Here Are 6 Dividend Stocks I'm Buying For A Generational Market Shift

seekingalpha05-08

I believe that inflation and interest rates will remain higher for longer, signaling the end of the good times of 2009-2021.The debt situation in the US and other Western nations is a major concern, ...

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Oleg Prolat/iStock via Getty ImagesIntroduction As most of my readers know, I'm always talking about the \"big picture,\" which has become the cornerstone of my research. This includes macroeconomics, geopolitics, and supply chains. While all of these issues are connected, I always try to build a longer-term view that helps me put money to work in areas that could provide us with above-average returns. Leo Nelissen (Research Framework)With that in mind, I was just interviewed to discuss several topics, including the global economy and where I am putting my money. This article is going to be an elaboration of that interview, as I will do a few things.  I will explain why I believe the Fed will have to make tough choices in the quarters ahead. We will discuss why the market's risk/reward makes me nervous. I will obviously tell you where I am putting my money, including a few concrete examples.   So, as we have a lot to discuss, let's get to it! Higher For Longer & Tough Choices I'm in the \"higher-for-longer\" camp, as I believe that inflation and interest rates will remain higher for longer on a long-term basis. In prior articles (like this one), I have used the chart below, which shows that younger investors - like myself - do not have experience with a prolonged period of inflation above the Fed's 2% target. Federal Reserve Bank of St. LouisIn fact, one can even make the case that anyone who started investing in the 1990s and after has not been through a period where inflation was a major issue for central banks. Although I am not at all making the case for hyperinflation or other doomsday scenarios, I believe the good times of 2009-2021 are over. As I wrote in the article I referred to above, there are a few factors that provided low inflation before the pandemic. These factors are now reversing.   Globalization is suffering, pressured by ongoing supply chain re-shoring and new geopolitical tensions. The shale revolution has ended. Natural gas, oil, and coal supply growth is much slower compared to pre-pandemic years. Labor market dynamics have become less favorable. High inflation in 2021 and 2022 has worked its way through the economy, causing sticky wage inflation (supported by the aforementioned labor market changes).   Especially the shale revolution is important to me, as I have written countless articles on changing supply/demand dynamics in the oil sector. Due to lower supply growth in the U.S. and OPEC gaining pricing power, I believe in prolonged elevated fossil fuel prices, with the potential for >$100 WTI if we get a synchronized global growth rebound. As we can see below, after strong pre-pandemic growth, oil production in the United States has barely grown since 2019. Energy Information AdministrationOn top of that, I'm very worried about the debt situation in the United States - and other Western nations. As I wrote in a recent article, we could likely see an environment where governments try to inflate their way out of this situation. After 2030, the net interest spending of the U.S. government could be north of $1.5 trillion! It already exceeded defense spending this year, crossing the $1.0 trillion mark. Federal Reserve Bank of St. LouisEven the Federal Reserve is now starting to realize that we may not be as close to normalization as one may have expected going into this year. I added emphasis to the quote below: “We’ve stated that we do not expect that it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Powell said during a press conference Wednesday after the central bank elected to leave its benchmark interest rate unchanged and signaled fresh concerns about inflation. - Via Bloomberg Generally speaking, the Fed is making the right decision. After all, fighting inflation is its job. The problem is that Powell is running out of time. He needs to beat inflation as soon as possible. Preferably yesterday. Not only is the U.S. government increasingly faced with a wave of expensive debt, but the same applies to households and corporations. According to the latest data, almost 3.5% of credit card balances were at least 30 days past due! Some credit scores are back at 2020 lows. BloombergWe are seeing similar developments in other areas, including commercial real estate. As I wrote in an article last month, some players are increasingly faced with poor loan quality, pressuring them to build reserves for potential losses down the road. In this current market environment, however, we believe it is in the best interest of ACRE and its stakeholders to reduce the quarterly dividend to help preserve book value and liquidity and to pay out an amount more in line with our expected near-term quarterly distributable earnings before realized losses. Ultimately, as we get through this cycle, [indiscernible] we execute on our earnings opportunities as discussed, we expect we can return to higher levels of profitability. - ACRE 4Q23 Earnings Call This is why I expect that the Fed will keep rates higher for longer until we get to a point where the economy is so fragile that the Fed needs to choose between protecting economic growth and fighting inflation. Generally speaking, none of this bodes well for stocks, which is why almost every single easing cycle of the Fed involves a recession (see the chart below). Data by YChartsOn top of that, we're dealing with a lofty stock market valuation. I'm Seeking Value Markets are lofty valued. This is a major risk. Going into this month, the S&P 500 traded at roughly 20x forward earnings, roughly one standard deviation above its 30-year average. JP MorganGenerally speaking, this suggests subdued returns in the years ahead, which means we can assume that a bigger part of future returns will come from dividends. JP MorganOther numbers support this thesis. For example, the S&P 500 earnings yield (the inverted P/E ratio) is roughly equal to the 10-year treasury yield. This means investors get the same payout by buying \"risk-free\" government bonds.   BloombergEven worse is that this puts tremendous pressure on S&P 500 companies to deliver strong earnings. After all, the only way to justify a high valuation is by growing fast. If that happens, there's nothing to worry about. Hence, the good news is that the earnings season, with 80% of S&P 500 companies having reported, has been quite good. As we can see below, 77% of companies beat earnings compared to their preseason expectations.   