With the shutdown/debt ceiling crisis behind us, the stock market is free to worry about a slowdown in U.S. economic growth and to hope for a delay in the Federal Reserve’s taper until sometime in 2014.
That’s pushing the U.S. market away from growth sensitive stocks and toward what James Mackintosh of the Financial Times today called “bond proxies.”
That means stocks with safe dividends that won’t be cut even if the economy stumbles.
Yesterday’s market leaders were telecom stocks (up 1.7%), utilities (up 1.6%), and consumer staples (up 0.8%) on a day when the Standard & Poor’s 500 stock index climbed just 0.67%
The worry here, of course, is that a U.S. economy that wasn’t growing fast enough for the Fed to begin to withdraw any of it stimulus even before the shutdown/debt ceiling crisis will show even slower growth in the fourth quarter because of that crisis. And that the damage will extend into 2014 because we’re scheduled to revisit the shutdown and debt ceiling battles in January and February of 2014.
The hope—for bonds themselves and “bond proxy” stocks–is that uncertainty about economic growth will keep the Fed from beginning to taper off its $85 billion a month in purchases of Treasuries and mortgage-backed assets until January or maybe even March or April. That kind of delay would continue the post crisis rally in Treasuries that has sent the yield on the 10-year Treasury to 2.59% today from slightly above 3% in early September. Falling yields make the payouts from “bond proxy” stocks more valuable. For example, eight of the 12 stocks in my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ are up today as of 2:15 p.m. New York time. Verizon (VZ), which isn’t part of that portfolio, is up 1.57% today. Read more
The run up in U.S. interest rates and worries in the weeks leading up to tomorrow’s Federal Reserve decision on whether or not to begin reducing the central bank’s monthly purchases of $85 billion of Treasuries and mortgage-backed securities hasn’t been kind to dividend stocks, REITs (real estate investment trusts) or MLPs (master limited partnerships.) In fact pretty much anything that trades on yield has tumbled.
For example, units of Kinder Morgan Energy Partners (KMP), a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ , had fallen from $83.35 on August 28 to $81.32 on September 10. That’s a pull back of about 2.4%.
But the damage has gotten a lot worse in the last few days. On September 11 an analyst with Hedgeye Risk Management told Fox Business Network that Kinder Morgan was a house of cards,” that “Kinder Morgan’s issues are very concerning,” and that “there are some very misleading statements with some of the non-GAAP financials.” Investors should sell Kinder Morgan. (The analyst, Kevin Kaiser, seems to have been talking about all the Kinder Morgan companies: Kinder Morgan (KMI,) the general partner; Kinder Morgan Management (KMR), which pays distributions in shares rather than in cash; and Kinder Morgan Energy Partners (KMP), the cash-distributing MLP.)
On that blast the units of Kinder Morgan Energy Partners have dropped to $78.17 at the close on September 17, a drop of another 3.9%.
Since I was about to recommend buying Kinder Morgan Energy Partners on the drop—since the yield has climbed to 6.75%–I thought it would be a good idea to dig into the report and Kinder Morgan.
My conclusion: I’m still recommending that you buy the units at this yield. Read more
I think this is a good time to be buying–selectively—income-producing MLPs (master limited partnerships.) I’m less enthusiastic about REITS (real estate investment trusts): There are good buys in the sector but you have to be even more selective than with MLPs. In this post I’m going to explain how you go about being selective in buying MLPs and REITs.
On September 18 I think the Federal Reserve will begin to reduce its monthly purchases of Treasuries and mortgage-backed securities. About 65% of economists surveyed by Bloomberg on August 21 agree with that opinion.
The consensus is that the taper will begin with a reduction in monthly purchases from the current $85 billion to something like $75 billion or $70 billion. And my suspicion is that a reduction of that magnitude won’t have much effect on the financial markets. In fact my suspicion is that the reaction will be “That’s what we were worried about?” and that we’ll get at least a temporary rally in bonds, dividend-paying stocks and other income vehicles. (“Temporary.” Remember that the markets also have to cope with the threat of a government shutdown in September over the budget and a potential debt ceiling crisis in October.)
If my suspicion is correct, right now is a good time to pick up shares of dividend-paying companies and units of MLPs (master limited partnerships) and REITS (real estate investment trusts.) After the drubbing dealt out to income assets in the last month, it’s relatively easy to find dividend stocks that pay 5.24% as TECO Energy did at the August 23 close or MLPs paying 5.72% as ONEOK Partners did on Friday.
But I’d like to have more than suspicion in my corner before buying anything in the income sector now. Yes, it stands to reason that a taper to $75 billion from $85 billion won’t be a big deal and that income assets are now over sold, but I wouldn’t mind buttressing that suspicion with as many other advantages I can find.
And fortunately I can find two that suggest where the biggest and safest bargains lie in the income sector. Read more
I’ve collected my dividend so now it’s time to sell stock pick Total out of my dividend income portfolio
On May 31 I wrote http://jubakpicks.com/2013/05/31/sell-stock-pick-total-out-of-my-dividend-portfolio-but-not-quite-yet/ that I would sell shares of Total (TOT) out of my Dividend Income portfolio but not quite yet. (The sell decision was based on the downward trend in oil prices and the fact that Total was in a capital spending phase that wouldn’t turn into cash flow until 2014. You can see more details on that argument in my post.) I decided to wait to sell until the company had paid its next dividend on June 24. (The stock went ex-dividend on June 24 and the dividend is scheduled to be paid today, June 27, to shareholders of record.)
I got a number of comments suggesting that I should sell now since the market seemed to be headed for a drop (absolutely right, as it turned out) and others noting that stock prices drop by the amount of the dividend payout after the payout so why hang around. For what is a dividend income portfolio I chose to hold on to collect my cash, however, since generating income is a big part of the goal of this portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
So how did my decision to wait to sell until after the dividend payout work?
The shares closed at $49.85 on May 31 and after the bounce of the last few days they closed today, June 27, at $48.48 as of 3 p.m. New York time. The dividend payout today is .59 euros, or 77 cents at today’s exchange rate. By waiting to sell I lost 60 cents a share.
The gain on these shares was 3.24% from my purchase price on May 28, 2010. At the time of purchase the stock paid a yield of 6.5%.
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 Total 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/
This is a tough one and I’d bet that many of you would disagree no matter what I decided.
The name in question is Magellan Midstream Partners (MMP), a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
This master limited partnership has been a very, very good addition to the portfolio. At the time of the initial buy, these units paid a 7.3% distribution. Since I added the units to the portfolio on December 6, 2005, they’ve gained 60.3% (to the close on June 7, 2013.)
And that’s the problem.
The partnership has increased distributions every year. From $1.45 in 2010 to $1.56 in 2011 to $1.78 in 2012, but the increases in distributions haven’t kept up with the increase—27.4% in 2011 and 30.6% in 2012, for example, in the price of the units.
Consequently, the yield on this holding has come down every year—from 6.55% in 2009 to 5.15% in 2010 to 4.52% in 2011 to 4.13% in 2012 to 3.9% right now.
Why is that an issue? Because that falling yield is a sign that dividend stocks have gotten too popular. Especially recently. Read more