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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
Qualcomm
QCOM 05/05/2016 $50.92
Tomorrow I'm adding shares of Qualcomm (QCOM) to my dividend portfolio in an effort to pick up a higher than average yield on the recent general slump in technology shares,... more
Market Vector Preferred Securities Ex-Financials ETF
PFXF 02/26/2016 $19.26
It's common these days for personal finance gurus, financial advisors, and, of course, mutual fund company CEOs to lament the proliferating flavors of ETFs (exchange traded funds.) And I'd agree... more
Kinder Morgan
KMI 02/24/2016 $17.42
Kinder Morgan's (KMI) decision to cut its dividend to 50 cents a share certainly wasn't popular with the market and especially not with the income investors who had stuck with... more
Verizon
VZ 10/22/2015 $45.89
Update : When Verizon (VZ) reported fourth quarter earnings on January 26, everything was in line. There were no real surprises. And that was disappointing to investors who were looking for signs... more  |  Read Jim's Original Buy
Cummins
CMI 10/12/2015 $111.91
Update November 11, 2015: Updated November 11, 2015. Yesterday at its analyst day presentation Cummins (CMI) said that it expected 2016 revenue to come in at least 5% below 2015 levels. The bad news was... more  |  Read Jim's Original Buy
Exxon Mobile
XOM 05/21/2015 $87.21
Update August 3, 2015: Update: August 3, 2015. Dividend income investors don’t buy ExxonMobil (XOM) because it pays the highest dividend in the market or in the oil sector. They buy it—and I bought... more  |  Read Jim's Original Buy
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
Update November 17, 2015: The energy space, especially the energy income space, continues to reorganize itself through cuts in capital spending, the elimination of dividends, and the sale or reshuffling of assets. One of the... more  |  Read Jim's Original Buy
Intel
INTC 01/11/2013 $22.00
Update October 13, 2015: Update: October 13 Back on October 9 on my JubakAM.com subscription site I wondered whether a continued drop in PC sales in the third quarter of 2015 might be setting... more  |  Read Jim's Original Buy
SeaDrill
SDRL 07/03/2012 $36.25
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
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 $22.90
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
General Electric
GE 02/03/2012 $18.85
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
Oneok Partners
OKS 12/06/2005 $22.85
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

Using tech sector softness to add Qualcomm as a dividend pick

May 5th, 2016

Tomorrow I’m adding shares of Qualcomm (QCOM) to my dividend portfolio in an effort to pick up a higher than average yield on the recent general slump in technology shares, and in the shares of companies in the smart phone business in particular.

Qualcomm has been in steady slide since November–when the stock closed at 60.87 on November 3. The high for the last 52 weeks is $71.32. The price at today’s close was $50.92.

That has brought yield on these shares up to 4.18%, above average for even the big old-school technology stocks that have made the transition from growth stocks to value/dividend plays. Intel (INTC), which I also hold in my dividend portfolio, yields 3.43%. Cisco Systems (CSCO) yields 3.87%. Microsoft (MSFT) pays 2.89%.

Qualcomm’s dividend will be paid to shareholders of record on June 22. The ex-dividend date is May 27 and the record date is June 1.

I’ll understand if you want to wait until later in the weak summer quarter for technology stocks before picking this up. Maybe Qualcomm will retreat a bit more and give you a better yield. But the company’s higher than average dividend at a time when yield is hard to find is likely to support the shares in any general sector weakness.

Buy Market Vectors Preferred ETF

February 25th, 2016

It’s common these days for personal finance gurus, financial advisors, and, of course, mutual fund company CEOs to lament the proliferating flavors of ETFs (exchange traded funds.) And I’d agree that we probably really don’t need an ETF that gives the owner three-times downside leverage to the price of oil, or one that specializes in an index of cyber-security stocks, or yet another ETF that slices and dices emerging markets according to some catchy set of initials.

But last I looked nobody was holding a gun to my head to make me buy any of these alternatives. And I more often than not these days find myself appreciating the ability to fine-tune exposure to a sector using the “tweaks” of an ETF.

Which is exactly the case for ETFs that invest in preferred stocks. These are vehicles designed to appeal to dividend income investors since preferred shares pay higher rates of dividends than do common shares. And, theoretically, they are less risky than a portfolio of common shares since preferred dividends get paid first and are less liable to be slashed by a company looking to preserve cash.

