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.
|Symbol||Date Picked||Price Then||Price Now||Today's Change||Jubak's Gain/Loss|
|Normally I look for dividend yields above 4% or 5% for my dividend income portfolio. On this measure, Exxon Mobil (XOM) with its 3.35% yield isn’t exactly an astounding opportunity. But something... more|
|Update June 28, 2015: Update: February 3. Today, February 3, before the New York market opened, Hi-Crush Partners (HCLP) reported earnings of 85 cents per unit in the fourth quarter of 2014. That was... more | Read Jim's Original Buy|
|I’m going to make some buys and sells in my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ today. In these buys and sells I’ll be adding Holly Energy Partners (HEP), one of the... more|
|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|
|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|
|Update June 13, 2014: Shares of Intel (INTC) have soared today after the company raised its guidance yesterday for second quarter sales. The stock is up 6.7% to $29.83 a share as of 3:30... more | Read Jim's Original Buy|
|Update June 4, 2013: I’ve had a number of readers email me to ask, “What happened to Seadrill’s (SDRL) fourth quarter 2012 dividend? That dividend would normally have been paid out in January and... more | Read Jim's Original Buy|
|Western Gas Partners|
|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
|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|
|Update June 27, 2015: Update: General Electric. Shares of General Electric (GE) rocketed higher today, April 10,climbing $2.84, or 11.02%, on news that the company would sell the real estate holdings of its GE... more | Read Jim's Original Buy|
|Update February 1, 2015: Update January 22: Yesterday I took a look a one energy sector dividend play—Hi-Crush Partners (HCLP)—and the so-far, so-good story on dividend payouts for this supplier of fracking sand during... more | Read Jim's Original Buy|
June 27th, 2015
Normally I look for dividend yields above 4% or 5% for my dividend income portfolio.
On this measure, Exxon Mobil (XOM) with its 3.35% yield isn’t exactly an astounding opportunity.
But something out of a recent report from Goldman Sachs caught my eye: Exxon Mobile (XOM) will be “the only U.S. or European major that can generate sufficient free cash flow to cover its dividend near $60 a barrel in 2016-17.” While other oil majors, Goldman continues, will be struggling to keep the dividend flat, Exxon Mobil will be in a position to increase the dividend for the next several years.
Goldman is, at the moment, extremely bearish on oil prices, lowering its forecast in the last few days to an average in 2015 of $58 a barrel for Brent and $52 for West Texas Intermediate. (Brent closed at $66.54 a barrel today, May 21, while West Texas Intermediate closed at $60.72 a barrel.) But while you probably think (as I do) that Goldman’s forecast is too pessimistic, I would make the point that oil prices could well stay at $70 or less for a while. And in that environment, oil companies aren’t going to be awash in cash for distribution to shareholders as dividends or buybacks.
Except for Exxon Mobil.
Standard & Poor’s has recently made the same point. “We see 2016 operating cash flow well in excess of capital spending, raising flexibility for returns to shareholders.”
And so has Morningstar: We “continue to see the dividend as the safest of all of the
oil majors” with a significant step up in free cash flow by 2018
A decent yield now, a safe yield going forward, and the prospects of continued dividend growth even during this period of depressed oil prices. (Exxon Mobil has grown its dividend at a 10.5% annual rate over the last five years.) Sounds like a good deal for income investors to me. I’ll be adding ExxonMobil to my dividend income portfolio tomorrow May 22. The shares closed at $87.21 today, May 21. The 52-week high/low range is $104.76 to $82.68 a share. (Exxon Mobil is already a member of my Jubak’s 50 long-term stock portfolio.)
So where does all this cash flow come from?
Partly it’s a result of Exxon Mobil winding down the capital spending stage on seven big projects that will go on line this year. (That is they will shift from eating cash to producing it.) And partly it’s a reflection of Exxon Mobil’s downstream strength. The company’s profit from its refineries doubled year over year in the first quarter. Low oil prices certainly hurt profits in the company’s up stream production business but they push up profits as refineries can buy crude at bargain prices. Despite distributing $3.9 billion to shareholders in the first quarter, Exxon Mobil’s cash position grew by $500 million in the period.
