Investors Shift Focus from Big Tech to Dividend Stocks and Specialized ETFs

Where Investors Are Starting To Turn Their Attention As Big Tech Loses Steam

Why U.S. markets have strayed "pretty far into overvalued territory". Shares of big tech have been losing steam recently after pushing U.S. markets to numerous record highs. But which sectors may benefit from a possible rotation out of tech? MoneyTalk's Anthony Okolie discusses with David Sekera, Chief U.S. Market Strategist with Morningstar Research. Anthony Okolie: Well, US markets have hit new record highs in recent trading sessions as the big tech names continue to push higher. But are valuations beginning to look stretched? Joining us now to discuss is David Sekera, Chief US Market Strategist with Morningstar Research. And, David, thanks for being with us today. David Sekera: Of course. Good afternoon. Always good to see you, Anthony. Anthony Okolie: You too. OK, we'll start with market valuations, which are looking stretched after the big run we've had. What are your thoughts? David Sekera: According to our valuations to this point, you know, not only stretched, but the market in the US is actually starting to trade pretty far into overvalued territory. So when I look at the market valuation, it's trading at about a 6% or 7% premium to a composite of our fair values. And let me just explain a little bit how we look at the market versus what you may hear from other strategists. So we cover over 700 stocks that trade in the US. And what we do is, we put together a composite of the intrinsic valuation of all of those companies as determined by our equity analyst team using a fundamental bottom-up analysis. And we then compare that to where they're trading in the marketplace. And when we look at that today, that's how we get to that price-to-fair value, showing that 6% to 7% premium. And I got to say, this is pretty rare territory that we're in. If I look back through 2010, the markets traded at this much of a premium or more only 1% of the time. The last time the market was getting to be this far overvalued was at the end of 2021 when we were entering 2022. So, when I think about the market right now, even though the market is pretty far overvalued, it's always tough to know when we're going to see that correction. I do think there's a possibility where we could be in one of those markets where it could stay overvalued for a while, similar to 2021, until there's really a reason for it to correct. So I do think now's a good time for investors to review your asset allocations. If your equity allocation has run up too far over your targeted percentage, now might be a pretty good time to lock in some profits, sell a little bit of that down, and get back towards your long-term targeted allocations. Anthony Okolie: Yeah. It looks like we're seeing a bit of that rotation happening in the markets over the last couple of days. Now, we've surpassed the former highs that we saw in 2022. How do current conditions differ from then? David Sekera: Well, in our 2022 outlook, we actually noted that at point in time we thought stocks were overvalued, and that investors really should have been underweight equity at that point in time. But when I look at the conditions now versus then, they're actually pretty different. So in the beginning of 2022, in our annual outlook, we noted there were four main headwinds that the market was going to have to contend with back then. So, we were projecting inflation to increase. We were forecasting long-term interest rates to increase. We expected the Fed to start tightening monetary policy. And our US economics team was forecasting the US economy to slow. Now, all of that, of course, came to fruition in 2022. Stocks plunged, but the market did what the market always does. It acted like a pendulum and it swung too far to the downside. But since bottoming out at the end of, well, October of 2022, I think, when the bottom hit, we're now surging to those new highs. So, what's different now? Well, three of those four same headwinds are actually still tailwinds. So inflation, we expect to continue to keep moderating for the rest of this year going into next year. Our US economics team is projecting long-term interest rates to be on a multi-year decline. And we expect the Fed to start easing monetary policy with a cut as soon as the September meeting. So, really, the only headwind that we have right now is a slowing rate of economic growth. But having said that, our US economics team is in that soft landing camp, where we're looking for growth to slow but not looking for a recession. Anthony Okolie: OK. Of course, the AI demand trend has been a huge component. Can stocks like Nvidia (NVDA) go much higher? David Sekera: You know, that's always hard to say. A fully- to over-valued stock can always become more overvalued in the short-term before it corrects. And specifically, looking at the AI stocks, and even more specifically looking at Nvidia, I know our analyst team expects that there's at least four more quarters of similar high growth rates that we've seen over the past couple of quarters. Demand for their artificial intelligence GPUs remains extraordinarily high, but they are supply-constrained. So right now, they can sell everything that they can make at whatever prices they want. However, I do think the stock probably prices that in and maybe even more. So, let me explain. So, last year's revenue doubled from the prior year and came in at $60 billion. And our model currently forecasts revenue to double again up to $126 billion for this fiscal year. And looking at our model, we expect it to grow all the way to $235 billion by 2029. Now, over that same time period, we're looking for margins to expand and get to new highs. We're looking for earnings growth to get to $2.80 per share this year, growing all the way to $5.24 in 2029. So that stock is trading at 43 times this year's earnings. In fact, it's trading at 23 times 2029 earnings. So I think the key to watch for with Nvidia, and, in fact, a lot of the AI stocks, is the guidance from their largest customers. So, specifically, we'll be listening to the CapEx spending programs from companies such as Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN) - some of the largest buyers of those chips - really to start listening for when they start slowing their CapEx spending, especially if they're going to mention any slowing on artificial intelligence. And if so, when that happens, in my opinion, I do think Nvidia's stock could be