Jubak Dividend Income Portfolio

Every income investor needs a healthy dose of dividend stocks.

Why bother? Why not just concentrate on bonds or CDs or whatever?

Because all the different income-producing assets available to income investors have characteristics that make them suited to one market and not another. You need all of these types of assets if you’re going to generate maximum income with minimum risk as the market twists and turns.

For example: bonds are great when interest rates are falling. Buy early in that kind of market and you can just sit back and collect that initial high yield as well as the capital gains that are generated as the bonds appreciate in price with each drop in interest rates.

CDs, on the other hand, are a great way to lock in a yield with almost absolute safety when you’d like to avoid the risk of having to reinvest in an uncertain market or when interest rates are crashing.

Dividend stocks have one very special characteristic that sets them apart from bonds and CDs: companies raise dividends over time. Some companies raise them significantly from one quarter or year to the next. That makes a dividend-paying stock one of the best sources of income when interest rates start to rise.

Bonds will get killed in that environment because bond prices will fall so that yields on existing bonds keep pace with rising interest rates.

But because interest rates usually go up during periods when the economy is cooking, there’s a very good chance that the company you own will be seeing rising profits. And that it will raise its dividend payout to share some of that with shareholders.

With a dividend stock you’ve got a chance that the yield you’re collecting will keep up with rising market interest rates.

But wouldn’t ya know it?

Just when dividend investing is getting to be more important—becoming in my opinion the key stock market strategy for the current market environment—it’s also getting to be more difficult to execute  with shifting tax rates and special dividends distorting the reported yield on many stocks.

I think there’s really only one real choice—investors have to pull up their socks and work even harder at their dividend investing strategy. That’s why with my January 11, 2013 post (http://jubakam.com/2013/01/a-new-improved-dividend-income-portfolio-and-three-dividend-picks/ or http://jubakpicks.com/2013/01/11/reformatting-my-dividend-income-portfolio-for-a-period-when-dividend-investing-gets-more-important-and-tougher-too/ depending on which of my sites you read)  I revamped the format of the Dividend Income portfolio http://jubakam.com/portfolios/  that I’ve been running since October 2009. The changes aren’t to the basic strategy. That’s worked well, I think, and I’ll give you some numbers later on so you can judge for yourself. No, the changes are designed to do two things: First, to let you and me track the performance of the portfolio more comprehensively and more easily compare it to the performance turned in by other strategies, and second, to generate a bigger and more frequent roster of dividend picks so that readers, especially readers who suddenly have a need to put more money to work in a dividend strategy, have more dividend choices to work with.

Why is dividend investing so important in this environment? I’ve laid out the reasons elsewhere but let me recapitulate here. Volatility will create repeated opportunities to capture yields of 5%–the “new normal” and “paranormal” target rate of return–or more as stock prices fall in the latest panic. By using that 5% dividend yield as a target for buys (and sells) dividend investors will avoid the worst of buying high (yields won’t justify the buy) and selling low (yields will argue that this is a time to buy.) And unlike bond payouts, which are fixed by coupon, stock dividends can rise with time, giving investors some protection against inflation.

The challenge in dividend investing during this period is using dividend yield as a guide to buying and selling without becoming totally and exclusively focused on yield. What continues to matter most is total return. A 5% yield can get wiped out very easily by a relatively small drop in share price.

Going forward, I will continue to report on the cash thrown off by the portfolio—since I recognize that many investors are looking for ways to increase their current cash incomes. But I’m also going to report the total return on the portfolio—so you can compare this performance to other alternatives—and I’m going to assume that an investor will reinvest the cash from these dividend stocks back into other dividend stocks. That will give the portfolio—and investors who follow it—the advantage of compounding over time, one of the biggest strengths in any dividend income strategy.

What are some of the numbers on this portfolio? $29,477 in dividends received from October 2009 through December 31, 2013. On the original $100,000 investment in October 2009 that comes to a 29.5% payout on that initial investment over a period of 39 months. That’s a compound annual growth rate of 8.27%.

