Investors Alley

The 2022 bear market hit high-yield stocks (except for energy stocks) hard, and my subscribers sent me many questions about the status of their investments. One stock, in particular, moved relentlessly down, making investors wonder if the company’s big dividend was safe.

Last week, the patience paid off, and investors who averaged down are back to even, with a 25% lower share price.

Let’s take a look at how this approach really pays off for dividend investors…

My addition of OneMain Financial (OMF) to the Dividend Hunter recommendations list was not very timely. I first recommended the stock in November 2021, soon after it peaked at just under $60 per share. From the fall of 2021, the share price declined steadily for a year. This chart shows OMF from October 2021 until October 2022. You can see the near straight-line decline and the share price halving.

Through the year-long decline, I monitored OneMain’s financial results, and the company continued to pay a $0.95 per share quarterly dividend. Earnings came in each quarter as expected, and for 2022, the company earned over $7.00 per share.

The share price bottomed in late September 2022 at just under $29 per share. From October until the fourth-quarter earnings were released last week, OMF reversed course, reaching $42.30 the day before earnings were announced on February 7.

Those earnings were in line with Wall Street estimates, and the company announced a 5% dividend increase, to $1.00 per share. The share price popped higher by more than 10% on this news.

The moral of this tale is that through the year-long decline, I trusted the fundamentals and continued to add shares. I recommended the same to my subscribers, suggesting building up a position with small purchases as the share price continued to fall.

I bought my first shares in November 2021 for $59.20 per share. By averaging down, my cost per share is now $47.60. My position is now close to profitable, and I suspect it will soon turn positive. Over the last year, I also earned $3.80 per share in dividends, and my position has a yield on cost of 8.5%.

The averaging down of OMF to a profitable position happened because I understood that the OMF financial results were fine and that the share price decline was unwarranted.

Oil giant BP (BP) posted strong earnings last week, accompanied by a dividend hike and share buyback. The stock price jumped from $34 to over $38 in just two days. Judging by a block trade in BP options, the stock could remain elevated into March. A trader purchased 10,000 covered calls which collect about 1%

The markets are showing some signs of rolling over into a big move downward, but not soon.

The tug-of-war between what the Federal Reserve says and what the market hopes the Fed will do continues to be front and center for equity prices.

In other words, nothing much has changed since we last spoke. But there are still some great buying opportunities for those willing to go against the grain.

Take a look at this one…

Most traders who are active today have never seen a series of rate hikes like we have seen in the past year. This has been one of the fastest rate increases ever, with the fed funds rate going from a functional zero to 4.75% in a very short period of time. More to the point, with something close to 80% of all trading done by algorithms, none of the people who programmed the black boxes have even seen inflation and rising rates.

The result is a market that is choppy and sloppy.

There are signs of momentum rolling over, but it has not happened yet.

Most mid to large capitalization stocks are still somewhere between moderately and ridiculously overvalued. Instead, market conditions like this have historically been an excellent opportunity to shop for some stocks no one cares about but are likely to be much higher a few years from now.

The first stock that is worth consideration for patient investors is CarMax (KMX). I have to confess to some bias here, as we bought a vehicle at CarMax in 2021, and it was the best car-shopping experience of my life.

We needed a car to replace my wife’s old CRV. Unfortunately, our youngest daughter had wrecked her new car, so we gave her the old Honda (HMC), a reliable tank, and went shopping for a new one. The Honda salesman was willing to part with a new CRV for just $15,000 over sticker at the time.

After a few minutes of exponentially expanding the vocabulary of the salesman and his boss, we left and left. I pulled into the CarMax lot a few miles down the street on a whim. We found a year-old CRV. (My wife loves them for some reason. This one is her third in a row.) The price was fair, the vehicle history checked out, and the salesman was fantastic. We were in and out in less than an hour.

Neither my wife nor I are car people, so a good car at a good piece is all we ever need. We have better things on which to spend our money than cars. Given the high level of service and great prices we got, I doubt we will ever buy another car anywhere but CarMax again.

CarMax has the size and scale to price its inventory well under its competitors. Its sales strategy is to develop happy customers, not realize the highest gross profit attainable on every transaction. CarMax salespeople are paid the same commission on every car they sell, regardless of price. They have no idea what the profit margin is and no incentive to fight for every possible dollar.

The company is prepared for an economic slowdown, and its pricing and sales strategy should be an advantage in a slowing economy.

Management expects revenue to grow by 12-29% over the next several years, accelerating the growth rate from 2000 through today.

CEO William Nash obviously thinks his company’s stock is a good buy, seeing as on December 30, he broke out his checkbook and spent more than $500,000 to add to his ownership stake in CarMax.

