Amid Trillions In Stimulus, These Dividend Stocks Are Strong Buys
Summary
- The big stimulus package that recently passed from the House of Representatives to the Senate has many investors worried about inflation.
- Fear of inflation is fueling the rise in interest rates, which is subsequently pressuring dividend stocks.
- But wasteful and unproductive government spending does not actually stimulate the economy or inflation in the long run.
- As with so many government efforts, there are negative unintended consequences that turn out to be disinflationary.
- A number of high-quality dividend stocks have become very attractive on the pullback.
- I do much more than just articles at High Yield Landlord: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Investment Thesis
Recently, investors have begun to fear that trillions of dollars of federal stimulus money flooding into the economy will result in strong inflationary pressures, which is one reason why interest rates have risen in the last few months. These rising interest rates have spurred a selloff of high-quality dividend stocks, giving investors a great opportunity to buy temporarily cheap shares.
Image Source: Pixabay
American Rescue Plan
The giant stimulus bill recently passed by the House of Representatives contains a wide variety of spending measures, some clearly relevant to COVID-19 and economic recovery, others less so. Titled the "American Rescue Plan," the bill evinces much of the same immoderate largesse that tends to characterize huge spending packages in Congress. The non-partisan Committee for a Responsible Federal Budget estimates that the bill will add $1.94 trillion in deficit spending from 2021 to 2031.
The CRFB argues that the bill "is much larger than the needs of the economy, much of its spending is poorly targeted," and "it includes a number of measures unrelated to the COVID pandemic and economic crisis."
Here are some examples, in my humble opinion, of the profligate spending laden throughout the "American Rescue Plan":
- $422 billion for $1,400 stimulus checks for each individual earning less than $75,000 in adjusted gross income, or couples earning less than $150,000 in AGI, plus an additional $1,400 per adult and child dependent.
- $350 billion for state and local governments that actually ran a collective surplus in 2020 (including a $15 billion surplus in California) and may have even enjoyed slightly higher tax revenue than in 2019, according to the Bureau of Economic Analysis.
- $54 billion to increase the federal minimum wage to $15 an hour by 2025, a policy which has already been disallowed by the Senate parliamentarian.
- $30 billion in grants to transit agencies and Amtrak.
- $25 billion for expansion of federal Medicaid spending.
- $17 billion for Veterans Affairs, which may or may not be worthy spending but has little to nothing to do with COVID-19 or economic recovery.
- $5 billion to provide debt relief and other benefits to "socially disadvantaged" farmers.
- $1 billion for unspecified science, space, and technology spending.
- Tens or hundreds of millions of dollars for "testing and monitoring for COVID... among animal populations."
If all of the above line items were cut from the bill, the total price tag would be reduced by $905 billion to around $1 trillion. That's a little lower than the $1.1 trillion to which the CRFB believes the bill could be reduced.
Why would the $1,400 stimulus checks be wasteful? For three reasons: (1) there have already been two previous stimulus checks, totaling $1,800, which were more easily justifiable because of the status of the pandemic at the time they were sent; (2) checks would be sent for dependents as well, despite hundreds of billions of overlapping relief spending in the package like expansion of the child tax credit; (3) it would be on top of more targeted relief such as enhanced unemployment benefits and expansion of the earned income tax credit (for the lower-income employed).
I acknowledge that this is a controversial opinion on my part and that not everyone will agree with it. That's fine. The more relevant point to investors is what impact the bill will have on consumer inflation and the asset markets.
Inflation Fears Are Unfounded
Perhaps the biggest investor response to this gargantuan spending bill is fear of inflation. As the economy steadily reopens and recovers, fiscal spending that may have more accurately been called "relief" in the middle of the pandemic looks increasingly like true "stimulus."
But will it actually stimulate the economy and produce inflation in consumer prices? I argue that it will not result in the amount of consumer inflation that most people fear. Rather, though it may contribute to a temporary reflationary bounce in prices coming out of the pandemic, the spending bill is unlikely to render material inflationary pressure on aggregate consumer prices in the long run.
I explained my thinking on this subject in detail in "Don't Fear The Inflation Reaper," but there is more to be said that I didn't cover in that article.
The prevailing belief is that fiscal quantitative easing, or federal spending that is financed indirectly through central bank balance sheet expansion, is inherently inflationary. But this ignores what the money is being spent on. Unproductive spending, however it is being financed, is ultimately disinflationary because it distorts and weakens the economy. It advances moral hazards and trains economic actors to shape their decisions around fiscal spending rather than productive investment.
As I explained in "The Real Problem Behind The $26.8 Trillion U.S. National Debt" (now $28 trillion),
...there is a very simple way to measure whether government debt is productive or unproductive. Just look at the amount of GDP generated by each unit of additional debt. It may not work well during recessions, but it is informative during expansions and over long periods of time.