at risk of potentially gapping down. Anthony Okolie: And are you seeing signs of that CapEx potentially slowing down this year? David Sekera: Not yet. At this point, talking to our equity analyst team, they're still looking for at least another four quarters of that same kind of growth that we've seen the past couple of quarters. So, it could be another year where we're looking at that growth. But, based on where that stock is valued, I think that amount of growth is already priced in. Anthony Okolie: OK. Great perspective. Now, again, we've talked a little bit about this rotation out of some of these big-cap stocks into some of these sort of average stocks and small-caps. Walk us through why small-caps and value stocks look interesting right now. David Sekera: Well, in addition to calculating a price-to-fair value for the broad market, we also break that down into the component parts using the Morningstar Style Box. And so we'll break it down into capitalization. We'll break it down into different styles like value and growth. And when I look at our price-to-fair value for small-cap and value stocks, small-caps specifically on a relative value basis are trading near some of their most undervalued levels that we've seen since 2010. And even value stocks are trading at pretty undervalued levels as compared to the market. So I think what the market is starting to price in right now with this rotation we've seen over the past week or so, historically, small-cap stocks have performed pretty well when interest rates are falling in combination with the Fed easing monetary policy. And to some degree, with AI stocks having taken all the oxygen in the market over the past year and a half, value stocks have just gotten left too far behind. And I think there is that rotation coming out of growth into value. Anthony Okolie: OK. Besides value and small-cap, what other areas of the market look interesting to you right now? David Sekera: So we also break our valuations down by sector. And the three sectors that I think I see the most opportunities and value is going to be real estate, energy, and basic materials. So real estate, of course, is still the most hated asset class on Wall Street. Personally, I would still steer clear of urban office space. It models undervalued, but at the same point in time, there still could be more downside risk before it truly bottoms out. But we do see a lot of value for investors in real estate that has defensive characteristics. So, think about health care, medical offices, life sciences, things like that. When I take a look at the energy sector, I think that's pretty interesting. Now, we actually have a relatively bearish view on the price of oil. We're actually looking for a mid-cycle price of oil to be $55 a barrel for West Texas Intermediate. But energy stocks generally look pretty attractive to us even with that bearish view. So, if oil were to stay here or move higher, I do think there's a lot of upside leverage in the energy sector. And then lastly, the basic materials has a lot of really interesting opportunities. A lot of them are very idiosyncratic, specifically areas where the pandemic had led to an increase, like in home food consumption. But then we had all those transportation bottlenecks in 2022 that played havoc with supply chains. So what happened was, due to that excess demand from the pandemic in 2020 and 2021, a lot of companies then overordered in 2022. And what happened is when all of that came in, they had too much inventory. They had to pare that inventory back in 2023. So your earnings, I think, were artificially depressed last year. We think that generally this destocking is coming to an end this year, and looking for more normalized growth patterns going forward. So two areas that look particularly interesting to us would include manufacturers of food additives as well as manufacturers of potash.

Dividends Are Back: 3 Massively Undervalued Dividend Growth Stocks Set To Soar

Looking for more investing ideas like this one? Get them exclusively at iREIT® on Alpha. Learn More " Introduction Guess what? Dividend stocks are back! After roughly 1.5 years of non-stop underperformance, dividend stocks are making a comeback, as displayed by the ratio between the Schwab U.S. Dividend Equity ETF (SCHD) and the S&P 500 below. Although we're still dealing with green shoots, current momentum is promising and increasingly backed by favorable fundamentals, as we'll discuss in this article. It's also an important development, as I have beaten the drum for a while on the importance of avoiding the top-heavy S&P 500 and finding value in undervalued areas instead. This includes a recent article titled "Forget Big Tech, 3 Terrific Dividend Growth Stocks To Buy," where I also wrote that a broadening market would offer tremendous opportunities: While the market is far from cheap, my point is not that investors should dump their shares. My thesis is a broadening of strength, as I expect the equal-weight S&P 500 to outperform the market-weighted S&P 500. In this article, I'll update my thesis, discuss upcoming earnings, and present three dividend stocks that I consider to be significantly undervalued and poised to deliver elevated long-term gains. So, let's get to it! The Return Of Dividends Ever since ChatGPT and AI, in general, became popular last year (supported by peaking inflation rates), the S&P 500 has been all about AI stocks. I have used the chart below in a number of other articles as well, as it shows that the biggest ten stocks of the S&P 500 accounted for 37% of its total value going into this month! While the stock price surges of the "big guys" were justified - most of them have truly fantastic business models - the risk/reward hasn't gotten any better for them. As we head into the hot phase of the 2Q24 earnings season, we're dealing with a few interesting developments I wanted to share with you. For example, the U.S. economic surprise index has hit its lowest level since 2015. While this does not mean that economic growth has hit the lowest level since 2015, it indicates that macroeconomic numbers have been much worse than expected. Generally speaking, this could indicate that earnings could come in lower than expected. Bloomberg's John Authers makes a great case, as he noted that analysts had not revised their 2Q24 earnings estimates over the past three months (see the chart below). While none of this is truly alarming news, it does show somewhat of an asymmetry between worse-than-expected economic data and