The selloff has created big bargains in dividend stocks–I’m adding two to my income portfolio
Once upon a time, I worked in an office beneath a sign that read: “We’re a non-profit company…but we didn’t plan it that way.”
I feel a similar emotion as I write today about all the wonderful buys this market correction has created for dividend income investors.
I’m a dividend income bargain hunter…but I didn’t plan it that way.
Nonetheless and despite my chagrin, I think the bargains in this market are too amazing to pass up. The 12% drop (as of May 25) in the Standard & Poor’s 500 Stock Index from the April 23 high pushed up yields to the point that some stocks I never thought I’d ever put in a dividend income are begging to join the Jubak Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio )
Intel (INTC) yielding 3.1%. Nucor (NUE) at 3.4%. Nokia at 4.3%. Taiwan Semiconductor Manufacturing (TSM) at 3.7%. When a 10-year Treasury is yielding just 3.15%.?
Now if I can find yields like that by just rolling out of bed and over to my computer, think what a little digging will do.
You remember the rules of the Dividend Income Portfolio, right? The goal was to beat the yield on the 10-year Treasury with the dividend from a common stock (or its near equivalent.) By sticking to common stocks where the dividend rises over time (if you pick the right stock) unlike a bond where the coupon interest rate is fixed at issue I gained an edge against any return of inflation or higher interest rates. A stock like Verizon (VZ), for example, which has grown its dividend payout by almost 4% a year over the last five years, provides good protection for income investors against rising interest rates.
Of course, while the rules of the portfolio may not change, market conditions do. Right now, thanks to the euro debt crisis, it doesn’t look like income investors need to worry about inflation or higher interest rates any time soon. And right now equities are demonstrating, for anyone who had forgotten (hah!), that stocks are risky and volatile. So in adding to the portfolio now I’m a little less concerned about avoiding interest rate increases and a little more concerned with getting more yield, a lot more yield, than I’d get with a much less risky Treasury note.
So I’m looking for a stock or two that will beat not the 3.15% yield on the 10-year Treasury but the 4.28% yield on Dividend Income portfolio member Rayonier (RYN) and the 4.63% yield on E.I. du Pont (DD). They’re the two lowest yielding stocks in the portfolio. (Well, except for Telkom Indonesia (TLK), but I think that stock has more upside in any end of 2010 recovery from the current emerging market selloff.)
Ok. If I’m selling Rayonier and du Pont out of the Dividend Income portfolio what am I replacing them with? (I’m also selling Rayonier out of the Jubak’s Picks portfolio with today. You’ll find more detail on that sell in a post later today.)
There are high yielding stocks that I think are just too risky. Deutsche Telekom (DT), for example, yields 9.6% right now but its wireless business is struggling and I don’t see a turn around as likely, Barnes & Noble (BKS) yields 5.2%, but, well, you know what’s going on in the book business these days.
On the other hand, I would say that Spain’s Banco Santander (STD) isn’t as risky as it seems and the ADR’s 8.5% yield amply compensates me for that risk. Banco Santander looks like it’s going to emerge as one of the winners of Spain’s banking crisis. Spain’s big banks have lost market share in the last two years to regional banks that have kept on making real estate loans even as the risk of those loans defaulting was climbing. Now those regional banks are in deep, deep trouble and the Bank of Spain has begun shutting the worst of them and forcing others to combine. I think that will put business back in the hands of Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA). The dividend yield on Banco Bilbao is just 6.2%. (For more on the state of banking in Spain in particular and Europe in general see my post http://jubakpicks.com/2010/05/24/worry-over-shaky-euro-banks-pushes-up-interest-rates-threatening-the-global-economic-recovery/ )
(Most U.S. banks haven’t yet restored the dividends on their common stock that they were forced to cut when they took taxpayer cash in the post-Lehman Bros. bailout of the sector. I have found one interesting play among the U.S. group—although since it’s not a common stock, it doesn’t fit in the Jubak Dividend Income portfolio. But it might fit in yours so let me mention it. The stock is JPMorgan Chase, 8.625% Non-Cumulative Preferred Stock, Series (JPM-I). The symbol on Yahoo Finance is JPM-PI; at Charles Schwab, where I bought some recently, the symbol is JPM+I. The CUSIP is 46625H621. The preferred shares were issued with a coupon rate of 8.625%. On May 25 they were trading slightly above the par value of $25 so the yield was about 7.9%. The shares have traded as high as $29 recently and I wouldn’t buy there since they can be called away from investors at $25 as early as September 2013. But if you can buy the shares near $25 or $26, I think the yield and the potential capital gain from any reduction in sector risk make the shares attractive.)
