increase this year, the DKS dividend had been growing by more than 20% per year. Investors have seen a 380% total return over the last five years. I suspect the growing dividends had something to do with those great returns.

In February, the Federal Agricultural Mortgage Corp (AGM) increased its dividend by 16%, going from $0.95 to $1.10 per share. Through most of the first quarter, when the broader market was up about 4%, AGM appreciated by 26%. The AGM dividend average growth for the last decade was 20% per year, meaning investors in the stock enjoyed a 400% total return for the ten years.

I hope boards of directors realize that few things help a share price more than meaningful dividend increases. Share buybacks are a hot topic these days, but I think returning cash to shareholders as growing dividends produces better returns for those investors.

I employ a dividend growth-focused strategy with my Monthly Dividend Multiplier service. I provide a model portfolio and track the returns. The portfolio consistently outperforms the S&P 500.
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Everyone pretty much agrees that we will—eventually, at least—transition from a fossil fuel-powered economy to one powered by less polluting energy sources.

However, as this energy transition gains speed, the risk of chaos emanating from it is rising. Here’s why…

Today, investment in new oil and gas supply is well below what it was a decade ago. And investment in clean energy, though accelerating, is not increasing as quickly as it needs to.

Fast forward to a few years in the future and that could translate to a very large mismatch between ever-rising energy demand and energy supplies. The end result would be a replay of what we saw in the aftermath of Russia’s invasion of Ukraine, with energy prices rising rapidly, forcing governments to help their citizens heat their homes and fuel their vehicles—but magnified by several times.

As investors, here’s how we position ourselves for this possibility…

Oil Companies Are Not Investing Enough

A great article from the Financial Times’ Energy Source newsletter explained that one main reason for this is simply that oil and gas companies are just not investing as much as needed into increasing future production.

Despite record profits last year, oil and gas companies globally invested about $310 billion into capital spending. This was far lower than the $477 billion they invested in 2014. The rest of their profits went toward share buybacks, dividends, and paying down debt. If oil and gas companies had invested the same percentage of profits into finding more oil and gas as they did 10 years ago, the oil and gas firms could have invested an estimated nearly $600 billion.

There are a couple of reasons they did not. First, after many years of poor returns—especially in the shale sector—investors want to see their money coming back. But more importantly, the energy market is responding to policy efforts to cut down on future demand for fossil fuels.

Luisa Palacios is the co-author of a new research paper, entitled Investing in Oil and Gas Transition Assets en Route to Net Zero, from Columbia University’s Center on Global Energy Policy. She told the Financial Times: “What we’re looking at is an energy transition not where demand adjusts first—but an energy transition where supply adjusts first.”

So, while fossil fuel energy supplies are being adjusted downward—even as demand rises—we will need a bigger contribution from clean energy sources. However, investments there have not risen fast enough. They currently sit at a ratio of 1.5:1 compared to fossil fuels. Estimates are that this needs to increase to 9:1 by 2030 if net zero goals are to be achieved.

This all adds to a real mess on our hands in the near future with regard to energy as the transition happens…and it also leads to the companies that produce fossil fuels making a lot of money.

Energy Transition Winner

My favorite companies in this area continue to be the European oil companies, which are trading at much lower valuations than their American counterparts.

For example, Exxon and Chevron are valued at about six times their cash flow. That compares with about three times for Shell. And U.S. oil firms have a price-to-earnings ratio of around 8, while European oil stocks have a P/E of around 4! The reason for the lower valuations is ironic. Investors are rating these companies lower because they are slowly transitioning away from fossil fuels to clean energy.

Among the European majors, an interesting company is Norway’s Equinor ASA (EQNR), which produces more than two million barrels a day of oil and its equivalent, split evenly between oil and gas. Two-thirds of its output comes from its prolific Norwegian offshore fields.

European natural gas accounts for about a third of its total output, and most of it is sold on the spot market, benefiting from any spike higher in prices. But, unlike some of its European peers, Equinor plans to grow oil and gas production through 2026, at about a 2% compound annual growth rate.

The company made a record-adjusted pre-tax profit of $75 billion last year, thanks to all-time high natural gas prices. This helped it emerge as one of the biggest winners of the energy crisis, as Norway replaced Russia as Europe’s largest supplier of natural gas.

The $75 billion annual pre-tax earnings smashed the group’s previous record of $36.2 billion in 2008 when oil prices reached record highs of more than $140 a barrel. Adjusted earnings for the year after tax were $22.7 billion, up from just $10 billion in 2021.

