On January 11 in 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/ I sold Brazilian utility CPFL Energia (CPL) out of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ . As of the end of 2012 I had a loss of 2.5% on this position (including dividend income.)
The logic behind this sell is pretty simple. As part of Brazilian President Dilma Rousseff’s drive to take costs out of the Brazilian economy, Brazilian utilities have been told to cut the price they charge for electricity if they’d like to see their concessions on electric power plants renewed. I think that’s good for Brazil, which has some of the world’s highest electricity costs, but it’s not good for revenue and cash flow at Brazil’s utilities.
Since the announcement of the new policy on September 11, shares of Brazil’s utilities in general have taken a beating. In particular the New York traded ADRs of CPFL Energia are down 8.6% from September 11 through my January 10 sell call.
What concerns me about CPFL Energia as a dividend stock is that the utility has paid out 95% of net income as dividends on average over the last seven years. The payout ratio hit 100% in the third quarter of 2012. That doesn’t leave CPFL with any room to increase dividends if net income falls as a result of new government initiatives. (The company’s dividend policy requires a minimum 50% payout.)
I don’t think the September 11 policy change is the last one that Brazilian utilities are likely to see either. Read more
I think the argument that we’re in an income asset bubble is easy to make–deciding when it might burst and what to do about it are much harder
We are looking at a bubble in the market for income assets.
Money continues to pour into the government bonds of the United States, Japan, Germany and other “safe haven” countries even though yields there are negative after inflation and even though some of these “safe havens” rank among the world’s most indebted governments.
Dividend stocks too have risen to historic highs even as yields have dipped. For example, an index that tracks the Standard & Poor’s “dividend aristocrats,” a basket of 51 stocks that have increased their dividends annually for at least 25 years, hit an all-time high in October.
We all understand the reasons behind this love affair with income assets. Stocks have been scarily volatile for the last decade or more—and threaten to become even more so. The world’s central banks have flooded financial markets with cash, crushing yields, but at the same time promising to keep interest rates extraordinarily low for an extended period, in the formulation of the U.S. Federal Reserve. A sputtering global economy has resulted in low rates of inflation and frequently, in fact, deflation seems a more immediate threat than inflation.
But we know that we’re nearing the end of this cycle. The yield on two-year Treasury notes could drop below the current 0.24%–that’s a negative 1.96% yield at recent U.S. inflation rates—but the yield is unlikely to go below zero. At some point—mid-2015 in the Federal Reserve’s most recent formulation—the world’s central banks will start raising interest rates again. A return to global growth or simple demographic pressures or the aging of the world’s population will lead to higher rates of inflation.
And we all know the big important questions too: When? And What? Knowing what we know—about the likelihood of a bubble and the eventual breaking of that bubble—When do we take action to avoid getting caught up in the bursting of that bubble? And when we take action What do we do? Read more
If you want to earn more dividend income, you’ll have to put up with more volatility–what you want to avoid is a permanent impairment of capital
“What do you mean, get paid while you wait? A stock with a 4% dividend that falls 25% in price is still a losing proposition,” read an email I got recently in response to a post where I added Ensco (ESV) to my watch list http://jubakpicks.com/tag/ensco/
And that is, of course, absolutely right. A 4% dividend gets wiped out pretty quickly when a stock tumbles in price.
Ideally, you’d like to buy dividend stocks that never go down in price and that don’t share in market volatility—except to the upside.
Unfortunately, in my experience, “ideally” doesn’t exist. Dividend stocks may go down less than the average stock—after all they have that dividend yield to support their price—in a down market but they do go down nonetheless. Dividend stocks do turn in bad quarters and when they do they go down in price. Even stocks with long uninterrupted histories of never cutting dividends and, of raising them every quarter, fall in price.
And if you’re going to wait until you’ve found a dividend stock that never goes down before adding one to your portfolio, you’re never going to buy a dividend stock. For that matter, you’ll never buy a bond either—since bond prices fluctuate with interest rates, inflation, fear, and the credit ratings of the issuer.
What we hope for from a bond is that despite the fluctuations in the price of the bond, it will 1) pay the interest promised to buyers and on time, and 2) when it comes time for the bond to mature pay off 100% of its promised maturity value.
Now dividend stocks are riskier than bonds. Read more
Catching up with bookkeeping in my dividend income portfolio and my February 3 add of Westpac Banking
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. Read more
Digital Realty Trust (DLR) will pay its quarterly dividend on June 29 to shareholders of record on June 15. The REIT (real estate investment trust) went ex-dividend on June 13. That means you’ll receive your dividend as long as you held on June 13. And you’re now free to sell without losing the dividend payment.
I’m going to take advantage of that timing to sell Digital Realty Trust out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ today. The REIT has gained 1.23% in capital appreciation since I added it to the portfolio on March 23, 2012. The 73 cents a share in quarterly dividends (buying on March 23, I missed the March dividend payout with its record date of March 15) paid in June add another 1.01% in income to that return. The total return since purchase on March 23 then comes to 2.25%.
Even in this market, I’m not about to write home about 2.25% in three months but this pick did what it was supposed to do—it held its value (and a little more) and provided some yield while I waited to see where stocks might be headed.
So why sell now? Read more