The U.S. Federal Reserve will make big headlines this week—just not at tomorrow’s (March 13) meeting of its Open Market Committee. The Fed body that sets short-term interest rates is expected to leave rates just where they are at 0% to 0.25% and put a damper on whatever hopes for a third round of quantitative easing the financial market may still have.

In other words, business as usual Tuesday.

Thursday is a very different matter.

That’s the day when the Federal Reserve is scheduled to announce the results of its annual stress test on U.S. banks. The Fed is expected to give the go ahead for big dividend increases at banks that cut their dividends after the Lehman bankruptcy and that have been prohibited from raising dividends back to former levels since then by the Fed’s rulings that they hadn’t built up capital reserves to withstand another financial crisis.

Dividends at the 19 largest U.S. lenders will climb 30% in 2012 from 2011, according to Wall Street estimates. The biggest jumps, analysts project will occur at Wells Fargo (WFC) and Citigroup (C). Citigroup now pays a nominal one-cent a share quarterly dividend. Wells Fargo’s current quarterly dividend is 12 cents a share for a yield of 1.75%. Overall, estimates Barclays Capital, banks (excluding investment banks such as Goldman Sachs (GS) and Morgan

Stanley (MS)) will raise their payout ratios from 24% of earnings in 2011 to 48% of earnings in 2012. The dividend yield on the KBW Bank Index (BKX) is now just 1.8%, about half the 2007 level.

The stress test asked banks to model their capital ratios if unemployment hit 13% and housing prices slumped another 20%.

Bank of America (BAC) will be absent from any Fed announcement. After getting its request to raise its dividend rebuffed by the Fed in the last stress test, the bank didn’t ask to raise its dividend or stock buyback in this round.

Western Gas Partners (WES) hit my target price of $40 a share on January 23. The stock kept going up to $46.12 on March 1. And now it looks like it’s pulling back a bit with the rest of the market.

Sell? Hold? What have I been waiting for? My gain on Western Gas Partners was 22.6% as of the close on March 6 from November 16, 2011 when I added it to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/

The master limited partnership’s fourth quarter earnings report on February 27, actually. I’ ve been waiting to see what the partnership’s list of growth projects looked like.

As I’ve noted about Kinder Morgan Energy Partners (KMP) and ONEOK (OKS) in my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/  master limited partnerships grow their cash flow (and hence their distributions to investors) by borrowing money and then investing it in projects with returns above their cost of capital. So two things really matter to investors in a master limited partnership: First, Is money cheap or expensive, and, second, Does the partnership have a good list of opportunities for investment?

Right now money is cheap. Very cheap. So master limited partnerships with a long list of viable investment opportunities should be able to grow cash flow and distributions at a hefty rate.

For the full year of 2011, Western Gas Partners showed in its fourth quarter report, distributable cash flow climbed 4% to $2.33 a partnership unit. (EBITDA—that’s earnings before interest, taxes, depreciation, and amortization–increased by 19% from the fourth quarter of 2010 due to an increase in natural gas and, especially, natural gas liquids flowing through the partnership’s pipeline system.) That increase in cash flow was good enough to enable the company to raise its quarterly distribution by 4.5% from the payout in the third quarter to an annual $1.76 a unit. (The year-to-year increase comes to 16% from the fourth quarter of 2010.) At the March 6 closing price that’s good for a yield of 3.98% for 2012–if the partnership doesn’t raise distributions in the quarters ahead.

But what I was happiest to see was big increase in cash-earnings assets and plans for assets. Read more

In the 0% interest-rate world of Ben Bernanke, the 3% dividend yield is king.

When a 2-year Treasury note yields 0.22% and a two-year CD pays 0.85%, it’s not surprising that savers and investors are eager to snap up anything with a higher yield.

That’s got an upside—stocks that pay 3% or more have shown big gains in price as dividend-hungry investors have bought the shares. Intel (INTC), for example, which paid a 3% dividend at the end of 2010, returned 19.03% in 2011 (in price appreciation and dividends.)

