Marketplace Roundtable - 2023 Look Ahead - Dividends, Income And REITs

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  • We continue our roundtable series with much-awaited dividends, income and REITs coverage.
  • Eight of our Marketplace contributors give their analysis and share one top idea.
  • Next up we have growth, tech and crypto.
Cocoa with marshmallows and chocolate in a red mug on a wooden table near a burning fireplace

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~ By Ashutosh Gowli, Marketplace Specialist

Thank you to all readers of our first part of the 2023 Look Ahead Roundtable Series. So far we've covered Macro, Value Stocks and Commodities. Today we continue with Dividends, Income and REITs coverage with analysis and top ideas from eight of our contributors.

Once again, the questions we asked were:

What are you expecting and/or looking for in your area of focus for 2023?

What is one of your top ideas for 2023 and why?

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ADS Analytics of Systematic Income: Our allocation approach takes action in response to existing and developing market and macro conditions rather than a pin-point forecast of what is going to happen. Unlike the environment in 2021 which was nearly uniformly unattractive, income investors are entering 2023 in a much more favorable position. Yields are significantly higher while discounts of investment vehicles such as CEFs and BDCs are at historically wide levels. Unlike 2021, these factors provide investors with a much higher margin of safety as well as a higher level of income.

That said the market is not uniformly appealing as credit spreads remain stubbornly tight. Given this investment environment of high Treasury yields, inverted yield curve, modest credit spreads and attractive discounts we view decent-quality floating-rate securities as very attractive at the moment. These securities take advantage of the best valued parts of the market (high and likely stable short-term rates and inverted yield curve) and largely avoid parts that remain vulnerable (credit spreads). They're also likely to perform well if we do indeed fall into a recession sometime in the next year.

Idea: Our top ideas are focused on taking advantage of high and rising rates and maintaining resilience rather than on securities that are “going to the moon” while also exposing investors to significant downside risk. Among these is the mostly floating-rate investment-grade CEF Angel Oak Financial Strategies Income Term Trust (FINS). Apart from its very attractive allocation profile (being in higher-quality / floating-rate assets) the fund trades at an attractive valuation of 12% discount to book, providing another margin of safety for investors. Unlike most other CEFs, its liabilities are largely fixed-rate, allowing it to pass on more of its rising income to investors. FINS offers not only quality, resilience and margin of safety for income investors but also growing income and likely upside as well. FINS trades at a 8.8% yield.

Disclosure: FINS

Fred Piard of Quantitative Risk & Value: "Dividend-oriented ETFs and strategies have outperformed the market in 2022, regardless of stock quality. I think quality will be key in 2023. The equity risk premium, the S&P 500 aggregate EPS, retail sales and housing starts are trending down. This is a high-risk environment. Moving to quality stocks is a factor of risk reduction. When picking stocks, my advice is to watch data such as return on assets, return on equity, gross margin, net free cash flow. I also think volatility may create opportunities in closed-end funds. My data-driven models in dividend stocks and CEFs have been ahead of their benchmarks in 2022*. I plan to continue with them in 2023.

*Past performance is not a guarantee of future return.

Idea: My largest position is in the Cohen & Steers Quality Income Realty Fund (RQI). It's selected by a rotational model, so this position may have changed when you read this. Anyway, I think RQI is a buy when the discount to net asset value is good enough. The threshold for "good enough" may vary over time, and it is about 4% now.

Disclosure: RQI

Kirk Spano of Margin of Safety Investing: A lot of dividend stocks held up in 2022, but many more took their lumps. When I look at dividend stocks, I'm not just focused on a big fat yield number. I'm looking for healthy companies with underlying growth that the market does not recognize. Those companies are the most likely to support the current dividend, as well as grow future dividends. In 2023, companies without underlying growth or some extremely valuable asset, will finally take their lumps. Meanwhile, companies with underlying growth will start to rebound strongly by the second half of 2023.