And since we care about total return, how about capital gains or losses from the portfolio? The total equity price value of the portfolio came to $119,958 on December 31, 2012. That’s a gain of $19,958 over 39 months on that initial $100,000 investment or a compound annual growth rate of 5.76%.

The total return on the portfolio for that period comes to $49,435 or a compound annual growth rate of 13.2%.

How does that compare to the total return on the Standard & Poor’s 500 Stock Index for that 39-month period? In that period $100,000 invested in the S&P 500 would have grown to $141,468 with price appreciation and dividends included.) That’s a total compounded annual rate of return of 11.26%.

That’s an annual 2 percentage point advantage to my Dividend Income portfolio. That’s significant, I’d argue, in the context of a low risk strategy.

View Sells

Symbol	Date Picked	Price Then	Price Now	Today's Change	Jubak's Gain/Loss
Eni
E	03/25/2013	$46.44
Way back on March 12, I promised http://jubakpicks.com/2013/03/12/all-time-high-for-u-s-stocks-hooray-but-why-should-we-care/ that I was going to add a stock to my dividend income portfolio soon (on March 13, I said.) Well, I... more
ConocoPhillips
COP	01/11/2013	$58.27
I added ConocoPhillips (COP) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because what was then a relatively pessimistic view of growth in global economy had hit oil... more
Targa Resources Partners
NGLS	01/11/2013	$39.04
I added Targa Resources Partners (NGLS) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because the units offer a really attractive potential for dividend growth and capital gains.... more
Intel
INTC	01/11/2013	$22.00
Update March 12, 2013: I don’t think it’s wise—or profitable—to ever underestimate Intel’s (INTC) patience. Recent product announcements and news on design wins show that the company continues its long-term attack on markets where... more  |  Read Jim's Original Buy
SeaDrill
SDRL	07/03/2012	$36.25
When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio more
Western Gas Partners
WES	07/03/2012	$43.42
When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio more
Westpac Banking
WBK	02/03/2012	$110.23
Tomorrow, July 3, 2012, I’m going to do one of my periodic updates of my Dividend Income portfolio. Those updates are useful for several reasons: I get to think about... more
Kinder Morgan Energy Partners
KMP	02/03/2012	$85.81
Update March 1, 2012: It’s on to the vote for Kinder Morgan’s (KMI) bid to acquire El Paso (EP) and its mix of oil and gas assets and pipelines for $21.1 billion. Delaware Chancery Court... more  |  Read Jim's Original Buy
General Electric
GE	02/03/2012	$18.85
Update April 8, 2013: General Electric (GE), at least, thinks there’s a future in the commodities sector. Today the company announced that it would spend part of the $16.7 billion in cash it received from... more  |  Read Jim's Original Buy
Total
TOT	05/28/2010	$46.96
I’m sure this one is going to be popular. (Yeah, right.) Today, May 28, I’m adding Total (TOT) to the Jubak Dividend Income portfolio.  That’s right a European (gasp) oil (shudder)... more
Banco Santander
SAN	05/28/2010	$10.20
Update December 17, 2012: Finally Banco Santander (SAN) has decided that in a shrinking Spanish banking market it doesn’t need three separate brands. The bank, Spain’s largest lender, will first buy the 10% of... more  |  Read Jim's Original Buy
Magellan Midstream Partners
MMP	12/06/2005	$32.62
Magellan Midstream Partners (MMP) owns an 8,500 mile pipeline system for the transportation and storage of refined petroleum products. The company’s capital spending plan called for $250 million in new... more
Oneok Partners
OKS	12/06/2005	$22.85
Update March 5, 2012: I’ve received a lot of email lately about the big unit offering by ONEOK Partners (OKS), a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ I understand the anxiety—this master limited... more  |  Read Jim's Original Buy

ENI (E)

March 25th, 2013

Way back on March 12, I promised http://jubakpicks.com/2013/03/12/all-time-high-for-u-s-stocks-hooray-but-why-should-we-care/ that I was going to add a stock to my dividend income portfolio soon (on March 13, I said.) Well, I didn’t make the add then and I’ve been waiting for the predictable volatility of this market to give me a better entry price. I got that price today and I’m finally making my add to that portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/

I’m going to take advantage of today’s 1.6% drop to recommend buying shares of Italian oil company Eni (E in New York.) It’s not surprising that shares of Eni are down today—the Milan exchange FTSE MIB index closed down 2.5% today in reaction to the Cyprus “solution.”

