Now or never for dividend stocks

Co-author of Hidden Opportunities.

In today’s world, we don’t like to wait for anything. Shipping should be instant, groceries should be delivered within hours, and our flight should be ready to pick us up at the exit from the airport. There is one thing, in In particular, I hate waiting-for food in a restaurant.

I enjoy a full meal consisting of an appetizer, main course, and dessert. And I will be happy if the next cycle comes because I am ready for it. I think that explains why I like the dividend so much.

“A good return on dividends means at least having an appetizer to eat while you wait for the main course.” – Jon Neff.

I like to value my investments, but I just don’t have the patience to sit around hungry. I enjoy the appetizer in the form of regular earnings Knowing that the delicious main course will arrive in due time. There is also candy. Today’s discounted dividend securities have the potential to offer raises and high capital, both perks missing from secured instruments such as certificates of deposit (“CDs”) and money market funds that pay historically high rates of interest.

With foolproof tools, you have your appetizer, but no main course or dessert to come when you’re done. With inflation clearly slowing in 2023, we are nearing the end of this interest rate cycle. Once Mr Market starts pricing in a full interest rate “pause,” or if interest rates start to fall, dividend stocks are set to rise, and dividend yields will shrink. We’re right at that time! Therefore, the coupons for the three-course meal are almost sold out.

We’re highlighting two +7% yield picks to act fast before you miss this opportunity of a lifetime.

Pick #1: UTG – Yield 8.3%

With the recession expected to hit the US economy as soon as possible in a few months, boosting your allocations to defense sectors is a good idea.

Utilities have historically been a defensive segment of the market due to the following factors:

• Steady Earnings Growth: Demand for electricity, natural gas, water and sanitation services will remain strong regardless of the state of the economy.

“Companies that make products that consumers buy regardless of the economic environment – think diapers and utilities – do well because people keep buying them” – Ariel Acuña, Founder, LTG Capital.

• Profits Concentration: Most utility companies pay a dividend, providing their shareholders with a reliable income stream. Notably, companies from this non-cyclical sector are considered “widows and orphans” due to their stable cash flows, predictable profits, and stable income for risk-averse investors.

• Regulatory protection: Utility companies are subject to significant regulatory oversight, which protects them from competition. Additionally, these companies protect their profit margins by securing regulatory support to pass the increased costs on to their customers. Most importantly, environmental legislation significantly impacts utility growth opportunities as companies expand their asset base with strong incentives from local, state and federal government agencies.

Despite the appeal of utilities in this uncertain economy, individual businesses are vulnerable to environmental (weather related) and operational (infrastructure related) risks. Moreover, companies can easily re-prioritize capital allocation targets, and we have no say in that decision. For income investors, diversification is a powerful ally to ensure the safety and sustainability of dividends.

Reeves Utility Income Fund (UTG) is a closed-end fund (“CEF”) focused on current income.

UTG Diversified across 44 holdings, its 10 largest constituents are some of the world’s largest utility and telecoms companies, and are well positioned to maintain their execution through thick and thin. source.

Despite the pandemic conditions and high and low interest rates, the fund’s largest holdings have maintained, if not enhanced, their profitability in recent years.

UTG pays a monthly dividend of $0.19/share. At current prices, this calculates to an 8.3% annual yield. It is important to remember that UTG is actively managed. We expect management to opportunistically move in and out of positions to generate returns for us.

UTG is modestly leveraged at 20% to boost dividend income and gains. Interest is calculated at the one month Guaranteed Overnight Financing Rate (“SOFR”) plus 0.65%. Rising borrowing costs have hurt CEF’s net asset value since the beginning of quantitative tightening.

However, we are nearing the end of increases in this price cycle, and UTG is in a better position to increase NAV as prices are either suspended or ready to move lower. With UTG trading roughly on par with NAV, this is an excellent time to buy at these higher yield levels and boost your recurring income portfolio.