Idea: Ford (F) pays a dividend around 5% right now, which puts it in the top decile of S&P 500 stocks. That's great, but wait, there's more! After seeing their technology at the Consumer Electronics Show in 2020 I dove into the company from engineering to real estate. Ford is one of the top 4th Industrial Revolution companies in the world. They will be a leader in EVs. The EV manufacturers stand to have a decade long run of sales growth as the transition accelerates due to a very old car fleet and more expensive fuels. In addition, EVs take half the factory floor space, which means that a lot of Ford's real estate is about to be freed up as supply chains continue to move back to America. On top of that, as we saw when they were asked to make ventilators during Covid, their tech is very adaptable. I fully expect Ford to expand their business lines internally and through joint ventures. Ford is one of my top 10 dividend stocks for the next decade.

Disclosure: I own Ford.

Canadian Dividend Growth Investor of DGI Across North America: At DGI Across North America, we're targeting long-term total returns of at least 12%-15% based on investments made in 2023. As we know, inflation and interest rates are relatively high compared to recent history. They dictate investors to request a higher rate of return (or a bigger margin of safety). Because of the macro environment, stock valuations have come down.

In 2023, many economists believe a recession will likely occur with a soft landing. Our service focuses on safety of income and principal. We will articulate it if a stock is higher risk and state what the risks are. All investments come with risks. Typically, taking higher risks might lead to higher returns.

Going for quality dividend stocks might mean paying a premium on the valuation. So, that'd be a risk of overpaying for a stock. That said, this type of risk, as long as you try to be rational about the valuation you pay, will be overcome over time assuming the business continues to (out)perform.

Idea: As noted earlier, we expect to be in a recession in 2023. So, a top dividend stock idea we would like to share for 2023 is a defensive one - renewable utility Brookfield Renewables Partners L.P. (BEP)(TSX:BEP.UN:CA). In fact, it's one of our top stock picks that we shared in our service last month for growing passive income.

The world's energy consumption is increasing for more reasons than just population growth. And BEP's riding on the global decarbonization mega growth trend over the next three decades. It has a diversified portfolio across North and South America, Europe, and Asia in different technologies.

Higher interest rates have also pressured on BEP stock. At $25.34 per unit at writing, it trades at a substantial discount of +30% and offers a juicy cash distribution yield of +5%. Assuming it takes five years for valuation expansion to play out, a 5% yield, and a 5% cash distribution growth rate supported by similar if not higher FFO growth, we're looking at annualized returns of at least 19%, which we think is absolutely attractive in a defensive dividend stock.

Disclosure: TSX:BEP.UN:CA

Fredrik Arnold of The Dividend Dogcatcher: Lower stock prices, triggered by Fed continuing rate hikes; leading to higher dividend yields.

Idea: The desirable outcome of the coming Fed-triggered recession will be all 10 top-yielding Dow Industrial Index stocks showing share prices lower than the dividend income from a $1k investment.

Disclosure: I own two Dow Index stocks, Cisco Systems (CSCO), and Intel (INTC).

Tariq Dennison of The Expat Portfolio: 2023 is the first year in over a decade starting with an S&P 500 dividend yield more than 200bp below that of the 10-year US treasury (US10Y), with only 8% of the S&P 500 (SPY) market cap yielding more than the current 3.8% level of US10Y. The below chart shows how this distribution of dividend yields looks far more favorable to dividend investors in three other major markets: Europe (IEUR) vs. the 10-year German Bund, Japan (EWJ) vs. the 30-year JGB, and China (MCHI) vs. the 10-year CGB.

It only makes sense to accept that relatively low yield if you expect US earnings growth to be that much more robust than these markets around the world, and I think we are more likely entering another decade of US underperformance than outperformance. While I have long seen better value in many foreign markets outside the US, I'm especially excited to start this year selling some of my strong dollar positions and buying higher yielding stocks denominated in cheaper Euros and Yen, and faster growing stocks in markets like China, India, Turkey, and South Africa. A Fed pivot and reversal of dollar strength would provide an additional tailwind, but not a necessary one in my view.