Source: Hoisington Investment Management Company
Even when it is financed by quantitative easing (central bank balance sheet expansion), wasteful and unproductive fiscal spending weighs on the economy by using up finite resources that could have found a more productive use. It crowds out GDP-enhancing investment and prevents the economy from restructuring in a way that would boost growth.
As evidence of this, just look at the surge of "zombie companies" that have only been able to survive because of cheap debt and government bailouts:
Source: FT
Economists writing for the New York Fed's "Liberty Street Economics" blog demonstrate the impact that such economic distortions as the rise of zombie companies have on inflation:
...zombie credit has a disinflationary effect. By helping distressed firms stay afloat, zombie credit creates excess production capacity, thereby driving product prices down. In our model, zombie credit hampers the adjustment in aggregate production capacity that usually follows a negative demand shock.
Here's the key point: if wasteful government spending (in addition to artificially cheap debt) hobbles the economy by producing all sorts of distortionary by-products like zombie companies, and if those distortionary by-products are disinflationary in nature by creating excess production capacity, then more wasteful government spending should produce more of the same result.
Probably the most potentially inflationary element of the bill is the $1,400 per person stimulus check. But as I explained in my previous article on the inflation reaper, very little of the first round of checks were used for consumption. Less than 10% went to discretionary spending. Lower income individuals mostly used it to pay down debt, and higher income individuals mostly put it in savings (and, for many, subsequently began playing the stock market casino, hoping to get rich quick off of GameStop (GME) and AMC Entertainment (AMC)). When asked what they would do with a future check, survey respondents said they would use even less of it for consumption.
The second most potentially inflationary part of the bill is the spending on accelerating the rollout and distribution of the vaccine. The reason this is potentially inflationary is that it could speed up the economic reopening process and lead to faster job growth in the most beaten down industries like hospitality and entertainment.
However, it must be kept in mind that the hundreds of billions of dollars in grants and additional PPP loans will undoubtedly have the distortionary and ultimately disinflationary effects described above.
Where does all of this holding forth lead us from an investment standpoint? Well, dividend investors should consider this: There has been a selloff of high-quality dividend growth stocks in recent weeks, due largely to rising interest rates which in turn are largely the result of rising inflation expectations. Those inflation expectations are unfounded, or at least overblown. Therefore, the selloff in dividend stocks is a good buy-the-dip opportunity.
Here are three of my favorite classes of attractive dividend stocks right now.
1. Renewable Energy YieldCos
If you haven't heard of YieldCos, that is probably because they are a relatively new entrant into the public equity space. They are a type of company that offers shareholders a high and growing dividend while acting as a financing vehicle for the parent or "sponsor" company, which is typically a utility or renewable energy developer.
Unlike utility companies, which sell electricity to households and businesses, YieldCos own the power generation assets and sell electricity to utilities, local governments, or large corporations.
Like REITs, BDCs, or MLPs, YieldCos (which are often structured as LPs) are pass-through entities in which taxes are not paid at the corporate level but rather taxed at the shareholder or "unitholder" level.
Brookfield Renewable Partners (BEP), which has a c-corp class of shares (BEPC), is the largest YieldCo at almost a $20 billion market cap. As the oldest and most established of its kind, BEP is the 800-pound gorilla of the renewables space and has earned a premium to its peers. Over the past year, the stock has appreciated by 50% and now yields only 2.9%. While I own units of BEP, I view its American YieldCo peers as better buying opportunities right now.
Data by YCharts
NextEra Energy Partners (NEP) is the YieldCo of NextEra Energy Inc. (NEE) and enjoys access to its massive portfolio of existing assets and development pipeline. As I outlined in my recent article on NEP, the company has accrued an impressive growth streak and looks likely to continue that pattern of double-digit cash flow and dividend growth well into the future. NEP offers a 3.4%-yielding dividend that is set to grow by 12-15% through at least 2024.
Clearway Energy Inc. (CWEN, CWEN.A) is the YieldCo of Clearway Energy Group, an international renewables developer. After the resolution of the Pacific Gas & Electric (PCG) bankruptcy, a substantial amount of restricted cash was freed up, and CWEN brought its dividend back up to its previous level before the PG&E-related cut several years ago. CWEN's dividend yields 4.7%, and management plans to raise it by 5-8% going forward.
Atlantica Sustainable Infrastructure (AY), 44% of which is owned by Algonquin Power & Utilities (AQN), is a more internationally diversified YieldCo than most of its peers (except BEP). Around 45% of assets are located in North America, 35% in Europe, and 12% in South America, but over 90% of contracts are denominated in US dollars, which stabilizes cash flow. The dividend has risen rapidly from $0.25 per quarter at the beginning of 2017 to $0.42 per quarter at the end of 2020. Future dividend growth guidance should be given at the beginning of March. The stock yields 4.7%.