unchanged S&P 500 earnings expectations. From a risk/reward point-of-view, that's not great. What's interesting as well is that if we dig deeper, we find that "average" S&P 500 earnings expectations are only unchanged because strength in the Mag-7/FANG+ has offset weakness in other areas. Mag-7 earnings expectations for 2Q, 3Q, and 4Q have consistently been hiked since early 2023. Although momentum has slowed since March, expectations have continued to increase. Meanwhile, this is what expectations for the "S&P 493" look like (the S&P 500 minus the Mag-7): While it may not seem like it, this provides a great risk/reward for a broadening market, where a bigger share of companies contributes to its performance. The Mag-7 are doing well. Analysts are upbeat, and "everyone" seems to be bullish. The S&P 493 has been left in the dust. Earnings growth expectations are poor, and "nobody" really cared to look beyond tech since last year. While I'm obviously painting with a broad brush here, this is what John Authers wrote (emphasis added): Glenmede's Jason Pride and Mike Reynolds argue that this earnings season could kickstart a market broadening, and the gap between forecasts for the Mag 7 and everyone else certainly seems to provide the ideal setup. Thursday's dramatic stock rotation after soft CPI boosted rate-cut hopes showed that there was an appetite for the non-Magnificents to outperform. That rotation continues with the Russell 2000 index, previously stagnant all year, rallying by about 11.5% in five days while the Russell's Top 50 index of mega caps stalls: This brings me to three special dividend stocks that all bring something unique to the table. I believe if the market keeps betting on rate cuts, a broader market will massively benefit dividend stocks, as investors will have to look for high-quality income. Northrop Grumman (NOC) - Mission-Critical & Undervalued Northrop Grumman is one of America's largest defense contractors. Known for major programs like the B-2 Spirit bomber and its successor, the B-21 Raider, it has returned 316% over the past ten years, beating the elevated 241% return of the S&P 500 by a wide margin. However, over the past five years, it has returned just 46%, while the S&P 500 more than doubled. This underperformance was mainly caused by the pandemic, which disrupted supply chains and negatively impacted some major defense programs. It also did not help that defense contractors encountered Department of Defense budget uncertainty in recent years. That said, because of these issues, I have started to accumulate a lot (relatively speaking) of defense stocks, giving the industry a 20% weighting in my long-term dividend growth portfolio. Needless to say, this makes it an ultra-high-conviction investment for me. Northrop Grumman stands out for multiple reasons, including its focus on shareholder distributions. Over the past ten years, this 1.9%-yielding stock has grown its dividend by 12% annually while buying back almost a third of its shares! Currently, the dividend has a payout ratio of just 31% and a number of tailwinds working in its favor - besides its dividend/buyback profile. One of them is its highly diversified business model, which comes with major exposure to fast-growing programs like missile defense, space, intelligence, and others. During the latest Bernstein Strategic Decisions Conference, the company noted it is optimistic about continued funding for strategic programs like the B-21 and Sentinel, which are crucial to national security. Additionally, the International Ballistic Missile Defense ("IBCS") program is expected to contribute significantly to revenue growth, with projected demand potentially reaching $10 billion from various international partners. Foreign markets, especially in Europe, offer great growth opportunities for the company, as most NATO nations have not met the 2% of GDP defense investment requirements. This has led to a high demand for modernization, including in reconnaissance. Northrop Grumman has a significant presence in this area through programs like the MG-4C Triton (shown below). NOC controls 20% of the North American UAV market, with expectations to become the second-largest player. Programs like Triton help it to achieve this. It also has a wide range of other drones, including an experimental underwater drone, the Manta Ray. Valuation-wise, the stock trades at a blended P/E ratio of 18.1x. In past articles, I have applied a 20x multiple, as I believe this better fits its growth profile of 5-11% annual EPS growth, as seen in the chart above. Based on this, I believe we are dealing with a fair stock price of roughly $580, 33% above the current price. As a result, NOC is a stock I'm consistently adding to, as I believe it's one of the best low-risk dividend growers on the market. Franco-Nevada Corp. (FNV) - A Fantastic High-Margin Streamer In March, I wrote an article titled "Franco-Nevada: Forget Volatile Miners - This Is How To Win With Gold." Since then, Franco Nevada is up 14%, beating the 8% return of the S&P 500 by a decent margin. The reason why I have liked gold for a while is the tricky situation of the Fed. It has the tough task of balancing economic growth and inflation. Inflation is coming down very slowly, while economic risks are building. As a result, investors want to own gold, as it is perfect protection if the Fed needs to pick protecting economic growth over fighting inflation. That's where FNV comes in. Unlike most miners, which have horrible long-term total returns, it has a fantastic business model. This Canadian giant is a streamer, which means it does not mine gold. It finances mining operations. In return for financing, it gets to buy a part of the mine's production at a discounted price. While the biggest risk is subdued demand for new mining operations, it is a very attractive way to invest in precious metals, as FNV does not have operational risks. Last year, it had an 83% adjusted EBITDA margin and a 56% net income margin. No miner can compete with this. Besides gold, FNV has exposure to other commodities, including silver and energy, as it owns royalty interests in oil and gas as well. As we can see below, 25% of its income comes from non-precious metal operations. No individual asset accounts for more than 15% of its revenue. Additionally, the streamer has no debt and $2.3 billion in available capital. More than half of these consists of cash. Since its IPO, the company has increased its reserves by 3.5x and plans to produce more than 540 thousand