CarMax is not statistically cheap at the current price. The stock is trading at about 21 times earnings right now. However, a customer-first sales and service policy in an industry that has made customer abuse a hallmark should enable CarMax to continue to excel at its business and reward shareholders.

Until 2013 CarMax committed 100% of its capital to opening new brick-and-mortar dealerships. That year, the company began buying back stock and has repurchased shares every quarter since. The share count has been reduced by almost 30% in the years since.

The current buyback authorization still has more than $770 million left, so buybacks will continue to be a part of CarMax’s strategy to build shareholder value.

Buying a little here and adding shares in every steep selloff in the broader market will have enormous long-term rewards for patient-aggressive investors.
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A lot of investors avoid Schedule K-1 reporting investments. These tax reporting documents can add significant extra work at tax filing time. On the flip side, K-1 investments typically pay tax-advantaged distributions. There exist a matched pair of stocks that lets us see how much the investing public values the simplicity of Forms 1099 over Schedules K-1.

One problem with K-1 investments is that owning this type of security in qualified retirement accounts such as IRAs can lead to significant tax expenses and penalties.

So, let’s go over a very popular energy income investment that uses K-1s – and see how you can get similar payouts without the K-1 hassle…

Companies organized as partnerships send out Schedules K-1 to limited partners for tax reporting. There are publicly traded partnerships, and you can spot them by the LP at the end of the name. Energy midstream master limited partnerships (MLPs) are the most common type of publicly traded partnership. There are also financial firms and shipping companies organized as partnerships. Again, most LPs send K-1s, but not all. The only way to check for sure is to go to a company’s investor relations web pages.

Plains All American Pipeline LP (PAA) is an MLP that owns and operates crude oil pipelines and storage facilities. PAA recently restarted distribution growth, and it is one of the most attractive MLPs for income-focused investors.

The distributions paid by MLPs are not taxable income. They will be classified as a non-taxable return of capital. The tax consequences of owning MLP units come when you file taxes and report the Schedule K-1 information. You benefit from non-cash expenses that reduce taxable income as a limited partner. In general, the income from MLP investments can be viewed as tax-free income.

Plains GP Holdings, LP (PAGP) is a limited partnership where each share is backed by one PAA unit. PAA and PAGP are essentially equivalent investments, except that PAGP sends out a Form 1099 for tax reporting. The 1099 reporting means you do not have the Schedule K-1 filing challenges. PAGP distributions pass through the tax advantages of MLP distributions, and PAGP shares are safe to own in qualified retirement accounts.

Due to the differences between 1099 and K-1 reporting, PAA and PAGP trade at different prices; however, they do pay the same dividend rates.

As I write, this PAA is priced at $12.72 and yields 8.41%.

PAGP shares trade at $13.20, giving a yield of 8.11%.

Investors who pick PAGP over PAA pay a 3.8% premium to avoid potential Schedule K-1 issues. Put another way; the 0.3% yield difference equals $30 per year of income per $10,000.

In my Dividend Hunter service, I have a policy of never recommending any K-1 reporting investments. I am happy Plains offers a 1099 reporting choice, and I have PAGP as one of my recommended investments.
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The world’s major oil companies have all reported record annual profits. And, despite what Wall Street is telling you, these are still stocks you want to have in your portfolio for both growth and dividends.

One oil major in particular reported some great earnings on February 2, making it a buy. Let’s take a look…

The company in question is Shell PLC (SHEL).

Europe’s largest oil and gas company said that adjusted earnings had more than doubled, to $39.9 billion—smashing the previous record of $28.4 billion set in 2008. That was the highest profits figure in Shell’s 115-year history!

And Shell’s adjusted earnings of $9.8 billion in the final quarter of the year—its second-highest quarterly figure ever—far exceeds average analyst estimates of $8 billion.

Almost two-thirds of Shell’s profits in the quarter came from its natural gas business, which includes the world’s largest liquefied natural gas (LNG) trading operation. That division generated adjusted earnings of $6 billion as Shell sold 16.8 million tons of LNG, up from 15.7 million tons in the third quarter.

The company’s net earnings in 2022 were more than 70% higher than just eight years earlier in 2014. One of the biggest differences between now and then was in the refining division, where refining margins were five times as high!

The other difference was pretty obvious: the normally quiet European natural gas market suffered massive shortages. The Ukraine war meant European gas prices averaged $40 per million BTU in 2022, almost four times what they were in 2014!