For my second pick, I’m going for a class of stock even more in the dog house than a European bank stock. Total (TOT) is a European oil stock. Shares have dropped from $65 at the beginning of 2010 to $45 now. That’s driven the yield up to 6.5%, considerably above the yields for U.S.-based oil companies such as Chevron (CVX) at 3.8%.
The company increased production in the first quarter by 6% and while its refinery business is running way below capacity (and it being France Total faces intense political pressure not to close any refineries), it’s chemical unit has enjoyed the same cost-savings and demand recovery that have buoyed stocks such as du Pont.
With any oil company these days an income investor has to ask how safe is the dividend if oil prices continue to fall or just stay at current depressed levels. Total finished the first quarter with a very modest 34% debt to equity ratio and with $17 billion in cash and cash equivalents on its balance sheet. That dividend looks secure to me.
Let me spell out the assumptions behind making any picks right now. Yes, stocks can continue to go down in price and my guess is that until the markets can put the euro debt crisis and fears of a growth slowdown in China in the past stocks will have a hard time moving up. (For more on my view of the market right now see my post http://jubakpicks.com/2010/05/21/sell-sure-but-try-to-do-it-on-the-fundamentals-and-not-in-panic/ )
But with a dividend income play you are being paid to wait—as long, at least, as the company is financially sound enough so that it can survive the turmoil without cutting its dividend or worse.
And, of course, if you’ve picked the right high yield stocks—say one that sold off along with the rest of European banks or with the general downturn in commodity stocks—after you’ve waited, collecting your dividends, for long enough you should be rewarded with tasty capital appreciation.
Full disclosure: I own shares of Banco Santander, JPMorgan Chase Preferred, and Rayonier in my personal portfolio.
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Jim, if at all possible I would love to know what you think of the preferred index – PFF. I have short term traded it successfully over the past two weeks but wondering if I should hold on to it for longer? thx!
Here’s a newbie question for you. The dividend rate that a stock pays will change daily as the stock price changes, right? So how do I know what dividend rate I will receive? Is it the one when I bought it or is it the one that is current when the dividend is paid?
dnwyo,
your yield is always based on the price you paid so its the div/purchase price
Jim,
Finally some focus on the dividend income!!! I’ve got one that I’m interested in, its ING Global Equity Div (IGD), pays monthly and is currently yeilding 13.26%. Anyone wanna check it out and give me their feedback?
I had looked at STD quite a while ago, and just thought Spain’s problems would eventually affect it. Seems I over estimated this.
In any event, people looking at this need to look at the dividend history. Like many europian stocks, the dividend is much more variable. This is not to say that this is bad. Just different, and over the long run they seem to pay out more than US companies.
Now, getting more to the point, if you look at the STD quarterly dividend history, you will see that there tends to be a large ‘bonus’ type dividend every April, the last one being 0.299/shr [2.9%]. The other three quarters average about 0.180/shr [1.7%]. So you do not get the full 8.5% in a neat little average payment.
Ruters
Saw your note after I posted. I bought some IGD back when the bottom fell out with some left-over cash I had. I also picked up PHK. I was pretty happy with the results, although when PHK spiked up at the end of last year, I sold it. I looked at the cap gains vs dividend at that point, and took that money elsewhere.
How about Telefonica SA (TEF), the Spanish telecom that has a big presence in S. America?