I say “theoretically” since not all preferred dividends look equally safe these days–investors and analysts are nervous right now about bad debt and cash flow at some banks with big exposure to the energy sector. And a cut in dividend isn’t the only potential source of risk to a portfolio of preferred stocks. For example, banks are big issuers of preferred shares and the financial sector has been one of the worst performers of 2016 what with the aforementioned risk of bad loans in the energy sector and the uncertain direction of the yield curve because of negative interest rates at most of the world’s biggest central banks and a conviction that the U.S. Federal Reserve isn’t going to raise interest rates in 2016 as expected earlier. Banks make more money when the yield curve sharpens. That was expected to take place in 2016; it hasn’t yet; and looks disappointingly less likely, the market has concluded, this year.

All of which makes the difference between the iShares U.S. Preferred Stock ETF (PFF) and the Market Vectors Preferred Securities ex-Financials ETF (PFXF) so exactly to the point. If you think financials are ready for  rebound, then the iShares Preferred ETF is your choice. About 62% of the fund’s holdings are preferred shares in the financial sector and with a rebound you can expect to collect the ETF’s 5.82% yield and some appreciation as the financial sector recovers. If, on the other hand, you think problems in the financial sector have further to run, your choice would be the Market Vectors Preferred ex-Financials ETF, because the ETF, as it’s name says, eschews financials. The portfolio for this ETF holds preferred shares from the likes of Tyson Foods, ArcelorMittal, Alcoa, and United Technologies rather than the preferred shares from HSBC, Ally Financial, Barclays, Wells Fargo, and Citigroup that make up the top five holdings at iShares Preferred. The biggest sector weightings for the Market Vectors Preferred ETF are in real estate investment trusts (35%), electric utilities (26%) and telecom (10%.)

The yield on the Market Vectors ETF is a little higher at 5.97% versus 5.82% (as of January 31) and the risk, in my estimation, is a little lower. (Fees are slightly higher at Market Vectors at 0.53% versus 0.47%.)  I added the Market Vectors Preferred Securities Ex-Financias ETF to my dividend income portfolio on February 23 at the closing price at day of $19.26.

 

Buy Kinder Morgan (KMI) for the cash flow

February 23rd, 2016

Kinder Morgan’s (KMI) decision to cut its dividend to 50 cents a share certainly wasn’t popular with the market and especially not with the income investors who had stuck with the company when it rolled its MLP (master limited partnership) Kinder Morgan Energy Partners into the Kinder Morgan general partner at the end of 2014. At the time of the consolidation Kinder Morgan had said it would pay a dividend of $2 a share in 2015 and projected a 10% annual increase in dividends through 2020. The December 8 announcement of a 75% cut to the dividend devastated the stock. Kinder Morgan shares are down roughly 50% from $32.68 back in October to a close at $17.42 on Tuesday, February 23.

But as painful as that drop has been, the dividend cut has positioned Kinder Morgan to be one not just one of the survivors but actually one of the few winners from the bust in the U.S. oil and gas sector. By cutting the dividend Kinder Morgan has moved into a position where it doesn’t need to tap equity or debt markets–at the current high cost that the financial markets are charging energy companies to raise capital–in order to fund its planned capital spending budget for 2016. After paying the new lower dividend, the company projects cash flow of $3.6 billion in 2016, up from $1.2 billion in 2015. That’s enough to fund the company’s $3 billion plus in projected capital spending for 2016. And at this point it looks like the company will be able to fund its 2017 capital plan internally as well. (Kinder Morgan has a backlog of some $18 billion in capital spending projects it could invest in. In the current environment the company is high grading those projects, looking for those that provide the biggest return on investment. It’s that dynamic plus the company’s sizable cash flow that has led an investment manager–probably Ted Wechsler–at Warren Buffett’s Berkshire Hathaway (BRK.B) to buy about $460 million in shares of Kinder Morgan recently.)

The advantages of being able to invest using internal cash at a time when the cost of external capital is so high for energy companies and when market turmoil is resulting in delays in competing projects are obvious.  The company projects that these investments plus returns on current assets will generate about 88 cents a unit in growth to 2020. That’s a compound annual growth rate of about 7%, Credit Suisse calculates. That kind of growth would enable Kinder Morgan to restore some of the dividend it slashed in December, especially if sometime during that period financial markets cut the price that energy companies have to pay for external capital. At Tuesday’s closing price of $17.42 Kinder Morgan showed a dividend yield of 2.88%. Not stunningly high but not a bad place to start if the company is able to increase dividend payouts after 2016 or 2017.

The big question, of course, for any investor is how accurate those cash flow projections are likely to be.

