In my February 3 post http://jubakpicks.com/2012/02/03/looking-for-higher-dividend-yields-and-dividend-growth-here-are-three-picks/#more-8475 I added three stocks to my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ and dropped three.
The reason, I argued then, was that the growing popularity of dividend paying stocks at a time when income vehicles such as Treasuries and CDs pay almost nothing, had created a glorious but still real problem for income investors. As investors flocked into dividend-paying shares, they drove up share prices. That was great for investors already fully invested, but for investors looking to get into new positions or for investors looking to put more cash into existing positions, it meant that yields were in constant danger of erosion. In this situation, income investors needed to look for stocks that paid higher yields now and that were also positioned—by their growing cash flows and by management disposition—to keep raising dividends. Look for those stocks, I advised, and beware dividend payers that didn’t seem to be in a position to keep raising dividends.
And with that as background I tweaked this portfolio by adding General Electric (GE), Westpac Banking (WBK) and Kinder Morgan Partners (KMP) while dropping Potlatch (PCH), Merck (MRK) and Abbott Laboratories (ABT).
Today I’m going to give you more detail on one of those adds, General Electric (and also actually make the change on the dividend portfolio page. (The rest of these six changes will follow in what I will try to make short order.)
On June 11. 2010 General Electric’s board of directors voted a quarterly dividend of 10 cents a share. That’s where the dividend had been stuck for a year—ever since in the aftermath of the financial crisis General Electric had cut its quarterly dividend from 31 cents a share in 2009.
Since June 2010, however, General Electric has raised its quarterly dividend by 70%. And the good news, for investors, is that the quarterly payment of 17 cents a share still significantly lags the pre-crisis 31 cents. You’re looking, I think, at a company that feels considerable internal pressure to get dividends back to where they were pre-crisis.
And fortunately, for dividend investors, General Electric has the cash flow to get there. Free cash flow for 2011 came to $19.4 billion—and that’s after the company’s $14.5 billion in capital spending. In 2011 dividend payments came to just $6.2 billion during the year. That’s a huge drop from the $9 billion paid out in dividends in 2009 or the $12.4 billion paid out in 2008 before the global financial crisis.
At the February 23 price of $19.31 General Electric paid a dividend yield of 3.5%. I think the company is able and willing to keep the yield at that level even if the share price climbs. (And we’d all like the price of a stock we own to go up, right?)
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of General Electric as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/