Pick #2: VZ – Yield 7.2%

Verizon Communications Inc. (VZ) has been one of the “dogs in the Dow” since the Federal Reserve started raising interest rates. As an income investor, stocks like these from industries with limited competition, inelastic demand, sector-leading profit margins, and a proven track record of earnings growth provide meaningful buying opportunities. We charge an attractive fee to wait for them to return the favor.

VZ First quarter 2023 earnings were reported on April 25th, and on a high note, everything is progressing according to management’s original guidance for the fiscal year.

VZ has always held a high position with profitability in the US telecom industry, and Q1 was no exception. The company continued to lead with an EBITDA margin of 41.5%, compared to AT&T Inc (T) at 40.7% and T-Mobile US, Inc. (TMUS) by 34%.

The company’s capital expenditures are expected to decline by 17%, supporting free cash flow (“FCF”) growth and leaving management optimistic about another dividend increase later this year.

Mr. Market continues to focus on the fact that first-quarter earnings exceeded the cash flow fund the company generated during the quarter. VZ paid $2.7 billion in Q1 dividends when FCF was $2.3 billion. This calculates to a payout ratio of 117% FCF. source.

We explained in the earnings update on AT&T that FCF tends to be lumpy, particularly in an industry where companies are expected to make significant capital expenditures toward 5G and fiber. Looking at the twelve months of consecutive cash flows (Q2, Q3, Q4 2022, and Q1 2023), we see $15.35 billion and $10.9 billion for common stock dividends. This indicates a payout ratio of approximately 60%, which is a healthy measure.

VZ didn’t provide official guidance for FCF for fiscal year 2023, but CEO Hans Vestberg said during the fourth-quarter conference call that the analyst’s projected $17 billion was within the ballpark. Assuming a 3% dividend increase in fall 2023, if VZ spent $11.1 billion on combined dividends, that would be 57-60%. VZ also provided an earnings per share (“EPS”) estimate of $4.55-4.85 for fiscal year 2023, which puts its projected annual earnings of $2.6/share at a modest 53-57% EPS. Both metrics based on fiscal year 2023 earnings guidance indicate that a modest earnings increase would be adequately supported.

At the end of the first quarter, VZ’s net unsecured debt to EBITDA ratio was approximately 2.7x. The company maintains an investment grade A-rated balance sheet and has low short-term unsecured debt maturities, with only $600 million due this year in the second quarter. VZ ended the first quarter with $3.9 billion in cash and cash equivalents on its balance sheet.

Higher rates make dividend stocks less attractive. But a qualified return of nearly 7% from a leading provider of services vital to the digital economy is something to watch out for. We don’t know what Mr. Market will do next, but VZ trades at very cheap valuations and is well positioned to implement its guidance and deliver and increase profits for shareholders. At current prices, VZ fits well with a long-term income portfolio for sustainable and growing income.

Conclusion

Have you played or heard of Age of Mythology? It was among the best PC games of 2002 from Microsoft Studios. It involved players selecting ancient civilizations and pursuing the strategic collection of humanity’s primary resources – food, wood, and gold. Players work to build an army and citizens, fight enemy units, and take over their cities. Greek civilization, in particular, had a buildable monument called the Plenty Vault. This unique monument automatically produces three units of food, wood, and gold every 5 seconds; The player was not required to take any action, effectively complementing the broader resource-gathering effort.

In the same sense, dividend stocks are the real world’s Plenty Vault. No matter how the market moves, I get a predictable and reliable cash infusion. And I buy as many as I can when they are on sale.

“Don’t look for the needle in the haystack. Just buy the haystack.” – John Bogle.

Now is the time to act, as interest rates are likely to have peaked and start falling soon. At High Dividend Opportunities, we purchase a haystack in the form of an overall ‘Model Portfolio’ of +45 Dividend Payers with a total return of +9%. We reserve “once in a lifetime” earnings opportunities. There are excellent returns available at “dirty cheap” rates, but not for long. Don’t wait until it’s too late. You can start with those two +7% returns!