And it’s got a downside—as investors pile into a stock yielding 3% or more, the dividend yield goes down as the price goes up—even if the company increases its dividend payout. Intel paid out 78 cents a share in dividends in 2011 versus 63 cents in 2010, but thanks to the climb in the stock’s price, the yield now—on February 1, 2012–of 2.94% is less than the 3% yield in December 2010.

Companies recognize this hunger and, as I wrote in my November 25 post http://jubakpicks.com/2011/11/25/companies-re-emphasize-dividends-and-it-couldnt-come-at-a-better-time/ , they’re aggressively raising their dividends because they realize that in the current low-yield world it’s an extremely effective way to support their stock price. Investors right now would rather get a higher dividend than a share buyback. This has led companies to shockingly hefty dividend increases. One recent example is Mattel (MAT), which lifted its dividend by 35% on January 31. A full year’s pay out at the new rate works out to a yield of 4% on the January 31 closing price even after the shares jumped 5% in price on the news.

I don’t think the trend pushing up the price of stocks yielding 3% or more is about to come to a quick end. At its January 25 meeting the Federal Reserve’s Open Market Committee said it would keep short-term interest rates at their current exceptionally low level—I guess 0% counts as exceptionally low—until the end of 2014. That’s a big extension of the Fed’s previous guidance for interest rates at this level until mid 2013.

Which sets savers and investors an interesting problem. We all want higher yields and we certainly don’t mind cashing in on any price appreciation. But the appreciation in share prices constantly pushes the yield down on these stocks. That’s not a problem for investors who already own shares. They’ve locked in their yield when they bought. But it is a problem for investors with new money as yesterday’s high dividend stock turns into tomorrow’s stock with a mediocre yield.

And settling for a declining yield because we locked in a good yield when we bought our shares a year or two or three ago strikes me as passing up one of the best things about the current dividend craze. Because many companies right now see a higher than 3% yield as the best way to support their share price in a sometimes difficult market, many companies are working hard at raising their dividend payout fast enough to keep pace with their rising share prices. The goal is to add enough to the dividend payout every year (or even every quarter) to keep that yield above 3% even if the share price is climbing. So, for example, Intel, which saw its yield slip below 3% as its share price climbed in the first half of 2011, upped its quarterly dividend to 21 cents from 18.12 cents with the August quarter.

Of course, not every company has the cash to do that—or a management that’s committed to increasing the dividend at that pace. But as a saver or investor in this financial environment, you’d sure like to have more of those stocks in your dividend income portfolio rather than less.

So that’s why I’m going to do a fine-tuning of my Dividend Income Portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ today. Read more

On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

Update DuPont (DD)

You’re entitled to feel whiplashed by DuPont (DD) over the last week or so.

First, on December 9, DuPont announced that fourth quarter earnings would come in at 28 cents to 36 cents a share, well below the Wall Street consensus of 46 cents a share. The problem, the company said, is that customers are cutting back on orders on fears of a global economic slowdown, preferring to draw down inventories rather than risk getting caught with raw materials they don’t need. The problem has been spread across DuPont’s businesses in plastics, autos, general packaging, home building, and electronics. Europe, no surprise, is the weakest region.

Second, on December 13 at the company’s investor day, DuPont said, in effect, that Wall Street had overreacted by cutting projections for full-year 2011 earnings to $4.23 after the negative pre-announcement. For 2011 the company projected earnings of $4.20 to $4.40 a share. Cost cutting and synergies from the acquisition of Danisco–$300 million and $130 million, respectively—are materializing sooner than expected. Although the businesses the company mentioned in the December 9 preannouncement are indeed slowing, growth is more than holding up at the fast-growth industrial biosciences and nutrition and health segments. DuPont said it expected long-term annual earnings growth of 12% (at the high end of company guidance of 10% to 13% annual growth) on long-term sales growth of 8% to 10% in agriculture, 10% to 12% in industrial biosciences, and 7% to 9% in nutrition and health.

What is DuPont really telling investors? Read more