2 Dividend Stocks For An Overvalued Market

Summary

  • The stock market is in a 3rd standard deviation of being overvalued.
  • Low interest rates are a justification for some of the historic overvaluation.
  • Federal Reserve produced excess liquidity is not infinite, but it is sufficient to fuel the rally for now – any pullback in excess liquidity would be met with stock selling.
  • Here are some stocks with little long-term risk that can hold up to future volatility should Fed policy become more constrained.

I know it is frustrating watching speculation take over the stock market. But, what I also know, is that speculation always, 100% of the time, no exceptions, ends in tears for most.

The problem of course, is that irrationality can take hold for a very long time, especially, when there is an enabler, like the Federal Reserve. 

The Stock Market Is Delusional

So, for us, the rational, we need to try to find investment ideas and trade ideas that manage risk first, but still give us a chance to participate in the gains of the market. So, here are several I think you should be considering adding, especially, if you are very heavy in cash. 

Consider this piece as a substitute for the stock and option ideas normally on Mondays.

Dividend Stocks With Low Long-term Risk

Dividend stocks get over valued as investors chase yield. Sometimes though, there is underlying value that the market is not pricing in yet. These two stocks fit that profile.

AT&T (T)

AT&T is my favorite pick in stalwart dividend stock universe. While many rail on its debt, the fact of the matter is that it keeps coming down. AT&T has enormous pricing power and can slowly raise fees over time. Their fiber network is second to none and in high demand that is growing.

Finally, the kicker with AT&T which I mention over and over, is that Warner Media is worth a fortune as an an income generation asset for AT&T or as a piece it sells off in a strategic deal. I would not be shocked to see Apple (AAPL) buy WarnerBros or at least negotiate a massive rights and development deal that came with some benefits for AT&T to sell Apple products a week or two before competitors like Verizon (VZ).

The company is also in the process of unwinding DirecTV, as well as, selling other billion dollar parts. 

AT&T has virtually no risk of permanent loss. It’s dividend from these prices yields over 7% which means that you double your money every decade even if the stock price stays the same. 

T Chart Link

I strongly recommend owning a 2-3% position in T for any retirement portfolio or even larger growth portfolios as a way to generate income to buy growth stocks. 

Kinder Morgan (KMI)

Kinder Morgan runs America’s largest network of natural gas pipelines. Natural gas pipelines do not have the risk of oil pipelines because natural gas will be used for power, heating and cooking for a long time. Oil pipelines on the other hand are at risk of oil companies going bankrupt and welching on deals. Natural gas pipelines are among the small group of fossil fuel investments that still have long-term value.  

While natural gas producer stocks are at risk for being zombies, they can pay their bills to the natural gas pipeline companies (including Williams (WMB) which I am likely to add to Q1 2021 VSL update). This means that the dividends are stable at the natural gas pipeline companies and that debt will continue to get whittled down.

It is important to know that there will be very few new natural gas pipelines built in the future, insuring the value of those that already are in operation. 

The existing right-of-ways are golden. New natural gas capacity will generally need to follow existing right-of-ways as few new ones are being granted. This gives Kinder, the biggest network operator, a built in advantage over competitors trying to move gas. 

One of the two main reasons that Dominion Energy(D) sold their pipelines to Berkshire Hathaway (BRK.B) is that they could not get approval for a pipeline network to connect West Virginia natural gas to their network in North Carolina.

This all results in a few natural gas pipeline companies acting as an essential oligopoly. Investors love oligopolies, not as much as monopolies, but pretty close.

For the few new gas pipeline projects in the future, they will be built based upon contracts with backers versus being on spec as they often were in the past. This eliminates the debt risk and risk of having to find takers for pipeline capacity.

Natural gas pipelines also come with some flexibility. They are easily converted to transporting CO2 which is a growing market and hydrogen which is likely to be a growing market in the future. They can even be converted to move water if that ever becomes a necessity – which I think in parts of the country it will be, think Arizona. 

Finally, and this is a big finally, the value of these companies has caught the attention of the most well known value investor in the world, none other than Warren Buffett. Take a look at the Dominion pipelines that Berkshire Hathaway bought to add to their existing network with those of Kinder Morgan and Williams. 

Natural Gas Piplelines

https://www.brkenergy.com/energy/natural-gas

km_asset_map.png

https://www.kindermorgan.com/Operations/Asset-Map

Operations | Williams Companies

While the Williams network would benefit Berkshire by connecting to the northwest, the Kinder Morgan assets fit extremely well filling in the gaps and connecting Berkshire’s other assets. Even if there is no strategic moves, the current makeup of Kinder Morgan and dividend makes it a buy here.

KMI Chart Link

I strongly recommend owning a 2-3% position in T for any retirement portfolio or even larger growth portfolios as a way to generate income to buy growth stocks.

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