These projections look as solid as projections can be. About 90% of the 2016 earnings before depreciation and amortization projection is fee-based rather than price-based so Kinder Morgan’s pipeline and storage system is relatively well buffered from the price of oil and natural gas. Of that 91% about 75% is take or pay–meaning Kinder Morgan gets paid whether the customer uses its pipelines or not–the rest is volume based. Of that volume-based 25%, about 80% is attributable to natural gas and refined product pipelines where, Credit Suisse believes, risk of volumes falling is relatively low. Kinder Morgan also looks relatively well protected from further deterioration in energy company balance sheets with 82% of its top 25 customers rated investment grade or better.

Kinder Morgan projects that a drop to $20 a barrel for West Texas Intermediate and to $1.75 per million BTUs for natural gas would result in only a $120 million hit to its budgeted dividend coverage.

Credit Suisse has a $20 one-year target price on Kinder Morgan. I think any gains in the price will depend on a turn in sentiment on energy stocks–and I’m not willing to call that yet. But cash flow does look very positive for dividend income investors.

 

Update Verizon (VZ)

When Verizon (VZ) reported fourth quarter earnings on January 26, everything was in line. There were no real surprises. And that was disappointing to investors who were looking for signs that a rising economy was lifting margins in Verizon’s legacy landline business or who were hoping for some sign that Apple (AAPL) was going to strike a deal with Verizon to sell the iPhone. Didn’t happen. So investors are stuck with the same old story. Which fortunately is pretty good despite its lack of surprises. Verizon reported fourth quarter 2009 earnings of 54 cents a share (matching Wall Street projections) and revenue of $27.09 billion (just short of the analyst consensus at $27.33) The company added 2.2 net wireless customers (that’s before the effect of acquisitions) in the quarter. For the critical FiOS Internet and cable TV unit, the company added another 153,000 for each service. That brought total Internet customers to 3.4 million and total TV customers to 2.9 million. Looking a little deeper into the numbers Verizon strikes me as a second half of 2010 story. Right now the company is using higher handset subsidies to grow its smartphone business. Only 26% of Verizon’s wireless customers own smartphones (versus 40% or more at AT&T (T), thanks to the iPhone). Smartphone owners use more higher-margin data and broadband services so increasing the percentage of customers with smartphones is crucial to driving margins higher. Of course, as AT&T’s problems show, if you drive up the number of customers using these services, you’d better build out your network to handle the traffic. For Verizon that means higher capital spending on wireless in 2010.  The company’s legacy landline business is supposed to be the cash cow that supports these subsidies and the build out for smartphones and the FiOS Internet and cable businesses. But because of the economic slowdown, businesses have been cutting rather than adding lines. In addition the soft economy has meant slower growth in higher margin broadband and data services for the landline business. There’s nothing here that a slightly stronger economy wouldn’t fix, however, and the company’s continued investment in wireless smartphone, FiOS, and landline data services will pay off in the future. The yield on February 15 was a very attractive 6.6%.

Update Cummins

November 11, 2015

Updated November 11, 2015. Yesterday at its analyst day presentation Cummins (CMI) said that it expected 2016 revenue to come in at least 5% below 2015 levels. The bad news was relatively expected and shares finished down just 1.47% for the day. They retreated another 3.52% today to $100.08. The news isn't good for Cummins, obviously, but given the company's solid historical record of increasing market share in downturns, I think Cummins' bad news is actually a bigger negative for  other U.S. exporters and producers of capital goods such as Deere (DE), Caterpillar (CAT), and Borg Warner (BWA). Cummins noted yesterday that conditions in core markets have changed with growth in emerging markets slowing, with lower investment in infrastructure, and with weaker commodity prices. Cyclical weaknesses are likely to persist, the company said. The company particularly pointed to slower revenue growth in sectors that include oil and gas, and global mining (where the company has a 35% market share for its diesel engines), and in markets that include Brazil and China. Like many exporters Cummins was looking toward revenue growth in China (where the company has a 17% market share in engines for heavy and middle duty engines), which accounted for 7% of revenue in the last 12 months, and in Asia, at 8% of revenue, and Latin America, at 7% of revenue. Growth in all those markets will be slower to materialize than expected, but Cummins continues to see market share gains, especially in China, from new products. Shareholders will be relieved to know that the company reiterated its goal of returning 50% of operating cash flow to investors, and that the company sees operating cash flow of $10 billion from 2011 to 2015, up from $4.8 billion from 2006 to 2010. Since 2005 Cummins has ranked among the top 5% of S&P 500 companies in dividend growth. After today's drop the shares are yielding 3.95  

Exxon’s dividend is up to 3.75% and latest quarterly report says dividend is safe even at current oil prices