But today’s drop brings the total decline since the January 17, 2013 high to 10.9% and it pushes the dividend yield close to my 5% dividend income buying target. (The yield is 4.95% on March 25 based on the paid September 2012 dividend and the declared May 20, 2013 dividend.)

And I think you might even get some growth out of this oil stock. The company is the largest producer of oil and gas in Africa of any of the international oil companies. And with Africa showing some of the most interesting new finds in the world—like the huge Area 4 natural gas discovery (an estimated 75 trillion cubic feet of natural gas) in Mozambique, Eni has a very attractive growth path. (Eni has agreed with Anadarko, another big player in natural gas in Mozambique, to build a plant to liquefy and export natural gas. That’s likely to prove a very expensive venture because almost all infrastructure for the plant will have t be built from scratch in Mozambique.)

What’s reassuring to dividend investors about Eni is that much of its forecast of increased production—600,000 barrels a day by 2016—will come in the 2013 to 2014 period. In fact 75% of new production forecast by 2016 will come in 2013 and 2014. (For example, the giant Kashagan field in the Caspian Sea is expected to start production in June 2013. The field is thought to be the largest discovered in the last 30 years.) That will help diversify the company’s production and lower Eni’s risk from its production in volatile countries such as Libya. And it should give the company plenty of cash flow to cover dividends and share buybacks even after capital spending.

Eni doesn’t always get the most out of its assets. The Italian government’s 30% stake means that Eni is, for what amounts to political reasons, engaged in businesses such as chemicals and electricity production that don’t have very attractive returns. To me that says I wouldn’t want to make this a long-term holding while I waited for growth to compound. But at the right moment and at the right price, this is solid dividend play with some price upside for a two- or three-year period.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any stock mentioned in this post 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/

COP

January 28th, 2013

I added ConocoPhillips (COP) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because what was then a relatively pessimistic view of growth in global economy had hit oil prices and thus the stocks of oil companies. On January 11, ConocoPhillips shares paid a 4.51% dividend yield.

Since then sentiment on global economic growth has turned up and so have the prices of oil and oil stocks. Shares of ConocoPhillips are up 4.8% from the January 11 close to the close on January 25. That has reduced the yield to 4.32%.

I still like these shares as a dividend income play, however, even at this slightly higher price. Through a series of asset sales and the May spin off of its refining assets into a separate company, Phillips 66 (PSX), ConocoPhillips has turned itself into the biggest U.S.-based independent exploration and production company. With that comes big exposure to the U.S. onshore oil boom—ConocoPhillips has big holdings in the Permian Basin, in Eagle Ford and in the Williston Basin (which includes120 wells in the Bakken formation of North Dakota.) ConocoPhillips also has significant assets in Canada’s oil sands, the Gulf of Mexico, Africa, and Asia.

ConocoPhillips does not look like it will grow reserves or production as quickly as some of the smaller, more concentrated U.S. independents such as Pioneer Natural Resources (PXD) or Denbury Resources (DNR). If you’re looking for a pure price appreciation play, those stocks are a better bet.

But ConocoPhillips does have one feature that the shares of those smaller companies don’t—a hefty dividend. Pioneer Natural Resources and Denbury Resources pay a dividend of 0.07% and 0%, respectively. I think ConocoPhillips offers investors the best combination of exposure to the U.S. oil boom and income.