gold-equivalent ounces by 2028, implying 10% organic growth with additional opportunities in Panama. Currently yielding 1.1%, the company has grown its dividend by 8.2% per year over the past five years. It has a sub-40% payout ratio and an attractive valuation. Currently trading at a blended P/E ratio of 33.3x, it trades a mile below its normalized P/E ratio of 53.2x. While this may seem like a lofty valuation, it is quite common for ultra-high-margin companies to trade at elevated multiples. After all, they generate more earnings from every revenue dollar. Using the FactSet data in the chart below, the company is expected to grow EPS by 18% and 13% in 2025 and 2026, respectively. Even applying a 40x multiple (like I did in my March article) gives us an annual return estimate of at least 13%. As such, I believe FNV is a great play for a broader market, a weaker dollar, and a bigger focus on quality income - despite its somewhat low yield. EOG Resources (EOG) - Undervalued Energy Dividends By now, I doubt it is a surprise to many when I say that I really like the energy sector. This includes upstream (oil and gas production), midstream (pipeline and similar infrastructure), downstream (refining), and related services. I believe energy is one of the best sectors to bet on broadening market strength, as it is massively undervalued, having underperformed the S&P 500 very consistently since 2011. Although I don't have a crystal ball, I believe the energy/S&P 500 ratio above bottomed after the pandemic. The shale revolution in the U.S. ended, slowing one of the biggest oil and gas supply engine of the past two decades. This shifts pricing power back to OPEC. People figured out the energy transition did not "kill" oil and gas. On the contrary, demand is healthy and expected to remain strong for many more decades. Elevated geopolitical tensions have become a bigger bullish factor. That's where EOG Resources comes in. My most recent in-depth article on this company was written on June 13, when I called it "Undervalued And Underappreciated." Since then, shares have appreciated 10%, with a lot more room to grow - I think. What sets EOG Resources apart is its position as one of America's largest onshore oil and gas producers, with super-efficient operations. The oil price required to generate a 10% return on capital is just $44. That's down from $85 in 2014. Moreover, as I wrote in my June article, during the recent Bernstein Strategic Decisions Conference, the company noted that it prioritizes projects that meet strict return thresholds, including a 30% after-tax rate of return at $40 per barrel of oil and $2.50 per MMBtu of natural gas. Historically, oil prices have averaged roughly $65 in the past decade, which puts EOG in a great spot - purely statistically speaking. Due to more favorable energy fundamentals, the company now believes in a "new normal" between $65 and $85 WTI. This is great news for investors, as the company has a focus on its shareholders. It hasn't cut its dividend in 26 years and massively increased total dividends since it started to deploy "premium drilling" in 2014. Currently yielding 2.8%, EOG estimates it can generate $22 billion in cumulative free cash flow through 2026 at $85 WTI/$3.24 Henry Hub. That would be 29% of its current market cap (10% annualized). As the company aims to return at least 70% of its free cash flow to shareholders, we're looking at a base case of 6-7% in annual returns. Especially if oil prices continue to rise, investors could be in for much higher returns. It also helps that it has a credit rating of A- and a highly favorable valuation. EOG trades at a blended P/OCF (operating cash flow) ratio of just 6.6x. It has a normalized P/OCF ratio of 7.1x. As I wrote in my in-depth article, I do not believe EOG should trade below an 8x multiple. Currently, this implies a fair stock price of $171, 30% above the current price. All things considered, I believe EOG offers a great risk/reward for investors seeking value with the potential to benefit from a strong long-term bull market in oil and gas. Takeaway Dividend stocks are finally making a strong comeback after a long period of underperformance. With favorable fundamentals and a broadening market, there's a unique opportunity to invest in undervalued areas. Northrop Grumman offers strong defense sector growth with a 1.9% yield and 12% annual dividend growth. Franco-Nevada provides high-margin exposure to gold without mining risks, enjoying an 83% EBITDA margin and a 1.1% yield. EOG Resources stands out in energy with a 2.8% yield and efficient operations that promise strong returns even at moderate oil prices. I believe these stocks are well-positioned to deliver elevated long-term gains in a broadening market. Test Drive iREIT© on Alpha For FREE (for 2 Weeks) Join iREIT on Alpha today to get the most in-depth research that includes REITs, mREITs, Preferreds, BDCs, MLPs, ETFs, and other income alternatives. 438 testimonials and most are 5 stars. Nothing to lose with our FREE 2-week trial. And this offer includes a 2-Week FREE TRIAL plus Brad Thomas' FREE book. Leo Nelissen is an analyst focusing on major economic developments related to supply chains, infrastructure, and commodities. He is a contributing author for iREIT® on Alpha. As a member of the iREIT® on Alpha team, Leo aims to provide insightful analysis and actionable investment ideas, with a particular emphasis on dividend growth opportunities. Learn More. Analyst's Disclosure: I/we have a beneficial long position in the shares of NOC either through stock ownership, options, or other derivatives. 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.

I SPY a Laggard: 5 Divvies Up to 9.2% to Buy Instead

