It’s a tradition unlike any other! Move over, Masters. In these contrarian pages we select one dividend stock (or fund) for the year ahead.
Last year we bet on a “safe, somewhat-secret” 7.4% dividend from Jamie Dimon & Co with iShares JP Morgan USD Emerging Markets Bond ETF (EMB). EMB’s payout plus price gains combined for a 12% total return.
Nice. This is exactly what we look for as income investors. A high-yield investment that will pay us our divvies—and gain a bit in price. But this year we are flipping the script. My favorite divvie stock for next year is a growth play with a lot of upside but only a modest 2.2% current yield. (Recent 67% dividend growth more than compensates!)
For those who need income now, read on. My two “runner up” dividends yield 8.9% and 6.6%. Not a bad way to round out the medal podium.
Let’s start with a play on stubbornly high mortgage rates. They are back above 7.4%—yikes for homebuyers, but bullish for our old Contrarian Income Report friend Rithm Capital (RITM).
Why? Because RITM is sitting on a stockpile of mortgage service rights (MSRs), which gain in value as rates grind sideways or up. MSRs are contracts that give the holder the right to collect payments from a borrower. These aren’t the loans themselves; they are the rights to service these loans. A subtle but important difference.
When I bought my first house, my bank flipped the servicing of my loan to a firm called Caliber Home Loans. Caliber collected our monthly payment and settled up with the lender. We made our payments on time, so this was easy money for Caliber.
Yes, our recent refi disrupted their smooth servicing process, but as rates continue to rise, Caliber will see fewer loans “called away” and paid early.
Ironically, RITM has purchased Caliber! Recently we booked profits on RITM in CIR because it appeared the mortgage market would come back to life. It’s time, however, to reverse our previous diagnosis—the housing market is dead as a doornail.
This is too bad for homebuyers, but it is fantastic news for MSR mega-long RITM, which yields an elite 8.9%. This stock is an interesting buy again here, perhaps more as a trade than a buy and hold given the likely volatility in the bond market.
Next up is a cheap energy stock. Wait, what? I’ve already heard from careful readers concerned that Trump “drilled so much first term, he tanked oil.”
It’s true that energy prices slid all four Trump years, but the bear market in oil started in 2014—two years before Trump 1.0. It was triggered by the massive supply from the US shale boom. So, by the time Trump was inaugurated in 2017, these trends were already in motion. I would not draw many conclusions from previous energy stock returns.
The biggest bargain on the energy board today is BP PLC (BP), the British behemoth. BP has been around forever (more than a century) and like the old British Empire the sun never sets on BP’s 61-country operation.
BP produces crude oil and natural gas; deals in wind power and hydrogen and carbon capture; owns thousands of miles of pipelines; has commercial operations such as convenience and retail fuel stations, Castrol lubricants and EV charging; trades oil, gas, and renewable and non-renewable power; and even has a bioenergy business.
BP cut its dividend by 50% in 2020 and shares, pulled lower by their “dividend magnet,” were chopped in half. Since then, though, the giant has recovered. Sales doubled between 2020 and 2023, and the firm is solidly profitable again.
The “payout penance” continues for BP, with four hikes on the books since its infamous cut. This reminds us, once again, that CFOs are like carpenters—they measure twice and cut the dividend just once if they can help it. So far, so good. BP’s dividend sits 50% higher than after the cut, still off its peak but trending positively.
Path From Dividend Doghouse
Yet income scars (and memories of them) are slow to heal. BP trades for only 8-times earnings and less than half of its trailing sales. Contrast BP with CIR alum Exxon Mobil (XOM) which trades for 15-times earnings and 1.5-times sales.
This sad pup will soon be readopted by income-hungry investors. The company recently completed a $3.5 billion share repurchase program and initiated a new one, which it says it will complete by year end, removing another 4% of the energy giant’s float!
But my favorite play for 2025 is a bet on the cheapest asset on the board right now—agriculture. Grains spiked in the spring of 2022 when Russia invaded major wheat exporter Ukraine, but they have trended lower since because global farmers have boosted supply:
Cheap Grains
Corn and wheat are mired in a decade-long bear market. But they are not going to stay cheap because they never do. Current low prices will cure themselves because farmers will plant less corn and wheat in favor of something more profitable, such as cotton:
Which means one of the surest bets we can make over the coming years is that the downtrends of corn and wheat will reverse. In fact, these two grains will likely spike at some point as supply diminishes and demand remains steady.
This is what always happens with commodities. Corn and wheat are as cyclical as it gets. And fertilizer makers like CF Industries (CF) will benefit handsomely from the upcoming rally in grain prices. CF is already forecasting strong global pricing for its nitrogen fertilizers.
The company forecasts that fertilizer demand will outpace supply over the next four years. The turnaround is already reflected in CF’s generous dividend hikes—67% combined over the past two years!
A Fertile Dividend
Wall Street is beginning to sniff this story out. CF shares rose 9.7% in November. This could be the start of a major upside move.
If a 2.2% current yield (or even 8.9%!) is too “miserly” for your holiday needs, I have a 12%+ monthly dividend payer ready to recommend in this Friday’s edition of Contrarian Income Report. Click here to receive the new pick and I’ll send you my latest research on my favorite monthly payers as a “Cyber Monday” bonus.
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