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 any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

NGLS

January 25th, 2013

I added Targa Resources Partners (NGLS) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because the units offer a really attractive potential for dividend growth and capital gains. The current dividend, at 6.81% on January 11, isn’t any too shabby either. (For the most recent update on that portfolio see my post http://jubakpicks.com/2013/01/11/reformatting-my-dividend-income-portfolio-for-a-period-when-dividend-investing-gets-more-important-and-tougher-too/

The big upside here comes from Targa’s acquisition of oil and natural gas pipelines from Saddle Butte Pipeline that for the first time moved Targa into the Bakken shale formation of North Dakota that is the heart of the U.S. oil boom. The deal also gave Targa its first oil pipelines—before that Targa had been a natural gas only pipeline play. The North Dakota oil boom is currently very underserved by pipelines, which gives pipeline companies with footholds in the area, and that now includes Targa, an opportunity to invest today’s cheap money in profitable new capital projects.

After the deal Targa reiterated its projections for 10% growth in distributions to holders of the MLP (master limited partnership) units in 2013 from 2012 levels. And the assets added in the deal look to me like they take some of the risk out of Targa’s cash flow. The company has been moving to increase the share of its revenue that comes from fee-based transportation of natural gas liquids from 37% in the last twelve months to a projected 55% by the end of 2014. Fee-based rather than price-based revenue gives Targa protection from what looks like a developing oversupply of natural gas liquids.

I think Targa can easily grow distributions by 9% or so a year over the next few years. That distribution and dividend growth gives Targa—and investors in Targa—protection from a return of inflation or from rising interest rates.

I calculate a one-year target price of $44 for Targa.

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 Targa as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

Never count Intel out–especially when it pays you 4.2% to wait

March 12, 2013

I don’t think it’s wise—or profitable—to ever underestimate Intel’s (INTC) patience. Recent product announcements and news on design wins show that the company continues its long-term attack on markets where Wall Street seems to have concluded that Intel can never win. (Intel is a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ It pays a 4.2% dividend.) “Never” is a long, long time. First, Intel announced a slight upgrade on its Atom chip—the Z2580--at February’s Barcelona Mobile World Congress and that was almost immediately followed by news that China’s ZTE, the fourth biggest seller of mobile phones in the world, has decided to use it in some of its new phones. This is an important follow up to Intel’s win with the Motorola Razr I phone last year. Intel still doesn’t have a central position in mobile phone silicon but it is no longer completely locked out of that market and the company even has some momentum. The Atom Z2580 does look like it has closed some of the graphics gap with chips from ARM Holdings (ARM.LN in London and ARMH in New York.) Second, Intel has beaten out Taiwan Semiconductor Manufacturing (TSM), the largest independent chip foundry in the world, to build chips for Altera (ALTR), a leader in field programmable gate array technology. Altera will continue to use Taiwan Semiconductor to manufacture chips on older production technology, but will move to Intel’s factories when 14-nanometer lines go into production. Taiwan Semiconductor dominates the $30.7 billion chip foundry market, but Intel continues to build shares with recent deals with Cisco Systems (CSCO) and now Altera. Making chips for other companies is a critical move if Intel hopes to capitalize on its huge investment in chip fabs and chip-making technology. And third, Intel TV. The company is working on a set top box for introduction in 2013. Intel TV has long been a rumor in Silicon Valley but Intel finally con firmed the effort in February. The idea is set-top box, sold directly to consumers, that works with a service that combines live TV, video on demand, and a catch-up component similar to the BBC’s iPlayer that lets viewers watch anything that aired on BBC within the last week. This may sound like just another set top box, like the one you’ve already got on top of your TV from a cable company, but there are significant differences. Intel TV is independent of what broadband pipe you use. Intel TV won’t care if you use coaxial cable, fiber optic cable or wireless access. You’ll be able to switch providers with no effect on your TV service. You’ll be able to move across town or across country and keep the same TV service—just as you do now with your phone number when you switch service providers. It’s build around the concept of cloud-based content from the beginning. (Not surprising given the number of server chips Intel sells already.) So a user might have access to every program for seven days (the BBC model) without having to record then on a home DVR because the content would be available in the cloud. And finally the service would be device neutral with delivery to every display you own from computer to TV to mobile phone. Do I expect Intel to get Intel TV right from the beginning? Absolutely not. Although I think it will come closer than you might think. You see patient Intel has been down this road before as one of the original partners of the not terribly successful Google TV effort. And more recently the company helped developed Comcast’s (CMCSA) X1 service and gateway device. Comcast is slowly rolling out this next generation platform—universal search; live, recorded and on-demand content; intuitive menus and graphic user interfaces with social media capabilities and personalization capabilities. I’d assume that Intel learned a little something from that effort. And on its track record, the company has the patience to keep chasing the learning curve. Not that it doesn’t have a reasonable amount of experience in building a box that sits in one place, that connects to the Internet, that uses lots of graphic processing, and that relies on multiple processors for multi-tasking and speed. Sounds kinda like a PC, doesn’t it? Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of First Intel as of the end of September. For a full list of the fund’s holdings as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Catching up on the bookkeeping for my July 3 buy of SeaDrill in my dividend income portfolio