Of course, if Goldman is wrong and oil prices finish stronger in 2015 than projected, Exxon Mobil (and dividend investors) ought to do okay too.
June 28, 2015Update: February 3. Today, February 3, before the New York market opened, Hi-Crush Partners (HCLP) reported earnings of 85 cents per unit in the fourth quarter of 2014. That was 5 cents a unit below the Wall Street consensus projection for the quarter. Revenue climbed to $`30.9 million, well above the $108.9 million expected by analysts. Revenue increased by 104% from the fourth quarter of 2013. The units of this master limited partnership were up $2.52, or 7.75%, on the news as of 11 a.m. New York time. Why the huge bump? First, relief that the company came so close to earnings estimates at a moment when everybody is waiting for the bottom to fall out of the U.S. oil and natural gas from shale sector. Hi-Crush sells sand for use in fracking and it’s only reasonable to worry that demand and prices will fall as companies cut the number of rigs in use. Countering that logic, however, is the increased amount of sand being used per well as producers try to get more oil and natural gas out of each well in order to cut costs and increase production while drilling fewer new holes. Second, a big increase in distributable cash flow to $32.7 million that leaves the master limited partnership with a distribution coverage of 1.31 times the $24.9 million in distributions scheduled to be paid to unit holders of record as of January 30 on February 13. In 2014 Hi-Crush increased its distributable cash flow by 60% and increased its distribution by 32%. The distribution on February 13 is an 8% increase from that for the third-quarter of 2014. Hi-Crush now yields 8.3%, a yield that reflects investor worry about the sustainability of distributions and distribution growth during the current plunge in oil prices. Third, forward-looking statements from the company that stressed the stability of revenue for 2015. 88% of the company’s projected 2015 sand production is committed under long-term take-or-pay contracts. That’s down only slightly from the 90% under long-term take-or-pay contracts in 2014. Hi-Crush isn’t by any means out of the woods and the longer oil prices stay below $60 a barrel, the more at risk its distribution is. (Continuing the recent rally in oil, West Texas Intermediate was up another 3.3% as of 11 a.m. in New York to $51.16 a barrel.) Hi-Crush Partners is a member of my Dividend Income portfolio http://jubakam.com/portfolios/
May 31st, 2013
I’m going to make some buys and sells in my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ today.
In these buys and sells I’ll be adding Holly Energy Partners (HEP), one of the stocks I wrote about in my post http://jubakpicks.com/2013/05/24/10-u-s-traded-dividend-income-stocks-picks-for-a-yield-hungry-market/ That pick is the subject of this post.
I’ll also be selling two of the stocks, Total (TOT) and Magellan Midstream Partners (MMP) currently in my Dividend Income Portfolio out of that portfolio. I’ll explain the reasons and the timing for those two sells in posts later today. (I don’t want to sell before I collect all the dividends that are on the table, right?)
But for the moment, I’d note that the buy of Holly Energy and the sell of Magellan Midstream both have a lot to do with my 5% rule of thumb for dividend plays in the current market.
What’s this 5% rule?
For more than a year now, I’ve been writing abut what I’ve called the new paranormal market. (To catch up if you’ve missed the foundation of this argument see my post from March 2012 http://jubakpicks.com/2012/03/02/call-it-the-new-paranormal-market-youll-need-some-new-investing-tools-but-the-profits-are-out-there/.) The premise of my argument is that we’ve entered a period of relatively low returns. Bill Gross, the bond guru at Pimco, calls this period the “new normal” and believes that we’ll be lucky to see average annual returns of 5% a year during this period, which could stretch out for a decade. In my model for the “paranormal market” I’ve added a wrinkle to Gross’s model. Not only will average annual returns be low by the standards of the great bull market that governed the 1980s and 1990s, but also markets will be extraordinarily volatile. So, yes, you might see an average annual return of 5%, but that average will include years of 10% or 15% drops as well as substantial rallies, and it will include years like 2011 when the market will produce a half dozen swings of 7% or more in a month as it did in August 2011.
