Let’s take the hint from the past couple of weeks—2022 looks choppy. And why wouldn’t it? Our prolific money printer Jay Powell has (finally) admitted that inflation is real (not transitory).
His easy money had been floating the market. Now, with Jay reappointed and looking to assuage his Congressional colleagues about rising prices, he’s about to reverse the flow of money. This will likely reverse the rising tide of the market and expose select stocks.
But we dividend investors needn’t panic. With 2022 turning into a stock picker’s market, this is our time to shine. A fragmented market is just fine for us. In fact, our favorite high-quality income stocks are likely to benefit from an upcoming rush to quality.
So let’s beat the investing herd to the dividends with this “all weather” income strategy for 2022.
Forget “Buy and Hold.” “Buy and Fold” Is Our Best Play for ’22
This isn’t a market for “set it and forget it” strategies like buy and hold—unless you don’t mind a case of severe nausea!
Instead we’ll follow a “buy and fold” strategy, picking up undervalued stocks (see names and tickers below) riding them higher and then “folding” them into our next bargain play!
Impossible, you say? No way. I’ll show you how we’ll do it using a simple two-step plan. Let’s start with a move that’ll give our portfolio a dose of fast-rising dividends and ballast to help us fend off whatever comes our way in ’22.
Base Your 2022 Game Plan on “Pick and Shovel” Stocks
If you’re a member of my Hidden Yields dividend-growth service, you know I’m a big fan of “pick and shovel” stocks. They take their name from the California gold rush and center on the idea that it was the folks selling the tools the prospectors needed, rather than the gold-fevered miners themselves, who made all the money!
A good example of how a pick-and-shovel play works in your favor is Crown Castle International (NYSE:CCI), which gives big telcos like AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) the cell towers they need to send their signals zipping through the air. CCI is cashing in on soaring mobile-data consumption, thanks to its 40,000 cell towers and 80,000 small-cell nodes, which work in tandem with towers to improve connectivity in urban cores, where demand is high.
One of the things we love about CCI is its smart capital allocation: it nicely splits its investments between shareholder returns (i.e., dividends and buybacks), acquisitions and building new towers.
CCI’s Balanced Approach
Source: Crown Castle October 2021 investor presentation
The company is also doing a good job of leveraging still-low interest rates to fuel its growth while maintaining a healthy balance sheet that will bolster it when rates do start rising. As I write, CCI’s $20 billion of long-term debt is around half the value of its assets and a quarter of its $82-billion market cap.
These investments have resulted in rising revenue, the benefits of which flow through to investors as dividend hikes. CCI’s stated yearly dividend-growth goal is 7% to 8%, and it’s been crushing that benchmark!
Source: Crown Castle October 2021 investor presentation
CCI’s stock performance is also a textbook example of how pick-and-shovel stocks beat the “prospectors” every time: it’s blown past its “tenants,” Verizon Communications and AT&T, over the last decade, even including the big dividends the telcos are known for.
Pick-and-Shovel Play Soars, “Prospectors” Stumble
Finally, even though we’ve been talking about soaring mobile data use for a decade, our smartphone addiction is still getting stronger: according to 5G network supplier Ericsson (NASDAQ:ERIC), North American mobile data use will hit 52 gigabytes per smartphone in 2027, up from just 14.6 gigs in 2021, as data-hungry applications like virtual reality come into their own. CCI is sitting squarely in the tracks of that trend.
Buying Stocks With “Relative Strength” Will Be Critical in ’22
Now let’s really go on offense with stocks that boast “relative strength,” which is a favorite buy signal of mine. It’ll be even more important if 2022’s market is, as I expect, uneven.
Relative strength simply means that strong stocks tend to stay strong, giving them a solid base from which to jump. Forget the bargain bin—we’re not looking for low P/E ratios here—just stocks that have momentum.
Everybody loves betting on a long shot, but these underdogs simply don’t come in enough to pay. We like strong stocks, smart management and megatrends. But everybody wants those, so where do we find our edge?
In two places:
- We find underappreciated and hence undervalued stocks in popular sectors. Think: firms with a technology edge that are not—yet!—priced like go-go tech stocks.
- Or we look at an out-of-favor sector and find a stock that has been mislabeled.
A good example of No. 2 is Broadcom (NASDAQ:AVGO), a standout in the tech sector, which has struggled as investors worry that rising rates will dampen future profits, which are the key share-price driver for growth-focused techs.
But that means less to Broadcom, a semiconductor maker whose products show up in all kinds of goods, including “connected” factory robots, renewable energy gear and automotive electronics. That’s partly because the company is operating during a global microchip shortage, which gives it a lot of pricing power.
Investors are only just starting to realize this: over the last few years, the company has mostly tracked the Invesco QQQ Trust (NASDAQ:QQQ), a proxy for the tech-laden NASDAQ. But it’s broken away since late November.
Broadcom Shows Its Relative Strength
The jump got a big boost from news that management is rolling out a new $10-billion buyback plan and a 14% dividend hike.
Both of those boost our return across the board because a rising dividend increases our income stream and the share price, too (I’ll explain how in a second). And buybacks cut the number of shares outstanding, further lifting earnings per share and attracting more investors—who in turn bid the price up even more.
We can see Broadcom’s “dividend magnet” in action below: its price tracks its payout higher point for point!
Broadcom’s Dividend Ignites Its Stock, With More Gains to Come
The company’s dividend-powered share price should keep marching higher in ’22, thanks to its low payout ratio—dividends accounted for just 46% of free cash flow in the last 12 months. Free cash flow is also on a tear, up 288% in the last decade.
Where does all this leave us for 2022? Building our portfolio’s base with pick-and-shovel plays like CCI while hunting down stocks like Broadcom, which we’ll buy on relative strength, ride higher on surging dividend growth, then sell and “fold” our profits into our next undervalued dividend-growth play!
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."