Shell’s Big Bet on Natural Gas

Shell’s latest results show that its big bet on natural gas—the $54 billion purchase of BG Group in 2015—was a wise move. At the time, Wall Street hated the move and punished the stock.

Most of the numbers below come from an article by The Financial Times’ Lex team:

Income at Shell’s midstream “integrated gas” division has grown by half since 2014—to $16.1 billion—and now accounts for 40% of Shell’s overall result.

Since 2014, the company has also gotten a lot more out of less. Shell’s cost per barrel of oil in 2022 was about half what it was in 2014, according to Bernstein analysts. That, together with those higher prices for natural gas, means net income from upstream operations was about 2.5 times that in 2014—despite 7% fewer barrels being produced.

Those higher natural gas prices and stronger refining margins helped push Shell’s return on capital employed (ROCE) to about 16%, more than double 2014’s number.

Shell Payouts

Now, let’s look at how Shell has treated its shareholders…

Shell distributed $26 billion to shareholders in 2022—more than 35% of operating cash flow. This included $18 billion in share buybacks. The company said it would buy back a further $4 billion in stock in the first four months of 2023.

The company also boosted its cash dividend by 15% in the fourth quarter, the fifth increase since it delivered a more than 60% cut in the wake of the coronavirus pandemic.

Overall, management is far exceeding its minimum targets of 4% annual dividend growth and shareholder distribution of 20% to 30% of operating cash flow.

Shell Remains Cheap

During the past five years Shell has reduced unit development cost and operating cost by 51% and 26%, respectively. Its goal is to reduce development costs by a further 10% and operating costs by 20% to 30%.

Shell has also reduced and focused investment on the highest quality assets. According to Shell, its slate of new projects will be return accretive with anticipated average returns of 20% to 25%, an average break-even price of $30 per barrel, and an average payback period of seven years. Based on Rystad data, Morningstar estimates Shell’s project queue has an average break-even price of just $42 per barrel, well below the current oil price.

Despite this, Shell remains an unloved, but high-return, investment. Even after the more than 25% share price increase seen in 2022, the oil and gas behemoth remains lowly rated by Wall Street. Shell sits at an EV/EBITDA ratios of 3. EV/EBITDA is a ratio that compares a company’s Enterprise Value (EV) to its earnings before interest, taxes, depreciation, and amortization (EBITDA). The EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different businesses.

I believe Shell stands to benefit more than its peers from the rise in global natural gas demand and likely strong prices for LNG over the next decade as it becomes an integral part of the energy landscape.

With regard to dividends, I would not be surprised to see an increase in the long-term return guidance (as a percent of cash flow) at Shell’s June strategic update. The current yield is 4.42%.

The stock is a buy anywhere in the $55 to $60 range.

Embattled gym equipment company Peloton (PTON) has reversed course in 2023. The stock is up a whopping 114% for the year. A recent block of PTON options suggest there could be another 30% of upside in the next month or so. An out-of-the-money calendar spread traded last week that is maximized if PTON ends up

The Federal Reserve is the swing factor in the current market. The tug-of-war between what the Fed officials have said and what the market thinks the Fed really plans to do is ongoing and makes for a problematic investing and trading environment.

Even our favorite special situations landscape is pretty quiet. Insiders are sitting still, activists are apparently on vacation, and even pending takeovers and announced strategic reviews are fairly priced right now.

Momentum is starting to fade, so we are not enthusiastic about adding to momentum trades, and there is no way I am suggesting we put on deep-value trades after an 8% one-month move in the S&P 500.

But there are two areas where I’m seeing plenty of buying opportunities…

It is a good time to avoid making new investments outside of select small banks and closed-end funds like those I discuss in my Bank Takeover Letter, The 20% Letter, and Underground Income – see below for more on that.

But at a time when it is quiet in the market and we are waiting for Fed- or earnings-related news to create new opportunities, our best use of time is probably to talk about nuclear energy.

In case you are new to the party, I am wildly bullish on the long-term future of nuclear energy and uranium.

I know all the horror stories. I watched Chernobyl on HBO. I watched the flooding and destruction of the Fukushima reactors with the same horror as everyone else. I lived in Baltimore, a mere 80 miles from Three Mile Island, when that fiasco occurred.

The headlines make for some scary reading.

But outside of the headlines, the truth is that nuclear energy is one of the planet’s safest, greenest sources of energy.

Best of all, unlike many renewable energy sources, nuclear energy is available on a 24/7 basis. Now that everyone who listens to the gospel of green and was not driven away by my love of fossil fuels has finally left, the rest of us can look at the reality of nuclear energy.