Bloomberg IntelligenceThe problem, however, is that expectations were extremely low, with a high likelihood that earnings expectations going forward are too high. I added emphasis to the quote below:  More than 80% of the S&P 500 companies have now reported first-quarter earnings, and profit growth has easily surpassed “mediocre expectations”, according to Gina Martin Adams at Bloomberg Intelligence. The index is now on pace for a 6.5% earnings growth, almost double pre-season estimates of 3.75%, she noted. Bets on double-digit earnings growth this year for companies in the S&P 500 are too lofty as Corporate America is likely to be challenged by higher rates, according to JPMorgan Chase Co.’s Marko Kolanovic. - Via Bloomberg  Generally speaking, this makes the value of shorter-term government bonds quite interesting, which will be a good hedge against economic turmoil. However, as I'm an equity dividend growth investor, I'm buying stocks with a multi-decade time horizon. That's why I'm looking for stocks with a decent dividend yield and general value characteristics. Using JPMorgan (JPM) data again, value stocks are very cheap relative to growth stocks with a much better track record during recessions and periods of elevated interest rates. JP MorganSo, where am I putting my money? Some Of My Favorite Long-Term Plays In This Market Three of the stocks I mentioned in the podcast/interview were also stocks highlighted in a recent article of mine, with the title \"3 Buffett-Style Dividend Stocks To Sink Your Teeth Into.\" One of them is my largest holding, accounting for roughly 11% of my total portfolio. Leo Nelissen (Via Corporate Websites)These three companies are:  Texas Pacific Land Corporation (TPL): a Permian-based oil and gas royalty play that benefits from every operation on its land, including water sales, pipelines, solar panels, and the sale of fossil fuels. As it does not directly produce oil and gas, it is one of the most profitable companies in the S&P 500, benefitting from elevated crude oil prices without having to deal with production costs. Texas Pacific Land CorporationWhile TPL yields less than 1%, it uses special dividends to distribute cash when oil prices are elevated.  Deere & Company (DE): the world's largest agriculture machinery producer, with a history of strong dividend growth and aggressive buybacks. Deere has strong pricing power and the ability to massively expand its technology footprint in an industry increasingly focused on efficiencies. As I'm bullish on energy and agriculture crops, I expect Deere to remain a great player for income growth and inflation protection. Deere & CompanyCurrently yielding 1.5%, DE has grown its dividend by 145% over the past ten years, supported by buybacks of more than a fifth of its outstanding shares. Data by YCharts Intercontinental Exchange (ICE): the owner of the NYSE and one of the fastest-growing financial companies in the world, with an increasing amount of money coming from recurring services and significant growth opportunities in the highly fragmented mortgage industry. Although ICE is not a high-yield company with a current yield in the mid-1% range, it comes with elevated EPS growth and the goal to distribute up to 100% of free cash flow to shareholders in times of low balance sheet debt levels. Intercontinental ExchangeThe fourth pick is a company I own in my trading account. However, as I'm planning to close that account (it's too small), I'm likely moving it over to my dividend growth account, which means I will be buying a lot more of it soon. That company is Nutrien Ltd. (NTR), one of the world's largest fertilizer producers. Trading at a blended operating cash flow multiple of less than 6x, I believe this 4%-yielding company is at least 35% undervalued - even in an environment of subdued agriculture commodity prices. FAST GraphsWhile NTR should not be owned by conservative investors (it's too volatile for most), it has very attractive tailwinds, including low global grain stocks, a rising population, and a recent decline in fertilizer application, which puts a bigger emphasis on higher growth in the years ahead. Nutrien Ltd.In general, I believe NTR is one of the best places to hide when money rotates from \"growth\" to \"value,\" as it has proven in the 2020-2022 period when inflation became an issue. Data by YChartsLast but not least, I'm buying more of Antero Midstream (AM) and Canadian Natural Resources (CNQ). In a recent article, I wrote that Antero Midstream is one of my favorite high-yield plays. With a 6.3% yield and room for growth, Antero Midstream owns major natural gas pipelines and processing facilities in the Appalachian Basin, where it benefits from strong demand and growth opportunities thanks to its strong partner Antero Resources (AR). Antero MidstreamI bought AM aggressively earlier this year and added it to a number of family accounts. Going into next year, we could see substantial dividend growth and buybacks, as the company is close to achieving its desired leverage levels. Last but not least, Canadian Natural is a high-margin oil and gas producer in Canada, where it benefits from very deep reserves, low breakeven prices, and extremely low decline rates. It also has the goal to distribute 100% of its free cash flow using special dividends and buybacks, which implies a double-digit annual distribution yield, as I wrote in a recent article. Even its regular dividend is close to 4%, with 24 consecutive years of dividend growth, including the Great Financial Crisis, the 2024/2015 oil crash, and the pandemic. Canadian Natural ResourcesWith all of this in mind, I am buying all of the stocks mentioned in this article and believe they will give me a shot at beating the market by a substantial margin over the next decade (and likely beyond). Although not all stocks have a juicy dividend yield, all come with consistent dividends, long-term growth, and terrific business models. Needless to say, going forward, I will continue to update readers on the challenging macroeconomic environment and actionable ideas for a wide range of scenarios. Takeaway My view on inflation and interest rates aligns with the \"higher-for-longer\" camp, driven by shifting dynamics in globalization, energy markets, and labor. This shift favors value stocks with the ability to protect investors against inflation and elevated economic risks. In light of uncertainties, I make the case for long-term plays like Texas Pacific Land Corporation, Deere & Company, Intercontinental Exchange, Nutrien, Antero Midstream, and Canadian Natural Resources. These selections reflect my commitment to dividend growth, resilient business models, and strategic positioning for future market conditions.  I believe these stocks are in a great spot to generate substantial long-term shareholder value when it matters most.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2434039242"}