Another company characteristic that I love is that Equinor has no net debt, giving it one of the best

balance sheets among the major energy companies and leaving lots of room for dividend growth (current yield 8.26%).

Speaking of payouts to shareholders…the company said it would increase returns to shareholders to an expected $17 billion this year, citing its strong earnings, outlook, and balance sheet.

Equinor increased its cash dividend to $0.30 a share for the last three months of the year, from $0.20 a share in the third quarter, a 50% increase! It will also introduce an “extraordinary cash dividend” of $0.60 in 2023, and plans to buy back $6 billion of shares in 2023.

The proposed $17 billion of payouts this year is equivalent to around 18% of the company’s total market capitalization.

Like other oil stocks, Equinor’s stock has been under pressure and is down 4.25% this year to date. That gives us a nice entry point, at anywhere in the $29 to $33 range.
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I’m looking at a chart comparing bond yields correlated to the US economy. 

Right now, there are extreme readings in a pattern not ever seen. 

Usually, as the economy goes down, so do bond yields and vice versa. 

However — right now, economic data is worsening quickly but bond yields are rocketing higher. 

I have not seen this before. 

Why does this matter? 

Because it will eventually affect equities in a major way. 

Every Thursday, I release a short, free video sharing an insight for the week. This is what I want to show you today. 

I’ll share in this 2 minute video WHEN I expect equities to make a major move based on this chart I’m looking at. 

Click here to see my prediction. If you’d followed me the past year,  you would’ve sold most of your risk assets at the end of 2021. 
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Silvergate Capital (SI) is a crypto-friendly bank that is down over 60% in a week (at the time of this writing). The regional bank is getting hit hard after admitting the company has concerns about its operational viability after the collapse of the crypto market in recent months. Several short-term options block trades suggest that

A popular method of trading the energy sector is by using the Energy Select Sector SPDR ETF (XLE), which tracks the energy stocks of the S&P 500. A strategist placed a call ratio spread last week that likely signals bullish expectations in energy stocks through April. A ratio spread is a way to reduce the

Everybody loves tech stocks.

After all, technology has changed the world and will continue to do so. The hard part is picking those tech stocks that will be the winners over time, and deliver potentially life-changing returns to shareholders.

In tech stock investing, getting caught up in a story is even easier than usual.

Consider my favorite story about tech stocks. This story came true, but the company’s valuation at its peak, when excitement was at its highest level, was so high that investors in the stock still are not even. And given that the peak came in 2000, that is a long time to be underwater.

Here’s how to avoid that trap – and invest profitably in tech…

The company I mentioned above is Cisco Systems Inc. (CSCO). Cisco was and is the company that made the internet possible. Its routers and switches dominated the market back in the 1990s as the internet boom took off.

The stock peaked at $88 a share in 2000 and has never even come close to that level again. As I’m writing this, 23 years later, it’s trading below $50 a share.

And yet Cisco went on to change the world as we know it. The company does more than $11 billion in revenue each year. It has bought hundreds of smaller tech companies, adding new and growing technologies to its product line. It continues to be the market leader in networking technology, and is also a leader in the fast-growing cybersecurity field.

If the stock gains 40 points, those who jumped on the bandwagon at the height of the excitement will finally be even.

Zoom Video Communications Inc. (ZM) is a more recent example of too much excitement over a tech stock, causing investors to get crushed.

The videoconferencing platform made the difference between the economy functioning and the U.S. economy spiraling into a Lord of the Flies situation during the pandemic.

DocuSign Inc. (DOCU) was another part of the dynamic duo that saved the economy in 2020 and 2021.

Those two companies made business possible during lockdowns and the subsequent reluctance to travel for business in the early stages of the pandemic. And as pandemic restrictions have eased, everything the pundits and talking heads told you about these companies has happened: they made doing business easier. They helped save on travel costs.

Investors naturally got excited. And, as is almost always the case, they got too excited and paid too high a price: Zoom and DocuSign are both now more than 80% off their highs.

How do we avoid being caught up in the too-excited aspect of investing and still participate in the amazing gains technology can provide?

My suggestion is that you steal ideas from a wildly successful technology investment firm that you probably have never heard of before. Or, if you have, it is because a few years ago, the founder paid off the student debt of the 2019 graduating class of Morehead College, a Historically Black University in Atlanta, Georgia.

My pick for technology ideas is Vista Equity Partners. Robert Smith’s private equity firm specializes in software companies and has a fantastic track record. Over the past decade, they have crushed the S&P 500 in both its private and public equity portfolios.