You've got some SPY in your portfolio. So much in fact you're probably trying to quickly change the subject from the SPDR S&P 500 ETF Trust (SPY). I'm not mad. (I'm just disappointed--ha!) We refer to SPY as "America's ticker for a reason." It is everywhere. And it's OK. Really it is. Holding SPY has worked out this year. But we're now at an inflection point--which is why we are having this conversation. Only three stocks account for 21% of the S&P 500. Apple (AAPL), Nvidia (NVDA) and Microsoft (MSFT) determine the entire market's moves! This trio is tired. The "S&P 3" need a rest. Which means money is about to flow into the forgotten 497. (Technically the overlooked 500 as the S&P 500 actually contains 503 stocks. We contrarians appreciate these nuances.) Let's discuss five dividend payers that are likely to lap SPY between now and the end of the year. Unlike the tired tech names, these "boring" dividends are due for a rally. They are utilities. And I'm most interested in them because sometimes income investing is just that simple. Utility stocks are "bond proxies" that benefit directly from falling rates. When rates drop, the 'utes rally: When Rates Decline, Utilities Rally The purple line is Utilities Select Sector SPDR ETF (XLU). the utility fund that basic investors and money managers buy. Over the past year, XLU rallied 24%. The catalyst? A lower 10-year Treasury rate, which eased from 5% to 4.2%. Utility stocks became so hot in May that mainstream pubs like The Wall Street Journal proclaimed them a "hot bet on AI"--ha! The narrative? Skyrocketing demand for electricity to support AI algorithms would benefit utilities. A connection so loose it's laughable. Aren't lower rates the real driver of the move in the 'utes? We basically started the utility stock bandwagon here at Contrarian Outlook. With the Federal Reserve set to cut rates sooner rather than later, utilities remain a best buy right now--before they grab attention. Another 0.8% decline in the 10-year yield could bring another terrific 24% price pop for the 'utes. But rather than buy vanilla XLU and its 3.2% yield, we'll supersize our dividend. Let's begin with Cohen & Steers Infrastructure Fund (UTF), my "go to" ticker for utility and infrastructure stocks. It pays 7.8% and gives us instant exposure to 242 terrific names including American Tower (AMT), The Southern Company (SO) and NextEra Energy (NEE). Sometimes we are fortunate enough to snag UTF at a discount to its net asset value (NAV). Today it trades at par. Take UTF anytime it's at par or below because its NAV will gain as rates decline. Reaves Utility Income (UTG) is a similar play. UTG yields a bit more at 8% and also trades at par. UTG focuses on higher yield plays, so it uses less leverage (20% versus 30% for UTF) to deliver its elite 8% dividend. UTG's premium is familiar territory. The fund's markup has wandered as high as 13% in recent years! We could see "premium expansion" happen again with falling rates providing a nice boost for its underlying holdings. DNP Select Income (DNP) is another fund that owns electric utilities and dishes an even bigger dividend. The fund is popular with income investors because it pays a monthly 6.5 cent dividend that nets out to a nifty 9.2% annually. DNP often trades at a premium to its net asset value (NAV)--in fact earlier this year, it fetched a 31% markup! In other words, investors were paying $1.31 for a dollar in assets. Not us! But now, thanks to the recent pullback in utilities, DNP's premium is down to 4%, which may be as low as we see it this cycle. We like it. Looking for individual utility plays? Here are a couple of ideas to cherry pick. Dominion Energy (D) lowered its dividend back in 2020 and has been in the doghouse since. The "dividend magnet" works both ways. After Dominion cut, its stock price was eventually punished. But the selloff looks overdone, and this utility has some upside to catch up with its payout: Dominion's Dividend Magnet is Due Why the 2020 chop? Too much debt, of course. Dominion had embarked on an acquisition binge in the name of growth. Which, ironically, backfired. The result was a rare payout slash from a utility--an income investor's worst nightmare. That's why first-level investors keep Dominion in the doghouse today. Which intrigues us here at Contrarian Outlook. Chief financial officers (CFOs) are like carpenters. It's best if they measure twice and cut only once. As a result, the safest dividend is often the one recently cut. Unless management is a complete clown show, the last thing they want is to have to cut twice. They don't have the nose for it! Meanwhile, American Electric Power (AEP) is a "dividend magnet" favorite. This regulated utility boasts 5.6 million customers across 11 states. "Regulated" means AEP has a "high floor" in terms of earnings, because regulators approve rates that afford utilities enough profits to serve customers but without gouging them. These profits grind higher and higher. AEP recently reached a deal with activist investor Carl Icahn for two board seats. Icahn, surely, was attracted to the company because of its consistent earnings growth. Since 2010, AEP has compounded its earnings by 5% per year and recently accelerated to 6.5%: AEP Earnings and CAGR AEP is a "pure play" on dividend growth. Over the past decade the company's dividend has catapulted 76% from $2.00 to $3.52 per share: AEP: A Steady Dividend Grower Source: Income Calendar About that 76% dividend climb. AEP's stock price 45% rise lags the divvie. That's one reason for spicey upside we rarely see from a utility. As rates cool down, AEP's dividend magnet could really pull shares higher: AEP's Dividend Magnet is Due Source: Income Calendar AEP's earnings always rise. Its payout always climbs. Its stock price overshoots and undershoots its dividend, as stocks do. But, over time, its price rises with its payout. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Undercovered Dozen ETF Edition: China, Bitcoin, Cybersecurity, Motley Fool +

Take a look and share your thoughts: are any of these worth a deeper look? The 'Undercovered' Dozen series began as an effort to highlight undercovered stocks on our platform for you to have another source for idea generation. We now produce a weekly piece highlighting these 12 picks that you can find in The Undercovered Dozen profile. Today we're introducing a new variant on this series focused explicitly on less covered exchange-traded funds: the Undercovered Dozen ETF Edition. The structure of the article will be the same as previous editions: seven ideas are primary features with an in-depth glimpse, while five others are included with fewer details. In this first edition, we are looking at ETFs from articles published from June 1st - July 15th. Take a look at what these ideas might hold for you. And please join the conversation below to share what you think: are any of these worth following up on? Saba Closed-End Funds ETF (CEFS) has put up strong performance since our last update and beat out the Cohen & Steers Closed-End Opportunity Fund (FOF) as expected. CEFS is a leveraged ETF that invests in closed-end funds, providing exposure to activist targets of Saba Capital Management all in one package. The fund has a solid track record, high distribution yield, and a diversified portfolio of equity, fixed-income, alternatives, and