Jim… thanks for talking about income stocks. I’ve been looking at NUE and recently added to my position of VOD which is yielding 6.5%. I like VOD b/c you get exposure to Verizon Wireless (and the potential for a dividend from it) as well as networks in developing countries like India and in Africa.
Personally, I would not touch STD. After being burned by C and BAC, I don’t trust bank stocks. Also, this seems like a pick that has very little upside and lots of downside, at least at the moment.
bsdgv… I was looking at TEF too, but am backing off for the moment as they may get into a bidding war with Portugal Telecom for Brazilian wireless Vivo.
Jim,
While I like your strategy, the choices aren’t impressive (except for possibly the JPMorgan).
A Spanish bank? Do you recommend any good beachfront REIT’s in Louisiana too?
All snark aside, STD is ok on paper. But that stock puts you dead center in the whole sovereign debt risk problem.
As for TOT, did you look at their financials? A 53% effective tax rate. A 6% net profit margin. A 7% ROI.
Even if they increased their profits by 6%, half of that would get sucked out in taxes. But they only increased their production by 6%? By the time that increase reaches their bottom line, you’re looking at a 0.16% increase to earnings.
Also, you said 34% debt/equity for TOT. That is their long term debt/equity. Their total debt to equity is 46%. By comparison, Exxon’s total debt/equity is 8%, BP’s is 31%, Chevron’s is 11%, and Royal Dutch Shell is 27%. On the other end of the spectrum is Petrobras with 61%. Mind you, I am not saying 46% debt/equity is necessarily bad. But when you add a 53% tax rate into the mix, ANY debt load becomes burdensome.
Having said that, I will add that the oil industry tends to have higher tax rates than other industries. But TOT is on the high end of the already highly taxed oil industry. If Europe’s economy deteriorates any, and increases their oil and/or corporate taxes, TOT’s already thin profit margins could become thinner.
I would also add that TOT only pays dividends twice a year, with the next one coming in November if they stay true to history (although they haven’t announced it yet).
Jim..Thanks for your posts on income…I like the preferreds as a way to get into some banks that arent paying a dividend…I own hcs, wfc-pj and bac-ph…if an when the banks gain alittle more respect these may gain in value…they all pay around 8%…
dnwyo – dividend yield is as defined by ruters78; as for your question, look at a stock chart showing dividend payouts (like over the past year), check the yield and correlate that with the actual payout (in other words, the actual payout amount and the history – increasing/decreasing, steady or sometimes suspended – are all important to consider.) Also important is tax treatment (obviated when the stock is held in a retirement account, but very important if the security is held in a taxable/trading/brokerage account.)
Ed,
What other players you think are better in the area?
Off topic:
“Citigroup: Sell-off in oil service stocks not proportionate to EPS impact
Citigroup believes the sell-off in shares of Oil Service & Equipment companies is out of proportion with the EPS impacts from the Gulf of Mexico oil spill. The firm expects growth in international markets to drive earnings growth for oil service and drilling companies in the years ahead and recommends owning Halliburton (HAL), Transocean (RIG), Diamond Offshore (DO) and Superior Energy (SPN). :theflyonthewall.com “
Can anyone help me figure out what the ticker is for the JPM-I reccomendation with Scottrade?
grindy2424,
I’m not buying equities at the moment. There is too much risk of losing principal for any dividend payment to outweigh.
If we make it through next week without a crash, ask me again.
All,
I wonder has anyone investigated funds like ETJ, it invests in stocks and writes put and call options on those stocks to earn extra income. Just started looking at this product but appears at first glance an excellent div income play….this fund currently pays 11.3% . Perhaps Jim or Ed have traded these before?
Apologies in advance if this has been covered elsewhere
Like the dividend play, not so hot on europe.
OFF TOPIC A BIT:
Worst may since 1962.
http://www.newsplayer.com/Stock-Market-Crash-1962-Video
I hear ya, Ed
I bought a huge insurance policy late yesterday of SDS.
I think there’s a pretty good chance the COP raises dividends a bit over the next two years. Yield hit 4.4% @ $50 a couple days ago. Now it’s 4.23%.