September 7th, 2012

When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ within a couple of days.

Talk is cheap. (Or writing in this case.)

Here it is early September and I’m just updating the portfolio now. My bad.

For those of you without perfect recall (or who have better things to stuff their brains with than changes in my portfolios) on July 3 I added SeaDrill (SDRL) to that portfolio. The price on July 3 was $36.25 a share.

How you feel about SeaDrill as a dividend income stock depends on what you think about the company’s high leverage strategy. SeaDrill current pays a dividend of 8.2%, but the company has a history of borrowing on a drilling rig as soon as it can so that it can invest in an additional rig. That strategy has helped SeaDrill build one of the biggest and newest deepwater drilling fleets in the world. But it does expose the company—and shareholders—to significant downside risk if the market for deepwater rigs should take a nosedive.

Right now that’s not a problem. When SeaDrill reported second quarter earnings on August 27 it said market for deepwater rigs is so tight and is projected to remain so tight that rig availability is “minimal” through 2014. That means not only that day rates continue to climb but also that the company is having no trouble signing up customers for rigs that haven’t even floated out of the shipyards yet. For instance, Petrobras (PBR) has signed three-fifteen year contracts with SeaDrill and its Brazilian partner SeteBrasil for three new builds to be delivered between 2016 and 2018 at a day rate of $610,000.

This kind of market gives SeaDrill extraordinary long-term visibility into revenues. That’s one reason that the company bumped up its quarterly dividend by 2 cents a share to 84 cents.

That gives me enough confidence to put these shares in my dividend income portfolio. But I sure wouldn’t go to sleep on this position.

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 own shares of SeaDrill as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

I bought Western Gas Partners on July 3

September 5th, 2012

When I posted my most recent update of my Dividend Income portfolio http://jubakpicks.com/2012/07/03/if-you-want-to-earn-more-dividend-income-youll-have-to-put-up-with-more-volatility-what-you-want-to-avoid-is-a-permanent-impairment-of-capital/ on July 3, I promised that I’d make the required changes to the online portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ within a couple of days.

Time sure flies when you’re having fun.

Here it is early September and I’m just updating the portfolio now. My bad.

For those of you without perfect recall (or who have better things to stuff their brains with than changes in my portfolios) on July 3 I dropped Penn Virginia Resource Partners (PVR) from that portfolio http://jubakpicks.com/2012/09/05/catching-up-on-booking-on-my-july-3-sell-of-penn-virginia-resource-partners/ ).

And I added shares of Western Gas Partners (WES) with that July 3 post at $43.42.

My logic was pretty simple: Master Limited Partnerships like Western Gas Partners grow by raising money in the public markets (since they distribute most of their profits to unit holders) and then using that cash to buy new assets that throw off profits that can be added to distributions. What you like is to invest in a Master Limited Partnership that is able to raise cheap cash (thank you Ben Bernanke) and that has a steady supply of profitable assets to buy.