The war in Ukraine has caused many European governments to reconsider their stance on nuclear energy. Now that our friend Vladimir Putin turned off the gas spigot, windmills and solar panels cannot meet demand—and so Europe has ended up burning coal and wood.

Several nations, including Japan, Belgium, and South Korea, have already changed their outlook on using nuclear energy. And the United States and the United Kingdom have decided that cutting down existing points was not such a good idea after all.

At the same time, the war has interrupted the global uranium supply chain, causing some shortages and driving up prices, creating wider margins for uranium miners.

For the first time, financial buyers such as hedge funds and exchange-traded funds have gotten involved, purchasing significant amounts of uranium. These buyers have no intention of selling until they make many multiples of what they paid.

There are two ways to make money off uranium. The first is to buy the miners—the uranium mining business should be very good for a long time.

Which miners should we buy?

The answer is all of them, so I am going to suggest something I rarely advise. To cash in on the coming boom for uranium miners, your best bet is to buy the Sprott Uranium Miners ETF (URNM).

This exchange-traded fund owns the largest uranium miners in the world. These companies will be the primary beneficiaries of surging uranium demand and soaring profit margins.

Using an ETF allows you to buy most of the global uranium mining industry for modest amounts of cash.

You should also buy the Sprott Physical Uranium Trust, which trades over the counter in the United States with the ticker SRUUF. The trust invests in physical, yellowcake uranium, a form created early in the mining cycle, before fuel fabrication.

The trust currently holds almost 60 million pounds of yellow cake uranium, worth nearly $3 billion. One uranium fuel pellet is the size of a gummy bear and produces as much energy as three barrels of oil, a ton of coal, or 17,000 cubic feet of natural gas.

The green energy advocates will tell you that spent nuclear fuel is a serious hazard and threat to the whole world. But, given that the United States has been transporting and storing spent fuel rods for more than 50 years with no accidents, that would appear to be an exaggeration.

Spent nuclear fuels can also be recycled to produce new fuels and byproducts. For example, while the United States has yet to start recycling, France has been recycling spent fuel since the 1960s and has recovered enough fuel to run its nuclear industry for 14 years.

Nuclear energy has to be part of the global energy plan, or we will go backward in reducing carbon emissions.

We can earn huge profits by owning the companies and fuel that will help drive a cleaner nuclear energy future.
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When markets are choppy (like today)… You have to use more advanced tools beyond simple moving averages and oscillators to identify where the market may go next.  I’m looking at implied volatility for a major ticker at the moment.  The last 2 years, this ticker hit low volatility, we saw big pullbacks.  I’ll share with

Snap (SNAP), parent company of popular social media app Snapchat, posted fairly brutal earnings last week. Concerns over future revenues sent the share price down 10% the following day. However, the options market showed that at least one trader had a differing opinion. A large block of 20,000 calls were purchased, which don’t expire until

For almost a year, the U.S. stock market—as tracked by the S&P 500—has cycled through a narrow trading range, frustrating both bullish investors and bearish investors. The frustration may continue if you have been waiting for a signal that the market has found either a bottom or its next bull market. The current “no-trend” trend could last for months.

But for us income investors, things are looking great. Here’s what I’m looking at…

Let’s start with some history. For illustration, I will use the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 stock index. The 2020-2021 bull market peaked right at the start of 2022. From there, the market fell by more than 20% to become an official bear market.

The initial drop from early January through mid-June, 2022, saw a 22.7% decline in the index (using the ETF for the math). The two-month bounce back between mid-June and mid-August produced a 16.2% increase off of the low, but that peak was still down 10.2% from January’s record high.

The summer rally was short-lived, and the SPY share price again declined to an October low of 27.5% below the record high set in January.

Since that October bottom, the market has struggled higher. Using the lower dotted line, SPY is currently up 9.2% from the initial bottom in June and equal to where the market was last May.

The point of this discussion is that for the last ten months, it has been impossible for investors to pick a bottom at which they feel it is time to get invested, and the uptrends have been very short-lived. I suspect that most investors have muddled through at best, jumping back in just as the short-term up-legs were near their peak and bailing out when it looked like the bear market had returned.

I expect the market to continue with the volatility shown since last June. The news swings almost daily between fears of an economic recession and the restart of the bull market if the Federal Reserve would just stop increasing interest rates.

I can’t remember a year better than 2022 for income-focused investors. The market drops allowed my Dividend Hunter investors to buy the recommended investments at great prices and yields. The economy did fine, so dividends were stable and growing. I expect 2023 to be another great year if your investment goal is to generate a high-yield cash income stream. And why wouldn’t it be?See below to see how to join me in collecting dividends every day on average in Dividend Hunter.
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