NUE pays special dividends when times are good. That way you get a nice, stable base throughout downturns plus a bonus when conditions are good. And it quite possibly has the best management in the USA–I can’t ever say that enough.
nmac,
ETJ looks ok on just a quick glance. I may look at it closer when I’m ready to go back into equities. Thanks for the tip!
BenWobbles,
If you’re trying to offset losses on your equities, that’s a smart move. But I wouldn’t buy the index shorts right now as a play in itself. There is some bullish risk heading into June (when you’re shorting, bullish risk is a bad thing).
Ed,
Do you consider yourself a trader or investor?
You seem to be quite active!
run26.2
VOD called its India venture a “fiasco” and not possible to make money in an recent report on reuter. (Only few days ago.)
Foreign companies that rushed to India with the thinking of India is China have all run into tremendous problems. There are many such reports out there.
The problem with foreign companies is that their dividends are not reliable. They are not discplined.
Both TOT and STO cut dividend this year according to my broker’s website.
swilson60
That symbol is JPMpI at Scottrade.
ogowan,
I’m both. I try to be a trader with an investor’s outlook. Generally speaking, I try to backstop my short term plays with long term value. That way, if the short term doesn’t play out as I expect, I can hold long term to get my returns. In more generic terms, I like value AND growth in my stocks. However, I also like to add commodity trades (physical ETF’s preferably) when economic conditions warrant it (they don’t right now).
Unfortunately, long term value is questionable in the market right now (which is why I’m currently out of equities).
swilson60,
The Scottrade symbol is:
JPMpI
I rarely buy any stock that doesn’t pay a good dividend and only buy if it looks like the stock will be able to pay the dividend for a long time. I am more a less a swing trader and play the dips and bounces. If I get caught in a stock (it goes down after I buy it) I at least get a dividend while waiting for it to recover or to try and cost average out of it. Well the year is nearly half over. How am I doing? I am currently down 5% for the year, including current holdings, but made 30% last year and over 20% the year before in that bad market. I got caught early this year in an oily; it went down quickly and immediately after I bought it and it took me thru April to finally cost average out of it. I hate to sell at a loss, but I should have taken my lumps as soon as the oily stock went down as it seemed obvious it was going down further in the near term, but that loss aversion thing kicked in and I just couldn’t let go until I got out of it even, but that consumed 4 long months. And we all know what May has been like.
The Scottrade symbol for JPM-I is JPMpI
CIM @ 17%
AAARRGGGHHHHH…too much information for me to proces!
Someone mentioned RIG and it sure looked enticing when it was around $54.00 the other day.
I’d like to second Grindy2424′s request Ed when you have time! Thanks!
Hey, guys.
I keep hearing about Ford Preferred shares.
After reviewing, which one are they referring to?
There seems to be a number of them out there and I was wondering what the symbol was
STL,
I answered Grindy’s request. I’m not buying equities right now. Period.
Ask me again next week.
Vintonbuck…
Just curious…do you have a set percentage loss in mind on a stock when you decide to dollar cost average??
Thanks!
nmac,
You may want to look at the long term chart on ETJ, as it appears to move in lock step with the overall market.
Ed (and other savvy “short” players),
Can I talk you into taking a little time to help out some of us who are just getting started with “shorting”? I have found a couple of sites that list ETFs out there (including inverse ETFs). But I for one could use some tips on what are the best areas and best ETFs to look at – especially in this volatile risky market. I have learned (somewhat the hard way) how tough it can be to sell out of some stock positions before things have gone too far south – tough to predict and sometimes tough to sell. It seems that when the market is like this and you have some cash available, your best move may be to go short to hedge your bets and limit what could turn into large losses. Thank you very much for any info/resources you could provide.
yx… re: VOD, I did read in their quarterly report about some of their challenges in India with competition and policies. I’ve not seen anything recent or about it being a “fiasco”, do you have a link? I searched on Reuters site and came up empty. Thanks!
vintonbuck:
You have my sympathy. Not exactly same situation, but I’d like to know how do you average out? When a stock is in negative, it does not matter if you sell one sum or average out.