mixed allocation. Today, FOF is still trading a bit richly, even as the premium has come down. I still would view CEFS as the top choice currently between the two, and wait for FOF to move to a meaningful discount. The iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) attracts a lot of attention from investors, likely due to the fund's sky-high yield. TLTW pays distributions monthly with the fund scheduled to pay out $0.276948 on July 8th; if we annualize that payout, TLTW's indicated yield is around 12.9%. I suppose it's only natural to wonder how an ETF with a name that implies it buys long-term Treasuries could possibly have a yield in the double digits. After all, benchmark 20- and 30-Year Treasuries haven't offered a yield much over 5% at any time in recent years. So, let's take a closer look at this ETF, including the strategy and total returns under different bond market trading environments. I understand what you might be thinking as you read this title: yet another author talking about the incredible opportunity behind a thematic ETF. You might ask yourself: "Why should I allocate part of my portfolio to cybersecurity when there isn't an ETF outperforming the broader Nasdaq Index?" That's a valid consideration. However, I strongly believe that the cybersecurity sector will capture a significant portion of the technology market in the future. Including an ETF like the iShares Cybersecurity and Tech ETF (IHAK) in a well-diversified portfolio could potentially generate alpha. There are several reasons for this, but the most significant ones are the widespread adoption of AI technology and the increasing use of digital payment methods. VanEck Bitcoin Trust ETF (HODL) is a passive portfolio strategy meant to track the price of Bitcoin (BTC-USD). The portfolio offers retail investors the ability to add BTC holdings to their tax-exempt retirement accounts, which, I believe, has broadened the investor pool for the once decentralized currency. Given the dynamic shift in traders for the cryptocurrency, many of the investment benefits, such as uncorrelated returns, have diminished as a result of by whom and how the assets are held. Given that I am not a BTC trader and view this investment strategy more as an asset allocation, I cannot recommend a price target for trading purposes. Comparing liquidity and AUM with HODL's peer BTC ETF strategy managed by iShares, the iShares Bitcoin Trust ETF (IBIT), I cannot recommend HODL as a BUY. Is China investible, that's the first question one may ask before considering buying into this market. The answer is yes, with two important caveats; 1. that the stocks have 20Fs, i.e. some reasonable sense of disclosure and audited financials, and 2. that the valuations compensate for the many other China factors. Those China risks are a lack of rule of law, the CCP (Chinese Communist Party) can and has changed regulation, policy, and directed capital as it sees fit and a company or negatively affected party has no recourse, no protection, the rules can change and there is little that can be done about it. The other factors are geopolitical, the "rivalry" with the West leads to protectionism, trade barriers, etc. that can and have made doing business difficult. I am upgrading the KraneShares CSI China Internet ETF (KWEB) to buy from hold due to a combination of positive factors that more than compensate for China's idiosyncratic risk. These factors include a lower relative valuation of 0.6x PEG (PE vs EPS growth), a consensus EPS growth upgrade of 5%, and a price target upgrade of 7% vs the December analysis. Managed futures, specifically Simplify Managed Futures Strategy ETF (CTA), offer potential for maximizing income, boosting returns, and reducing volatility in a portfolio. CTA has shown superior historical returns, consistent dividends, and unique strategies that could potentially outperform its peers by 3% per year. The risks to be aware of are that its volatility can be much higher than that of more proven peers like KFA Mount Lucas Index Strategy ETF (KMLM). Optimal portfolio design may include up to 50% managed futures, providing diversification, returns, and income growth while reducing volatility, including peak portfolio declines of just 7.5% since 1990 and 17% gains during the Great Recession. All while achieving double-digit returns and yields between 7% and 15%. iShares Interest Rate Hedged High Yield Bond ETF (HYGH) invests in high-yield corporate bonds and hedges its interest rate risk through swaps. HYGH has a strong 9.1% dividend yield, 3.1% higher than (HYG), the largest unhedged high-yield bond ETF in the market. HYGH's dividends have seen double-digit growth these past twelve months, and share prices have marginally increased as well. Although potential Fed rate cuts would lead to lower dividend yields for the fund, it trades with a widespread relative to its peers, so dividends should remain competitive. HYGH's strong 9.1% dividend yield, low rate risk, and potential outperformance, make the fund a buy. Motley Fool 100 Index ETF (TMFC) offers exposure to 100 stocks that The Motley Fool, LLC's analysts are bullish on. TMFC has solidly benefited from the growth-style rally, as it has beaten (IVV) and (QQQ) this year. However, it has underperformed QQQ and (SCHG) over February 2018-June 2024. Global X Russell 2000 Covered Call ETF (RYLD) has dropped over the last 7 months. Total return has done better, but the fund has only returned about 3.1% annually since inception. We go over why and tell you how we are making income while dodging this one. Silver futures broke out of a bearish trend and entered a bullish trend. Rising open interest and increasing prices validate a bullish trend in silver futures markets. Amplify Junior Silver Miners ETF (SILJ) is the junior silver mining ETF that tends to outperform the metal during rallies. Invesco S&P 500 GARP ETF (SPGP) is a multi-billion-dollar ETF with a portfolio of stocks with solid profitability trends, holding a 25% weight in the Energy sector. It is a large ETF with a low P/E ratio, high resource-sector exposure, and bullish technical trends, making it a solid choice for investors seeking equity diversification. ProShares Ultra Bloomberg Natural Gas ETF (BOIL) provides 200% exposure to near-month natural gas futures. Positive seasonality for natural gas prices recently ended as speculation for summer cooling demand has concluded. Looking forward, traders will need to be patient and wait to bet on winter cooling demand around August/September.