August 3, 2015

Update: August 3, 2015. Dividend income investors don’t buy ExxonMobil (XOM) because it pays the highest dividend in the market or in the oil sector. They buy it—and I bought it for my Dividend Income portfolio on May 21, 2015—because it pays a relatively high, safe yield. How does that trade off look after a truly horrible second quarter earnings report delivered on July 31? Exxon shares fell by 4.6% after the company reported its worst quarterly profit since 2009. Earnings of $4.2 billion, or $1.00 a share, were down 52% from the $8.8 billion or $2.05 a share reported in the second quarter of 2014. As of the close on Friday, July 31, shares were down almost 13% for 2015 and 17% for the trailing 12 months. Shares were down 9.2% since I added Exxon to my Dividend Income portfolio. Actually the trade off still looks pretty good. Thanks to that punishing drop in share price Exxon’s dividend yield as climbed to 3.68% from 3.35% at the time of my purchase. And despite the huge drop in earnings, Exxon doesn’t look to be in any danger of turning cash flow negative or of having to cut its dividend. In fact on July 29, the company voted to maintain its quarterly dividend at 73 cents a share after raising its dividend to that level on February 6 from 69 cents a share. (The record date for Exxon’s most recent dividend payout is August 13.) That’s because even after seeing earnings cut in half Exxon earned $4.2 billion in the quarter. And the company’s cash flow besides being really hefty shows plenty of room for reductions that don’t touch the dividend. For example, cash flow, a more important measure than earnings for seeing if a company might need to cut its dividend, came to $8 billion in quarter that ended on March 31. Capital spending came to $6.8 billion. The company used another $1.8 billion to buy back shares and spent almost $3 billion on dividend payouts. For that quarter Exxon grew cash by a bit less than $600 million. Can you see how easy it would be to reduce cash outflows in order to preserve the dividend? How about reducing capital spending? Capital spending was down 12% in the first half of 2015 and was down 16% in the second quarter from the same periods in 2014. Or how about reducing stock buybacks in the quarter by $500 million from $1 billion? Exxon’s ability to offset a crushing drop in oil prices with increased earnings from its refinery and distribution business also adds to the safety factor for this stock. What are called downstream earnings—that is earnings from refining oil and then selling it through gas stations--rose to $1.5 billion in the quarter from $831 million. That wasn’t nearly enough to offset the $2 billion decline in earnings from the company’s upstream business—oil production—but it sure doesn’t hurt an oil company to have a sizeable business that makes more money as oil prices fall. Shares of ExxonMobil fell below $80 a share on Friday, July 31, to their lowest level since 2012. And there’s certainly a good chance that shares will move lower in the current quarter since crude oil prices have moved lower than they were in the second quarter. Supply growth from OPEC and the end (probably) of sanctions against Iran are likely to increase supply in coming months. West Texas Intermediate, down to $47.12 a barrel on July 31, could retest lows from $40 to $45, although analyst projections still see West Texas Intermediate closing the year at $60 a barrel or better. But at $60 Exxon’s dividend is safe and the company has room to defend the current dividend at $45 as long as the market doesn’t get stuck at that level far into 2016. Morningstar currently has a one-year target price of $98 on the shares. Standard & Poor’s is projecting $90. Me? I wouldn’t mind seeing short-term dip that brought the yield up to 4% or more since, as I read Exxon’s cash flow, the company has plenty of powder available the ability its dividend. (On Monday August 3, shares of ExxonMobil fell another 1.45% and the dividend yield climbed to 3.75%) Not something I’d say about a lot of companies in the oil and gas sector.

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/

Targa Resources to acquire MLP Targa Resources Partners: OK deal but not a great deal