Dividend investing—active dividend investing–is extremely important in this environment. 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 newest 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.)
Holly Energy Partners, a master limited partnership, was spun off in 2004 by refiner Holly Corporation (now HollyFrontier (HFC)) in 2004 with assets that include 2,600 miles of pipelines, 12 million barrels of storage, and various terminals and truck loading racks. Holly Energy Partners has stumbled lately and that has moved the units decided above my 5% target. At a close of $35.96 on May 31 the dividend yield was 5.3%.
Of course, you don’t want to buy a dividend payer just because the yield has moved above 5%. Investors might be demanding a high payout because they think the company is in trouble or because they think the risk of holding this position is relatively high.
One of the things that I like about Holly Energy Partners is that the company’s revenue stream looks safer than that at some comparable pipeline and energy infrastructure master limited partnerships. Standard & Poor’s notes that 100% of Holly Energy Partners’ revenue is fee-based so that revenue isn’t dependent on either energy priced or energy volumes. Most of these long-term 10-15 year contracts come with minimum revenue guarantees that include annual rate increases based on increases in the Producer Price Index.
So if revenue is so safe, why the 5%+ yield? There’s very seldom a free lunch in investing—although there are mis-priced lunches.
And I think that’s the case here. Holly Energy Partners has depended on the drop down of assets from HollyFrontier for growth. That pipeline of assets that Holly Energy Partners can buy from HollyFrontier looks about empty with Holly Energy Partners acquisition of HollyFrontier’s 75% share in the UNEV Pipeline partnership.
But I think worries about a lack of future growth projects are overstated and ignore the growth opportunities that come from being located at the heart of the U.S. mid-continent energy boom. That boom has produced plenty of oil and natural gas but that production has come in a region with a relatively paucity of energy infrastructure from refineries (Holly Frontier’s business) to pipelines, collection systems, storage tanks and the like (Holly Energy’s business.) The drop downs may be running out but there are still plenty of investment opportunities for Holly Energy. The relatively small size of Holly Energy Partners means that small projects—say, to create infrastructure in the Permian and Niobrara fields—add enough revenue to make them worthwhile for Holly Energy Partners.
In April Holly Energy Partners raised its distribution to 47.75 cents, a 6.7% increase from the split-adjusted distribution in the first quarter of 2012. Wall Street projects that earnings per unit will grow to $1.47 in 2013 and to $1.60 in 2014 from the $1.29 earned in 2012.
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 shares of HollyFrontier or Holly Energy 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/
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/
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/
June 13, 2014Shares of Intel (INTC) have soared today after the company raised its guidance yesterday for second quarter sales. The stock is up 6.7% to $29.83 a share as of 3:30 P.M. New York time today. Intel is a member of my Dividend Income portfolio http://jubakam.com/portfolios/jubak-dividend-income/ Sure the capital gain is great—Intel’s share price is up 58.5% since I added it to this portfolio in September 2010. But the surge in price has knocked the dividend yield to 3.1% from 3.3% in April. And this supposed to be a dividend income play. Sell on the gain or hold? Intel has done a good job in recent years of increasing its dividend payout as the share price climbed. We’re roughly on schedule for another dividend announcement in the next week or two. I’d certainly hold on through that and see what the company has to say. Whatever the company says about dividends, though, I think this stock’s price has further to climb. I’m raising my target price to $34 a share by December from the current target of $32 by November 2014. Yesterday Intel said that it now expects second quarter sales of $13.7 billion. That’s a jump from the $13 billion in sales the company forecast back in April. Annual sales, Intel projects, will grow for the first time since 2011. Gross margin will climb to 64%, or 1 percentage point higher than it had last projected for the quarter, on higher PC unit volume. The big reason is an improvement in sales of traditional PCs. Sales dropped 10% in 2013 and while market researchers IDC and Gartner are still projecting a drop in PC shipments for 2014, they’re now forecasting a smaller decline. IDC, for example, is now projecting a 6% drop in worldwide shipments. (The bad news is that IDC sees growth in PC shipments staying negative until 2018) From what market researchers can see, it looks like corporate users have finally decided to replace their older PCs at a higher rate. A significant contributor to that trend is Microsoft’s decision to no longer support its long-in-the-tooth Windows XP operating system. That replacement cycle doesn’t fix the long-term problem of user moving from desktop machines to tablets and mobile devices and Intel still has to improve its penetration of those markets. But this kind of short-term news still helps. Intel isn’t the only stock moving on the improved PC sales forecast. Microsoft (MSFT) was up 1.6% as of 3:30 P.M. New York time and shares of Hewlett-Packard (HPQ) were up 4.9%. 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 managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.