6 Essential Strategies For Successful Dividend Investing

I do much more than just articles at The Dividend Kings: Members get access to model portfolios, regular updates, a chat room, and more. Learn More " It's been an incredible start to the year, with the stock market rising in an eerily low volatility rally. It was the best presidential election year in history and the 12th-best year for the S&P through the year's first half. Many are surprised by the rally's low volatility. It's the lowest volatility since 2017. In 2017, the tax cut euphoria rally triggered the lowest annual volatility in 52 years and the second-lowest volatility in US market history. I want to thank Charlie Bilello for his incredible charts, which are invaluable in showing my readers the important context of markets, investing history, and key investing lessons. Look at five critical investing lessons Nike and Costco can teach all investors. Forget these lessons, and you risk potential catastrophe for your portfolio that could cost you your retirement dreams. Remember them. You are far more likely to retire safely and splendor. Bubbles can last for years because investors have hindsight bias, thinking that what has happened recently will continue. On "Mad Money," Jim Cramer discusses "long-term" 18-month time frames. In fact, over 18 months, about 10% of stock returns are explained by fundamentals. Valuations always matter in the long term, but investors will always forget this in the face of a bubble, like what happened to Nike. Nike Became 600% Overvalued In The Tech Bubble: "It's A Tech Stock Now!" How crazy was Nike's peak PE ratio of 48 back in 2021? According to 40 Wall Street analysts, Nike's long-term growth consensus is 10.2%. What was the 20-year growth rate? 10%. What's Nike's fair value growing 10%? According to billions of cumulative investors over 20 years, factoring in all of Nike's risks, brand power, and wide moat, Nike's fair value is 24 to 25X earnings. Nike became overvalued in 2017 and kept on going. Its PE soared to almost 50 by the market peak in 2021 because "this time is different" and "Nike is now a tech company." According to John Templeton and Howard Marks, 20% to 30% of the time, "this time really is different." Most of the time, it's not. And this brings me to the second critical lesson Nike's crash can teach investors. Costco has been up 60% in the last year, while earnings have been up 14%. That's solid earnings growth, but this is not exactly an AI hyper-growth stock level. Narrative always follows price. In 2021, Nike saw its growth recover from the 36% decline caused by the pandemic (supply chain disruption in China) to 123%. That's great, but typically, stocks won't become 100% historically overvalued based on one blockbuster year. Nike's Direct-to-Consumer strategy, which began in earnest around 2017 but gained significant momentum in 2021, faced several challenges and ultimately led to a strategic pivot. Here's a summary of the plans and what went wrong: Nike's DTC Plans (2021 onwards): Shift focus to direct sales: Nike aimed to increase direct-to-consumer sales through its physical stores, website, and apps. Reduce wholesale partnerships: The company exited about 50% of its retail partners and focused on 40 "strategic" retail partners. Digital growth: Nike set ambitious goals for digital sales, aiming for 50% digital penetration by 2022. Consumer Direct Acceleration: Launched in 2020, this initiative aimed to create a seamless brand experience across digital and physical channels. Nike decided it could start cutting out traditional partners like Foot Locker and selling shoes online. A direct relationship with customers creates more opportunities for future marketing, and cutting out the middleman raises margins. Wall Street fell in love with Nike's new hyper-growth story. Nike wasn't a believed shoe brand. It was a tech company, just like in the tech bubble, when Nike convinced investors it was worth 175X earnings because the internet would turbocharge sales forever. Bear markets don't necessarily have to be caused just by valuation. Usually, they set up a stock for a nasty downturn and then some outside catalyst burst the investor bubble. The narrative of "Nike is a tech stock with hyper-growth forever!" we saw in 2000 and 2021 led to the current bear market and a long period of losses for investors who thought Nike was worth a 600% historical premium. Nike investors buying at the peak of the Internet bubble spent seven years underwater. Nike investors who bought at the top might break even, including dividends, around 2028 in a seven-year bear market like the one in 2000. What about Costco? Why on earth is it up 60% in the last year? What's the red hot story driving this stock to record high multiples? Membership Fee Increase: Costco announced its first membership fee hike in seven years, effective Sept. 1, 2024. This increase is expected to boost profits significantly as Costco's membership fees are a crucial revenue stream, contributing around 50% of its operating income. The anticipation of higher future earnings from this fee hike has positively influenced investor sentiment. Strong Sales Performance: Costco has reported robust sales figures with net sales reaching nearly $24.5 billion for the five weeks ending July 7, 2024, marking a 7.4% increase compared to the previous year. This strong performance underscores Costco's resilience and ability to grow even in challenging economic conditions. High Membership Renewal Rates: Costco enjoys a high membership renewal rate of around 90% globally, which provides a stable and predictable revenue stream. Investors highly value this stability, contributing to the stock's premium valuation. Expansion and Scale: Costco continues to expand its footprint by opening new locations, which boosts revenue and membership numbers. Its massive scale gives it significant purchasing power and negotiating leverage with suppliers, allowing it to offer low prices to customers and maintain a competitive edge. Digital Growth: Costco has seen a significant surge in online sales, highlighting its relevance in digital retail. This growth in e-commerce is an essential factor in its overall sales performance and future growth prospects. While these are all true bullish points for long-term COST investors, none will likely justify a 50+ PE in the long term. When stocks get cut in half, many investors are tempted to buy. We all remember wonderful world-beaters like Amazon (AMZN), which fell 93% in the tech crash and recovered to make investors millionaires. Most US Stocks Are Bad Investments While investing in US index funds is an excellent long-term strategy, and every bear market in US stocks is always a buying opportunity, barring an apocalypse, the same is not valid for individual stocks. Only 4% of stocks from 1926 to 2018 beat risk-free cash yields on T-bills. If you had bought Nike near IPO and held on, you'd have made 9,500X your money. Nike has fallen double-digits in a single month 40 times in its history, including losing 37% in February of 2000. But remember that most companies that fall 70%-plus never recover. And it's not just non-profitable meme stocks that are capital incinerators to avoid like the plague. According to JPMorgan, over 50% of tech stocks suffer "permanent catastrophic declines" and 65% of energy stocks. If you buy an individual tech or energy stock, the odds are not in your favor, and long-term risk management is critical. Remember how Nike's logical-sounding DTC strategy was supposed to boost