Buying the top ten public companies owned by Vista Equity partners has been a very successful way to both participate in the high returns of technology stocks and avoid many of the spectacular wealth-crushing declines of some of the most popular stocks.

As is usually the case, I will give you one pick I find exciting and let you do the leg work at SEC.gov if you want to see what else Vista Equity owns.

Vista bought PowerSchool Holdings Inc. (PWSC) in 2015 from the British publishing company Pearson Plc (PSO) and has made add-on acquisitions to grow the company ever since.

PowerSchool provides cloud-based software to North American schools that allows them to communicate with students, handle regulatory and compliance issues, take attendance, record grades, and just about everything else involved in running an education system.

Vista sold part of the company to the public back in 2021 but still owns about 37% of PowerSchool. To cash in on the rest of its incentive fee, the team at Vista needs to help PowerSchool management get the stock price as high as possible.

I am a huge fan of Ed-tech stocks, and PowerSchool has what it takes to be a leader in the sector. The more I learn about the company, the more I think PowerSchool could be a long-term ten-bagger or more for patient, aggressive investors.
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The U.S. economy will likely experience a recession this year. We may already be in one. I believe the 2023 slowdown will be significantly different compared to recent economic contractions.

Memorable recessions are usually associated with a larger financial crisis, such as the bursting of the dotcom bubble or out-of-control subprime mortgage lending, such as what we saw with the Great Financial Crisis.

I am calling the current/pending negative growth an earnings recession.

But here’s the thing – this won’t really spread to the wider economy. Or to our portfolios, as long as you do this one thing…

Let’s start with this graphic from a recent Wall Street Journal article:

You can see that corporate earnings are forecast to decline over the first half of 2023. This doesn’t mean that U.S. corporations will lose money. It means that company profits will decrease. Most U.S. corporations will still be profitable, but the profits will likely decline compared to the same periods last year.

The most significant cause of declining profits comes from higher interest rates. As a company has to pay more on its debt, less money falls to the bottom line.

I don’t think the profit slowdown will spread to the broader economy, which would result in higher unemployment numbers. Companies that hired too many employees over the last couple of years might right-size their numbers, but there will not be widespread layoffs. This situation means anyone who wants to work will still have a decent-paying job, and those workers will continue spending like Americans.

The earnings recession will leave regular folks feeling okay about their finances. Investors face a different challenge. They will need to put a value on the shares of companies where profits are going down. Markets don’t like that. For example, last week, New Fortress Energy (NFE) missed on revenue, and the share price dropped by 15% in one day. NFE will be an outstanding long-term stock, but it was a tough day. I picked up a few shares.

The best chance for attractive returns in 2023 will be high-yield stocks in sectors that are either immune or benefit from the current situation with interest rates and inflation.

Energy infrastructure will be one sector with growing cash flows and dividends. To my subscribers, I recommend exposure through the InfraCap MLP ETF (AMZA). The fund boosted its monthly dividends in January and currently yields 8.7%.

Business development companies (BDCs) are killing it with higher interest rates. BDCs lend to small and medium-sized corporations. These loans are almost exclusively floating rate, so higher interest rates mean higher profits. There seems to be daily news about another BDC boosting its dividend rate. For example, Blackstone Secured Lending (BXSL) recently raised its dividend by 16%, giving a current yield of 11%.

I added a fourth BDC to the recommended portfolio with the March newsletter for my Dividend Hunter service. The sector will be so good for investors in 2023.
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Last week the U.S. stock market experienced its biggest one-day decline in several years. A rapid yield increase on the 10-year Treasury note triggered the stock market route.

The market runup in January was due to investor expectations that the Federal Reserve would soon start to ease interest rates.February reversed that enthusiasm, and the stock market gave back almost all of those January gains.

My advice is to stop trying to guess what will happen with interest rates and instead take advantage of the yields you can earn on short-term investments.

Let me show you how…

This chart of the 10-year Treasury yield from the Wall Street Journal shows the rise and fall and rise of the note’s yield:

The increase in interest rates is not good news for stock market investors. But it is good news if you put your money into interest-paying investments. Here are a couple of ideas.

Money market mutual funds hold a stable one-dollar share price and carry yields based on short-term interest rates. These funds currently yield 4.2% to 4.5%. Your brokerage firm offers a choice of money market funds, letting you choose from government, corporate, or tax-free municipal holdings in the portfolios. These funds give you 100% liquidity and attractive yields.