Raise cash. Buy. Repeat.

Works as long as the cash remains cheap and as long as the partnership doesn’t run out of assets to buy.

The Federal Reserve has promised to take care of the first part of the formula by keeping rates low through 2014.

The new supply of new assets looks robust thanks to a continued stream of midstream pipelines and other assets available for purchase from Anadarko Petroleum (APC), which spun off Western Gas Partners in 2008. Credit Suisse projects a continued annual flow of approximately $500 million in dropdown acquisitions from Anadarko to Western Gas Partners. That should be enough, Credit Suisse estimates, to grow distributions to unit holders by 16% to 20% in 2012 and by 12.2% annually for the next five years.

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 own shares of Western Gas Partners as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Catching up with bookkeeping in my dividend income portfolio and my February 3 add of Westpac Banking

July 3rd, 2012

Tomorrow, July 3, 2012, I’m going to do one of my periodic updates of my Dividend Income portfolio. Those updates are useful for several reasons: I get to think about how dividends work in the current stock market, report on how the portfolio is doing, and make a few buys and sells.

And because they give me a chance to check up on my bookkeeping and see if the page that tracks this portfolio is up to date with the changes I’ve made in individual posts.

To my chagrin it isn’t. In my last post on this portfolio on portfolio February 3 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).

Well, at least that’s what I said in that February 3 post but one buy and one sell from that date never made it onto the portfolio page. So tonight, I’m doing a little catch up. I never actually got the buy of Westpac Banking done on the portfolio page. I’m going to fix that with this post.

Australia’s Westpac Banking pays its dividend twice a year—the last ex-dividend date was on May 14 and the next is in November. Each U.S. traded ADR represents five shares of the Australian bank so the 82-cent dividend payable to investors of record as of May 18 came to $4.10 for each ADR. That gives the ADR a 7.6% yield.

You should be ready for a little volatility in exchange for that dividend. Australian stocks in general dance to the tune of economic reports from China. When growth is projected to slow in China, Australia’s stocks drop as investors anticipate a slowdown in Australia’s exports of commodities to China.  And exactly the opposite effect goes to work when optimism about China’s economy is on the upswing.

In the long-term I also like the dividend from these shares because I think the Australian dollar will be one of the stronger currencies against a declining dollar. U.S.-based investors will get paid in a strengthening currency over time.

The ADRs, which traded at $110.23 on February 3, closed at $110.81 on July 2.

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 any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Kinder Morgan Energy Partners (KMP)

March 1, 2012

It’s on to the vote for Kinder Morgan’s (KMI) bid to acquire El Paso (EP) and its mix of oil and gas assets and pipelines for $21.1 billion. Delaware Chancery Court Judge Leo Strine scolded Goldman Sachs (GS) for its conflict of interest in the deal—saying that he found it disturbing that Goldman, which owns 19% of Kinder Morgan, served as El Paso’s advisor on the offer—but decided to deny an injunction on the shareholder vote scheduled for March 6. “Although it is true that measures were taken to cabin Goldman’s conflict,” he characterized those efforts as ineffective. He also noted that Goldman’s lead banker on the deal failed to disclose that he personally owned $340,000 of Kinder Morgan stock. But despite those very real problems, Judge Strine ruled that a vote was the proper vehicle for any shareholder who objects to Goldman’s role and who thinks that the investment bank’s advice resulted in El Paso selling for a low price. “El Paso stockholders should not be deprived of the chance to decide for themselves about the merger, despite the disturbing nature of some of the behavior leading to its terms,” Strine ruled. Kinder Morgan’s cash-and-stock bid works out to a 37% premium on the pre-deal price of El Paso’s shares, according to El Paso. Kinder Morgan is the general partner of Kinder Morgan Energy Partners (KMP), a master limited partnership that’s a pick in my dividend income fund http://jubakpicks.com/jubak-dividend-income-portfolio/ . My projection is that some of the pipeline assets Kinder Morgan would acquire in this deal, if it goes through, would flow down to Kinder Morgan Energy Partners and increase the asset base of the master limited partnership. 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 El Paso, Goldman Sachs, Kinder Morgan or Kinder Morgan Energy Partners 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/