November 17, 2015

The energy space, especially the energy income space, continues to reorganize itself through cuts in capital spending, the elimination of dividends, and the sale or reshuffling of assets. One of the latest involves an MLP (master limited partnership), Targa Resources Partners (NGLS) that I hold in both the 12-18 month Jubak Picks portfolio and in my dividend income portfolio. The general partner, Targa Resources (TRGP), has made an offer valued at $9 billion to buy the 91.2% of the master limited partnership that it doesn’t own. The deal, the general partner has said would give the master limited partnership greater access to capital at a lower cost since it would no longer have to pay distribution rights to the general partner. Investors in the master limited partnership would lose many of their tax benefits but, the general partner has argued, would be able to defer taxes over time by recapturing depreciation of the joint company’s pipelines and other system assets. The move makes sense in the short term since it will get Targa through the current rough patch in the energy sector. It looks like Targa Resources Partners is coming close to the limits on its debt covenants. That would limit the master limited partnerships ability to borrow to fund new projects. The deal isn’t bad deal—the price amounted to an 18% premium to Targa Resources Partners unit price at the time it was announced. And if projections are correct, the combined company will show 15% dividend growth in 2016. But the deal isn’t a great deal. When, earlier, Kinder Morgan (KMI) announced a buyout of its master limited partnership it included cash in compensation for the capital gains taxes the investors in the master limited partnership would have to pay to step up units in the MLP to shares in the parent company. At the moment, there are no comparable funds in the Targa deal. Kinder Morgan, with a project backlog of more than $20 billion, will also get more bang for the buck if it can, after the acquisition, raise more debt at a lower price. Targa has only $4 billion in potential projects so it will be able to put less capital to work. Besides any disgruntlement with the lack of  cash kicker to help pay investors’ taxes from the deal, there’s some bad feeling since the company turned down a $15 billion bid earlier, calling it inadequate. And now the deal is priced at $9 billion. It’s certainly possible to argue, and some investors are, that parent Targa is getting a bargain at the expense of holders of the master limited partnership. I’m inclined to sell on the deal but I’d like to get a better exit price. Units of Targa Resources Partners have rallied over the last few days, climbing 4.23% yesterday to $25.85 before declining in the oil sector sell off by 2.67% today. But the units still down significantly from the beginning of the month when they traded at $30.49 on November 2. I think that drop is a result of the general sell off in oil shares and in other energy stocks. I’d be inclined to wait a few more days to see if today’s bounce gives you a more attractive exit point. The MLP has paid its quarterly 82.5 cent a unit quarterly dividend so all you’re waiting for is to see if the upward trend runs for a while. If you’re looking for an alternative, I think Kinder Morgan (KMI) offers more leverage to the upside on its bigger portfolio of projects. Kinder Morgan pays a yield of 6.55% to a yield of 12.01 on Targa Resources Partners. Which, of course, does tell you what the market thinks of the relative risk in the two situations.

Update Intel: Where’s the growth?

October 13, 2015

Update: October 13 Back on October 9 on my JubakAM.com subscription site I wondered whether a continued drop in PC sales in the third quarter of 2015 might be setting up Intel (INTC) for growth in 2016. Signs of a return to growth in any of Intel’s business would move the stock out of my dividend income where its been since January 2013 (with a capital gain of 45.6%) and into my Jubak’s Picks portfolio. But without some growth in earnings and revenue, the stock’s (extremely safe) 3% dividend was the reason to own Intel. So any growth in the third quarter earnings announced after the close today, October 13? Not that I can see. Revenue of $14.47 billion was indeed $250 million above the Wall Street forecast, but still down 0.5% year over year. The Client Computing Group—otherwise known as the PC unit—saw revenue fall, as expected, by 7%. Data Center Group—the unit that makes chips for servers and cloud computing, did see revenue climb 12% year over year, but Intel took the shine off those results by projecting that growth in that business would decline to low-double digit rates against the 15% growth previously forecast. Revenue from the Internet of Things Group did glow 10% year over year, but with a total revenue of $581 million—versus $8.5 billion for the PC unit and 4.1 billion for the server and cloud group—the Internet of Things will be too small to drive growth at Intel for years to come. Besides the hard revenue and earnings numbers there are some disquieting softer news stories. Look inside Microsoft’s (MSFT) new Lumia smartphones and you’ll find a Qualcomm Snapdragon 808 processor in the Lumia 950 and the Snapdragon 810 inside the bigger Lumia 950XL. Microsoft isn’t going to sell a ton of Lumias but Intel’s inability to break into its long-term WinTel partner’s smartphones isn’t a sign of progress in Intel’s efforts to make up lost ground in mobile computer. The tech geek comments that I’ve read say Intel’s chips, such as the Atom Z3590, continue to lag on graphics, imaging, communications integration, and memory bandwidth. And the company is still having trouble delivering promised features on time Second, troubling story reports that Qualcomm (QCOM) continues to press ahead with new chips for the server market. The newest product is a 24-core server using a design from Arm Holdings (ARMH.) That—Qualcomm and Arm—is a pretty potent combo. There’s nothing here to endanger the dividend—Intel finished the quarter with $20.8 billion in cash and cash equivalents. But growth? Not yet visible.

Income investing stock pick Seadrill goes back to its normal dividend payout schedule this week

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 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/  

Western Gas Partners

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/

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 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/

Update General Electric

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 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.

Update ONEOK (OKS)

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 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


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