I have recommended the Invesco BulletShares fixed maturity bond ETFs for more yield to my Dividend Hunter subscribers. These funds have staggered maturities that lock in your yield to maturity. The funds redeem in December of the designated year. The Invesco BulletShares 2024 High Yield Corporate Bond ETF (BSCO) sports a 7.36% yield-to-maturity, and the Invesco BulletShares 2025 High Yield Corporate Bond ETF (BSCP) will pay 8.44%. With these funds, you will earn the yield-to-maturity, or very close, if you hold the shares until redemption.

You should also look at business development companies (BDCs) for some stock market ideas. These companies lend to medium-sized corporations. Their loans are almost 100% floating rate, and they are killing it in this market. This chart from Owl Rock Capital Corp. (ORCC) shows the positive earnings impact of rising interest rates:

The recently declared dividend from ORCC is 19% higher than last year’s rate. The shares yield more than 10%. I have increased the number of BDCs in my Dividend Hunter portfolio to four.
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2022 was truly a breakout year for generative artificial intelligence (AI), which can produce fluent textual responses to questions, draft stories, and generate images on demand.

But generative AI really came to the fore for investors after Microsoft (MSFT) made the decision in January of this year by to invest $10 billion in OpenAI, the creator of the chatbot sensation ChatGPT.

Microsoft stock itself jumped more than 12% shortly after the deal announcement, adding nearly $250 billion to the company’s market cap. The rise was based on hopes that the underlying technology will live up to the prediction by Satya Nadella, the company’s CEO, that it would “reshape pretty much every software category that we know.”

But the true winner of the AI wars won’t be Microsoft. Here’s who you should be looking at instead…

The AI Wars are About Chips

It’s little wonder that an all-out struggle seems to have broken out to see what company will dominate this brave new world of AI. The players include Microsoft, Google, and a host of others.

However, Wall Street thinks it already knows who the ultimate winner will be…the ‘picks and shovels’ companies that manufacture all the “weaponry” the combatants will be using.

And what are these weapons? They are the advanced chips needed for generative AI systems, such as the ChatGPT chatbot. According to Richard Waters of the Financial Times, “…investors are not betting on just any manufacturer” for the production of these chips. In a February 17 article, he pointed out that Nvidia Corp.’s (NVDA) graphical processing units (GPUs) dominate the market for training large AI models. The company’s shares have surged 45% already in 2023.

And as Waters pointed out, the stock has nearly doubled since its low in October. That was when Nvidia was in investors’ doghouse due to a combination of the crypto bust (crypto miners widely used Nvidia’s chips), a collapse in PC sales, and a bungled product transition in data center chips.

It does look like GPUs will be critical in this war to dominate in AI. Besides the job of training large AI models, GPUs are also likely to be more widely used in inferencing—the job of comparing real-world data against a trained model to provide a useful answer.

Waters quoted Karl Freund at Cambrian AI Research, who said that, until now, AI inferencing has been a healthy market for companies like Intel Corp.’s (INTC) that make CPUs (processors which can handle a wider range of tasks, but are less efficient to run). However, the AI models used in generative systems are likely to be too large for CPUs, requiring more powerful GPUs to handle the task.

Just five years ago, some on Wall Street predicted that GPUs were yesterday’s news and would not be needed in AI as much as competing technology like ASICs (application-specific integrated circuits).

Yet, here we are today and Nvidia is sitting on top of the mountain. Much of that, as Waters explains, is thanks to the company’s Cuda software, which is used for running applications on Nvidia’s GPUs. Nvidia also has a new product hitting the market at just the right time, in the form of its new H100 chip. This has been specifically designed to handle transformers, the AI technique behind recent big advances in language and vision models.

According to Nvidia, a transformer model is a neural network that learns context, and thus meaning, by tracking relationships in sequential data like the words in this sentence. Transformer models apply an evolving set of mathematical techniques, called attention or self-attention, to detect subtle ways even distant data elements in a series influence and depend on each other.

Why Buy Nvidia?

Of course, there are competitors infringing on Nvidia’s space, including all the “Big Tech” companies. Waters pointed to how Google decided eight years ago to design its own chips, known as tensor processing units, or TPUs, to handle its most intensive AI work. Amazon and Meta have followed a similar path.

At Microsoft, its success in generative AI owes a lot to the specialized hardware—based on GPUs—it has built to run the OpenAI models. However, in the chip industry, rumors have been swirling lately that Microsoft is now designing its own AI accelerators.

Despite all of this, I suspect that five years from now, the company will still be a major force in AI, building on its current first-mover advantage in chip solutions for AI.

Buy NVDA on any tech stock weakness, in the $180 to $220 range.
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