Income from GE while you wait for turn in commodity-related industrials

April 8, 2013

General Electric (GE), at least, thinks there’s a future in the commodities sector. Today the company announced that it would spend part of the $16.7 billion in cash it received from selling NBC Universal to Comcast (CMCSA) to buy Lufkin Industries (LUFK) for $3.3 billion. The price is a 38% premium to the April 5 close for shares of this maker of artificial lifts that bring crude oil to the surface. The deal will double GE’s share of the artificial lift market, giving the company a 15% market share. General Electric made $11 billion in acquisitions in the energy sector in 2010 and 2011 and this deal fits with CEO Jeff Immelt’s strategy of expanding General Electric’s industrial business while shrinking the relative importance of GE Capital. General Electric is paying about 13.5 times estimated EBITDA for Lufkin. That’s a little rich in comparison to other recent deals in the space, but analysts think there’s a good bit of fat to cut at Lufkin and that General Electric will be able to wring about $60 million in cost savings out of the company over the next five years. The $88.50 a share purchase price is a big increase from the pre-deal share price of $63.93, but it is roughly equal to Lufkin’s high of $85.39 back in back in February 2012. I wouldn’t say that GE is on a buying spree but the company is clearly using the softness in commodity related stocks to do some exploratory drilling of its own. Last year, for example, General Electric made two deals in the mining equipment business, purchasing Industrea Limited and Fairchild International. The two deals moved General Electric’s revenue from mining equipment to about 1% of company revenue. Given General Electric’s oft-repeated goal of being No. 1 or No. 2 in each sector where it does business, I doubt that the company will stop with these two deals. For investors who find the current depressed price of commodity-related stocks “interesting,” but are worried about getting in to early or about their ability to figure out which of the currently depressed companies are the best buys, shares of General Electric present an intriguing opportunity. The company clearly sees a combination of decent prices and potential growth in the sector. An investor can tag along with GE as it builds market share in the sector and collect the company’s 3.3% dividend yield as he or she waits for the turn. (General Electric is a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/  )   Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post 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/

Buy Total (TOT)

May 28th, 2010

  I’m sure this one is going to be popular. (Yeah, right.)

Today, May 28, I’m adding Total (TOT) to the Jubak Dividend Income portfolio.

 That’s right a European (gasp) oil (shudder) stock.

 Total’s 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 (DD).

 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. The dividend looks secure to me.

Full disclosure: I don’t own shares of any stock mentioned in this post.