Run26.2
It was on either rueter or bloomburg website that I read only few days ago.
“Fiasco” was literately the word of VOD CEO, title of the report. He said in the report, the problem in India is (because of quite number of local providers) the phone rate is getting so cheap for VOD to make money. Meanwhile the spectrum (I guess airway) are getting so expensive to obtain. The CEO called the whole thing “fiasco” in that report.
I’ll search the link later .
Run26.2
Here is one of the VOD “fiasco” report, though not the one that I read originally. Google it.
http://industry-news.org/2010/05/18/vodafones-colao-tackles-indian-fiasco-as-call-rates-plummet-costs-rise/
Thanks Jim for discussing the Divident Income Port. possible additions/subtractions. Will hold off on a bank in the euro mess for now and though TOT is a good oil co. but it’s taxes and div. reduction along with again the euro mess, will wait. Had BP for dividend but dumped it the day after the disaster. Anyone have thoughts on CEL, Israeli phone co. with 11.7% yield. thx.
Ed,
Why don’t we start with some ideas of what we are planning to do after this volatility stops?
I’m about 35% in cash right now. Partly because I am making a bit of a lifestyle change. My holdings are about 20% commodities, 20% dividend stocks, and the rest a mixed bag.
I’ll keep holding the commodities as they have taken a pretty good pounding (but could take more…. All long term plays.
Seaturtlelady:
I don’t have a set % when I cost average. I go more by the stock action. If the stock is dropping quickly, I stay out of the way and watch it for awhile until it seems to hit at least a temporary floor and ready for a bounce. I then buy more and try to catch a bounce up. The oily bounced up enough after my last buy, counting the quarterly dividend I collected, to get out even so I sold the entire position.
If you want to get paid more than the riskless
Treasury rate (and Treasuries aren’t so riskless these days), you’ve got to take on some risk. The question is Are you getting getting paid for that risk. In the case of STD, most investors think of this as a Spanish bank. Hence the selloff in the euro debt crisis. But Spain only accounts for about 25% of the bank’s operations. Latin America as a region is the banki’s biggest source of profits (about 40%) and Brazil is the biggest piece of that. Those economies provide a good buffer to problems with the Spanish economy. Of course, that emerging market’s exposure hasn’t done much to help the stock price in this correction since emerging markets are selling off too.
Jim,
Really like the STD play. Had been researching and almost bought when it was 12.00 a share. Still researching TOT as well.
STD besides being a great dividend play has some great upside.
Jim… thank you for the elaboration on STD. Will have to look further since I’m also eying ITUB, but for Brazil exposure, not DY.
I too have been watching STD for awhile. And while I love its growing earnings and presence in South America, my concern is its balance sheet (the same concern I have with all financial cos- the only one I have is USB).
Has anyone been able to determine how much it holds in Spanish Gov or corporate bonds, or other European government bonds that are weakening? That’s my concern- if the bonds crash, the bank crashes. (the one overriding lesson of the MBS crash in 2008.)
I’d love to own it. Can anyone offer insight on its balance sheet (and off balance sheet holdings ala Citi in 2008- the opaque shit nobody knew about because they were parked in off balance sheet SIVs)?
With regard to Bernake’s input as to the status of the economy; WHO CAN BELIEVE ANYONE IN THESE TIMES WHO HAS CONNECTIONS WITH THE GOVERNMENT. CONGRATULATIONS, WASHINGTON, YOU HAVE DONE A GREAT JOB IN BUILDING THE DOUBT THAT AMERICANS HAVE TODAY. WHERE ARE WE GOING??????
EdMcGon…savvy? If you took his advise on Total on May 28 you missed a $5 gain in the stock in the very next few days. It is a buy again. Incidently, a high tax rate actually argues in favor of leverage (debt) since it is deductible. A freshman finance student knows that. EdMcGon’s analysis of Total is bunk and should be ignored by long and short term players. Jim is right, it is a terrific buy. Nothing more boring than the guys who are always saying the sky is falling. Don’t fall for it.