June 4, 2013I’ve had a number of readers email me to ask, “What happened to Seadrill’s (SDRL) fourth quarter 2012 dividend? That dividend would normally have been paid out in January and it wasn’t. Now that the stock is about to go ex-dividend for its first quarter dividend, let me straighten out the record for this stock that I own in both my Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ and Dividend Income http://jubakpicks.com/jubak-dividend-income-portfolio/ portfolios. In 2012 Seadrill combined the payment of its third quarter 2012 and fourth quarter 2012 dividends into one payment of $1.70 a share distributed on December 21. Normally the fourth quarter dividend would have been paid out in January 2013, but like a number of other companies Seadrill accelerated its last dividend payment to escape potential changes in tax rates in 2013. That meant, of course, that there was no dividend payout in January. That had the effect of making some shareholders worry that company had omitted a dividend or that this high yielding stock was changing its dividend policy. I hope the first quarter dividend of 88 cents a share, an increase from the 85 cents a share paid out in the third and fourth quarters of 2012, puts those worries to rest. The record date on the first quarter dividend is June 7 and the shares will begin trading ex-dividend on June 5. The payout date to shareholders of record is on or about June 20, 2013, the company has announced. At the 2:30 p.m. (New York time) price of $41.10, the projected yield on Seadrill’s ADRs (American Depositary Receipts) comes to 8.6%. 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 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/
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/
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 traded at a split adjusted $22.90 on February 3.
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/
June 27, 2015Update: General Electric. Shares of General Electric (GE) rocketed higher today, April 10,climbing $2.84, or 11.02%, on news that the company would sell the real estate holdings of its GE Capital unit for $26.5 billion. The company’s board has authorized a new share buyback program of up to $50 billion. If, after this news, anyone still cares about the April 17 release of first quarter earnings, the company confirmed guidance for operating earnings of $1.10 to $1.20 a share for its industrial business. It’s not like the sale of assets belonging to GE Capital was unexpected. The company has made it clear that it intends to sell assets in its GE Capital unit and to reduce the operation to a financing business that supports the company’s industrial units such as jet engines and railroad locomotives. But the speed of the move was more aggressive than expected and so was the decision to launch such a huge share repurchase program, partially funded by the asset sale. Most of the moves to shrink GE Capital to data have been much smaller incremental sales, such as the sale of the company’s Australian and New Zealand consumer lending business. The deal announced today includes an agreement with Blackstone Group and Wells Fargo (WFC) that accounts for $23 billion in real estate assets. The remainder, General Electric said today, will come from ongoing talks with other potential buyers. General Electric has been a member of my Dividend Income portfolio since February 2, 2012. Appreciation to the close on April 10 is 47.6%. I think General Electric remains a stock to own in your portfolio. The reallocation of capital from the GE Capital unit to the company’s industrial business means a potential doubling of return on investment since the industrial units aren’t subject to the same reserve ratios as the financial business is. (Regulators decided that GE Capital was a systemically important financial company and that upped the capital the unit was required to keep in reserve.) The question at this point is how to characterize General Electric going forward. I had put the stock in my dividend income portfolio on the strength of a yield above 3% that looked like it was headed higher. Now, the company might be better characterized as investment in share price appreciation and as such maybe I should move it from the dividend portfolio to Jubak’s Picks I’m going to wait for the conference call after the April 17 earnings report to see what the company says about its dividend policy going forward before I make that decision. I’ll have a new target price after earnings as well.