2. Utilities
Publicly traded utility companies have also sold off in recent days and weeks. One of my favorites, despite having risen a little over 5% in the last year, has sold off by a little over 5% in the last few weeks.
It's Brookfield Infrastructure Partners (BIP), which also has a corporate version of shares (BIPC). The $21 billion+ infrastructure giant is diversified across asset types as well as continents. It owns utilities, pipelines, transportation assets, and data storage and transmission assets across the globe. The stock yields 4% and aims for 6-9% annual dividend growth.
Data by YCharts
Consolidated Edison (ED) is another huge utility ($22.5 billion in market cap) that provides electricity and gas to customers in New York City and the surrounding areas. Given how the Big Apple was hurt by the pandemic and lockdowns, it's not surprising to see ED having sold off by 25% over the last year, but 10% of that selloff has occurred in the last two weeks. The stock yields 4.7%, and the company has raised the dividend every year for almost half a century (46 years).
Algonquin Power & Utilities (AQN) is a Toronto, Canada-based company with an asset mix of roughly 65% regulated utilities and 35% non-regulated renewable assets. Around 30% of its non-regulated renewables comes from its interest in Atlantica Sustainable Infrastructure, while the rest is directly owned. The dividend now yields 4% and has been growing at 10% per year since 2009.
Pinnacle West Capital (PNW) is the parent company of Arizona Public Service, which provides utilities to most of the state of Arizona, including Phoenix. Like AQN, PNW has been growing its renewable energy generation assets at a rapid clip and plans to retire all coal-fired plants by 2031. The utility's ambitious decarbonization plans along with its enviable position as one of the sunniest states in the union gives me confidence that ESG-minded investors will return to this name at some point. Not to mention the state's rapid population growth. PNW yields 4.75% and has been raising its dividend at 5-6% per year.
3. Defensive REITs
REITs have rallied impressively since the announcement of an effective vaccine in November. Despite rising interest rates, the market has become more optimistic about real estate as a play on economic reopening/recovery.
W. P. Carey (WPC) is a popular pick among income investors because of its 6.1%-yielding dividend that has been raised for over 20 years straight. The REIT owns single-tenant, triple-net lease properties across the US and Europe, with a portfolio that is diversified across industrial, office, retail, and self-storage properties. And the REIT was one of the early pioneers of the sale-leaseback model, which should serve it well going forward as cash-strapped companies monetize their real estate through a landlord-partner like WPC.
Crown Castle International (CCI) is the second largest owner of cell towers and fiber optic lines in the nation. The 5G revolution will almost certainly create more demand for CCI's assets in the coming years and decades. The stock yields 3.4% and the dividend has been rising at around 10% per year.
Data by YCharts
Physicians Realty Trust (DOC) is a leading owner of medical office buildings in the US. It boasts the highest percentage of investment grade tenants in its peer group, which should serve it well in a world of evolving healthcare provision. The stock yields 5.4%, and dividend growth should gradually go up as the payout ratio comes down.
Finally, NETSTREIT (NTST) is another triple-net lease REIT, but unlike WPC, it focuses solely on high-quality retail. Having just IPO'd in 2020, the REIT still has a sizable cash pile to put to work in new properties this year. I offered "3 Compelling Reasons To Buy NetSTREIT" in a recent article. The stock yields 4.55% and promises plenty of growth ahead.
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This article was written by
Austin Rogers is an REIT specialist with a professional background in commercial real estate. He writes about high-quality dividend growth stocks with the goal of generating the safest growing passive income stream possible. Since his ideal holding period is "lifelong," his focus is on portfolio income growth rather than total returns.
Austin is a contributing author for the investing group High Yield Landlord, one of the largest real estate investment communities on Seeking Alpha, with thousands of members. It offers exclusive research on the global REIT sector, multiple real money portfolios, an active chat room, and direct access to the analysts. Learn more.Analyst’s Disclosure: I am/we are long BEP, NEP, CWEN.A, AY, BIP, AQN, PNW, WPC, CCI, DOC, NTST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (157)
"While nuclear plants do not emit significant greenhouse gasses, there is still risk here that gives me pause"More people have died falling off roofs installing solar panels than all nuclear accidents in the western world combined over the last 60 years. Same goes for children killed by accidents at daycare centers. More people have died choking on their tooth brush. Do those give you pause? Why don't we ban daycare centers? Superstition, fear, hysteria and ignorance are the main obstacle to going 100% nuclear, not safety issues.
You've made the case for the government not to intervene.