sales growth, expand margins, and widen its moat simultaneously? Here's what actually happened. Revenue declines: Nike experienced disappointing financial results, with revenue declining 2% in Q4 2023 and remaining flat for the year. Loss of retail presence: The exit from many wholesale partnerships reduced Nike's distribution points from 30,000 to 8,000. Underestimation of wholesale importance: Nike miscalculated the significance of third-party retailers in reaching consumers. Lack of product innovation: The focus on distribution channels overshadowed the importance of product development. Legal challenges: Nike faced a class-action lawsuit alleging misrepresentation of the DTC strategy's success. Consumer behavior mismatch: The strategy didn't align with consumer preferences for omnichannel shopping experiences. As a result of these issues, Nike has been forced to pivot its strategy. The company is now: Balancing DTC and wholesale approaches to serve customers across all channels. Nike took its eye off the ball, missing out on the recent renaissance in running shoes as it became overly dependent on Air Jordans. It didn't stick to its knitting. It focused on DTC, and when that didn't work out, its sales and earnings collapsed. Will Nike likely prove a good investment from today's levels? Most likely, yes. However, in the long term, analysts expect the 11% to 12% total returns to not be close to their historical 26% annual returns since 1985. But my point is that when Nike was flying high, investors focused only on what might go right. Like growth rates doubling from 12% to 25%. The fastest growth, more stable cash flow, and a wider moat would have justified a higher valuation. However, those things didn't happen. Have Costco's growth estimates doubled to 20%? COST's growth outlook hasn't changed significantly. Nothing justifies the highest PE in history (or close to it). So what does that mean for COST investors buying now? Costco has fallen 20%-plus in a single month, a one-month bear market, four times. It's even fallen 40% in a single month. Worst Case? COST Investors Might Be Underwater For 9 Years Adjusted For Inflation COST is expected to grow 10% to 11% annually, similar to its historical 11.6%. If it reverts to its 20-year average PE, it's currently pricing in about seven years of growth. Including inflation, COST investors buying today are potentially looking at a lost decade. Best Case: COST Investors Suffer 5 Years Underwater Adjusted For Inflation OK, so far, everything seems pretty straightforward. I've selected case-study stocks, but smart investing is easy in theory and much harder in practice. Nike's Historical PE Consider Nike's historical market-determined fair value PE. The mean-reversion of the future will continue, but what's the mean to which the PE will revert? Is it the 20-year average of 24X earnings? Or the five-year average of 33? The 20-year average PE for Nike says that if Nike grows as expected, it could match the market's 12% annual returns in the coming years. The five-year average PE says Nike has a consensus return potential of 24%. Matching the market? It's not worth owning a single stock for a specific reason (like an 8% to 12% yield). Double the market's returns? Buffett did that for over 50 years to become the best investor ever. 10-Year Average: My Personal Favorite Rule Of Thumb Time Frame I expect Nike to do well for investors in the future based on today's far more attractive valuation. At today's margin of safety, the question isn't "Will I make money in Nike?" but "How much money will I make and in what time period." What About Costco? DK uses the 10-year average PE for COST, factoring in that investors are willing to pay for its wide and sticky moat. However, does that mean I would pay 33X earnings for COST when it eventually reverts to that level? Buying at fair value only means fully participating in a company's future growth and dividends. COST's yield at fair value is just under 1%, and its growth consensus of 10.2% means that 11% to 12% long-term returns are what COST investors buying at fair value should expect. Would you be willing to pay 33X earnings (market-fair value) for a stock that's expected to underperform the S&P in the future? Markets can remain irrational longer than you can remain solvent" - John Manard Keynes "If I told you tomorrow's headlines, you'd blow up your portfolio." - Meb Faber If you think shorting Costco or any bubble stock is a good idea, it's not. The most a stock can fall is 100%. The most it can go up is infinite. Zimbabwe hyperinflation is the ultimate example of how shorting a bubble can go disastrously wrong. Zimbabwe experienced extreme hyperinflation from the early 2000s, peaking in 2008. The annual inflation rate reached an astronomical 89.7 sextillion percent (10^21) in November 2008, meaning prices doubled every 24.7 hours. Imagine a time when Traveler told you about Zimbabwe's hyperinflation ahead of time -- the worst inflation in human history. What do you think the stock market in that country did? Collapsed right? So shorting Zimbabwe stocks ahead of 90 sextillion inflation is a "sure thing." Imagine you risked 2% of your life savings to short Zimbabwe stocks ahead of the biggest spike in inflation. Zimbabwe's stock rose 50X in about six weeks during the height of the crisis as citizens rushed to invest everything in anything that might hedge inflation. The Zimbabwe market collapsed to nearly zero within eight weeks and shut down. You were 100% right! Shorting Zimbabwe's market was genius! Yet, you were wrong on the timing and lost 100%. That's why Meb Faber once said, "If I told you tomorrow's headlines, you'd blow up your portfolio." The stock market isn't the economy. The economy isn't the stock market. If you had known that a global pandemic and economic lockdowns were coming on Jan. 1, 2020, you would have shorted the S&P. And the market ended the year up 18%. If you knew that interest rates would triple in 2021 (off record lows) while inflation hit 8% by the end of the year, you would have likely shorted stocks. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested." -- Peter Lynch Both Nike and Costco are two classic examples of world-beater blue chips. Both are legendary for generating incredible long-term returns thanks to strong moats, great corporate cultures, and excellent long-term risk management skills. Both companies have proven highly innovative, and that's expected to continue. However, Nike is now in its third-worst bear market in history due to achieving an insane 100% premium in 2021 when it became priced for 25% growth. You're asking for trouble if you buy even God's stock at a 100% premium. Nike's problems can likely be fixed, and once the current turnaround goes through, it will likely generate 10% to 11% EPS in the future. Costco is a beautiful company that is firing on all cylinders, trading if it can grow earnings by 15% to 20% per year forever. There isn't a single professional analyst who thinks Costco's long-term growth can justify a 53 PE. At some point, it's likely to suffer a 5 to 9-year bear market, adjusted for inflation. I can't tell you when that bear market will begin. It could start today, in a month, or not for several years. But I can tell you that valuation means reversion is real and eternal. This means that stocks revert to change over time, and sometimes, "this time really is different." That's why smart investing is about asset allocation and risk management: it's impossible to know when "this time really is different."