February 1, 2015Update January 22: Yesterday I took a look a one energy sector dividend play—Hi-Crush Partners (HCLP)—and the so-far, so-good story on dividend payouts for this supplier of fracking sand during the current plunge in oil prices. (See that post here http://jubakam.com/2015/01/fracking-sand-mlp-hi-crush-increases-its-payout-for-now/ ) Today I’m going to take a look at another energy sector dividend play—midstream pipeline master limited partnership ONEOK Partners (OKS). Like Hi-Crush, this MLP has been hit hard during the energy sector sell off, dropping from $59.44 on August 29 to $42.79 at the close on January 22. Like Hi-Crush, though, ONEOK has recently raised its quarterly payout, raising quarterly distributions per unit to 79 cents from 75 cents, a 5.3% increase, on January 15. But as reassuring as the ONEOK’s decision to raise distributions may be, it’s certainly not the end of the story for income investors. Part of the appeal of energy sector MLPs has certainly been their relatively high yields during a period when yields on many income vehicles are extremely meager. But another part of the appeal, an important part, has been the record of these MLPs in growing distributions every year. How likely is that going forward, especially in the near-term? For an income investor the answer to that question is more important than the current high 7.54% yield on these units since prospects for annual that distribution growth are a big factor in the market’s decision of where to set the price of an MLP. ONEOK has two big advantages during the current energy rout. First, about 70% of the revenue from the MLP’s pipeline network comes from fee-based contracts, according to Morningstar. In the near-term at least that gives the MLP’s revenue stream significant shelter from shifts in the price of oil, natural gas, and natural gas liquids. Which is a very good thing since the price of natural gas liquids, the raw materials for the chemical and other industries and the foces of ONEOK’s network, has plunged along with oil. And for the same reason: Rising production from U.S. shale geologies has resulted in a significant surplus in supply. For example, the price of ethane, which makes up about 40% of ONEOK’s natural gas liquid flows, tumbled to 17 cents a gallon in December from 27 cents a gallon in July 2014. Second, ONEOK’s network of pipelines and processing plants reaches deep into underserved shale geologies such as North Dakota’s Bakken. The company characterizes the areas it serves as the core of the core in the shale energy boom. Analysts estimate that because of the high productivity in these areas all-in break-even costs for production companies are around $45 a barrel for oil. These producers will be among the last in the shale sector to cut production. All this doesn't mean that ONEOK doesn’t face challenges to reaching its target of 6% to 8% annual distribution growth. Some Wall Street analysts are predicting that distribution growth could slow to 3% or so—although that seems a very low-ball estimate given the recent 5.3% increase in the quarterly distribution. Other analysts are holding their projections in the neighborhood of 7% annual growth. It’s this uncertainty that has sent the unit price down from $59 in August to $42 now. That same uncertainty has pushed the yield up to 7.54% currently. (The record date for the quarterly payout is January 30 with the payout itself on February 13.) I think the risk of a period of lower distribution growth is real—although I’m with those analysts who think that 6% to 8% target is still reasonable. We’ll get a better sense of that when the MLP reports revenue and earnings on February 23. My read of the risk and reward on this income play is that I’d certainly hold here and that I’d recommend the units as a buy for income investors who can afford a bit of risk and who have the discipline to hold though any near-term price declines. Like Hi-Crush Partners, ONEOK is a member of my Dividend Income portfolio http://jubakam.com/portfolios