Idea: It's of course always very hard for a globally diversified dividend investor like me to narrow down to just one top idea, but if I had to pick one to focus on for discussion in 2023Q1, it would be the Norwegian fish companies, the largest of which is SalMar ASA (OTCPK:SALRY). This one currently trades at a dividend yield over 5% on the back of >10% annual revenue growth for each of the past 10 years, and the future of sustainable seafood is a theme I'm personally quite motivated to follow anyway. SalMar has usually announced their annual dividend in February, so I have it on my calendar next month to see if they increase it above the NOK 20.00/share they paid last year.

Disclosure: Long OTCPK:SALRY and TUR, short SPY

Double Dividend Stocks and Hidden Dividend Stocks Plus: Floating rate preferred dividend stocks are being favored over fixed rate preferreds by income investors in the current rate-rising environment.

Of particular interest to us are floating rate preferreds which have already entered or are about to enter their floating rate periods. In addition, there are certain floating rate preferreds which have some of the highest floating rates above 3 Month LIBOR in the market, well above 600 basis points.

Couple that with a current 3 Month LIBOR rate of 4.78%, and you have a 10%-plus dividend yield. Since preferreds normally have better dividend coverage rates than common, you have the added attraction of having a more secure income investment.

Idea: Our top pick for 2023 is the NuStar Energy L.P., 9.00% Series C Fixed/Float Cumulative Redeemable Perpetual Preferred Units (NS.PC).

NS-C just entered its floating rate period on 12/15/22, which calls for a 6.88% rate plus the 3 month LIBOR rate, which is currently 4.78%. The 3 Month LIBOR rate is up dramatically from 0.22% one year ago.

Although NS-C is up over 10% from when we added it to our Hidden Dividend Stocks Plus service ~2 weeks ago, it's still below its $25 call value, and should yield well over 11% when management declares the March dividend later in January.

NuStar Energy LP has had good DCF/Preferred dividend coverage, steady at ~3.81X in Q1-3 '22 and Q1-3 '21. NS issues a K-1 at tax time.

Disclosure: I'm long NS-C

KCI Research Ltd. of The Contrarian: We at The Contrarian are mostly known for our value-oriented calls, our macroeconomic calls, and our focus the last number of years on commodities, and commodity equities. We're "go anywhere" investors, and the focus in these areas has been because of the relative and absolute opportunities, which have been proven out by our performance, which is encapsulated in this recent ($) article.

Within The Contrarian we run a dividend focused Model Portfolio too, which is called the Stuck On Yield Model Portfolio. This Portfolio was higher by 34.3% in 2022, strongly ahead of the broader market, as measured by the SPDR S&P 500 ETF (SPY), which lost 18.2%. Importantly, this Stuck On Yield Model Portfolio also outperformed in 2021, gaining 44.2%, compared to the 28.7% gain in SPY.

The depth and breadth of the outperformance was due to our focus on our targeted arena of undervalued equities. This will be more important in the year ahead, as the everything bubble unwinds with higher interest rates, which is still going to have a disproportionate impact as profit margins contract.

Idea: One key to outperformance is too look forward, not backwards, and on that note, Equitrans Midstream (ETRN), which has been an under performer in our aforementioned Stuck On Yield Model Portfolio, has some potential upcoming positive catalysts, specifically the eventual completion of the stalled MVP pipeline. When this happens, Equitrans will receive a positive valuation bump higher, along with the increased prospect of a higher dividend payout.

On this note, some of our biggest winners in The Contrarian, including Antero Resources (AR) and Peabody Energy (BTU), which I both expect to be large dividend payers in the years ahead, were not in the Stuck On YieldModel Portfolio, so it shows the depth, and breadth of the outperformance of our targeted equities, even in the yield-oriented universe.

Going forward, in the golden age of active investing, which followed the very difficult decade of passive dominance, active stock pickers are going to have a unique advantage, and this will be increasingly important as higher short-term yields unwind many investors who were chasing unsustainable yields.

Disclosure: Long AR, BTU, ETRN

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

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