Santander looks to restructure and cut costs in Spain

December 17, 2012

Finally Banco Santander (SAN) has decided that in a shrinking Spanish banking market it doesn’t need three separate brands. The bank, Spain’s largest lender, will first buy the 10% of Banco Espanol de Credito or Banesto (BTO.SM in Madrid) that it doesn’t already own and then shut 700 Banesto branches and eliminate the Banif private bank brand. The restructuring will give Banco Santander a single brand across its 4,000 Spanish branches. Spain’s banks are expected to close 35% of their branches by 2015. The restructuring, which will see Banco Santander offer existing treasury stock to buy out Banesto investors, should help the bank close its cost gap with Banco Bilbao Vizcaya (BBVA), Spain’s second largest lender. The bank is projecting 520 million euros in annual savings by the end of the third year of the restructuring. The emphasis on increased efficiency is an implicit admission that growth isn’t coming back in Spain’s banking sector any time soon. Banco Santander’s non-Spanish units in the United States and Latin America carried the bank through the early stages of the Spanish financial crisis. But results in those markets lagged in the last quarter with net profit from U.S. operations coming in 5% below expectations and from Latin American operations 3% below expectations. On the other hand, net profits for the quarter ran about 8% above expectations in the United Kingdom largely as a result of cost cutting. And that certainly suggests that Banco Santander’s restructuring in Spain could help with the bank’s return to earnings growth. Right now it looks like 2012 will be the low point for earnings at the bank. For the year Banco Santander will report earnings of 0.32 euros per share, according to estimates by Credit Suisse. That’s a huge drop from earnings of 0.58 euros in 2011. But Credit Suisse is projecting that earnings will rebound to 0.59 euros per share in 2013. Banco Santander is a member of my Dividend Income Portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ and on the dividend front 2012 also looks like the turning point for the bank. The dividend payout ratio soared in 2012 to a projected 188% of earnings, a ratio that the bank only sustained by issuing stock to pay dividends.  That will help push shares outstanding to 10.42 billion by the end of 2012 from 9.53 billion in 2011. That 9.3% increase in shares outstanding certainly didn’t help the share price, even though maintaining the dividend did. In 2013, Credit Suisse estimates, the dividend payout ratio will shrink to 100.8% on its way to 86.97% in 2014. Even that 2014 ratio would be extraordinarily high and unsustainable in the long run, but at least you can see a “normal” payout ratio from there. I don’t believe for a moment that Banco Santander is out of the woods yet. But it does seem like the worst of the crisis for this global bank—if not for Spain’s smaller banks—is over. And that Banco Santander will continue to pay a yield of 8% of higher. 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 own shares of Banco Bilbao Vizcaya and Banco Santander and as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Buy Magellan Midstream Partners (MMP)

December 6th, 2005

Magellan Midstream Partners (MMP) owns an 8,500 mile pipeline system for the transportation and storage of refined petroleum products. The company’s capital spending plan called for $250 million in new projects to expand its already formidable reach. Magellan Midstream’s pipeline system can reach 43% of all U.S. refining capacity. Capital spending is scheduled to shrink to 90 million in 2010. The yield as of October 14, 2009 was 7.3%

Update ONEOK (OKS)

March 5, 2012

I’ve received a lot of email lately about the big unit offering by ONEOK Partners (OKS), a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ I understand the anxiety—this master limited partnership is selling 8 million units in a public offering and another 8 million units in a private placement (to its general partner). That will put 11% more units on the market. The fear, of course, is that this dilution will cut the price of the units because it will cut into the cash payout ONEOK can make to its unit holders. I wouldn’t worry—if fact, while dilution generally isn’t something to embrace with open arms, in this case I think it’s a sign that ONEOK has identified new investment opportunities that make raising cash a smart move here. And with management saying that it will ask the board of directors to approve a 2.5 cents a quarter increase in distributions, I don’t think investors need to worry about a drop in cash distributions because of the offering. Here’s what I think is going on. ONEOK decided not so long ago that the real investment opportunity in the natural gas space where it operates isn’t in its traditional natural gas pipelines but in transporting the natural gas liquids that are being produced from tight shale plays in the Permian Basin and the Bakken formation. Investing in that part of the natural gas distribution system paid off big in the fourth quarter of 2011—and in fact in all of 2011. In the fourth quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 70% year to year and 28% sequentially from the third quarter. About 95% of that increase, Morningstar calculates, was due to natural gas liquids. For the year operating income from natural gas liquids tripled. In its guidance for 2012 ONEOK raised its forecast of cash flow by $75 million from its previous estimate. The dividend yield on this master limited partnership has gradually lost ground as the unit price has climbed until the current trailing 12-month yield is down to 4.07%. The proposed increase in cash distributions would raise the dividend yield to 4.6% on today’s price of $58.15. I’m going to keep this one in my dividend income portfolio for a while yet. I like master limited partnerships with a clear roadmap of future investment opportunities. Raising capital and then investing it is the way that master limited partnerships grow cash flow for distribution to investors. 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 ONEOK 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/