Gold mining stocks add dividends as a way to compete with bullion ETFs

Gold mining companies are getting the dividend religion too.

They’re adding dividend payouts in an effort to close the “attractiveness gap” with gold bullion ETFs.

Back on November 25 I wrote about the general resurgence of dividends http://jubakpicks.com/2011/11/25/companies-re-emphasize-dividends-and-it-couldnt-come-at-a-better-time/ . Given the lack of any capital appreciation in the current market and an increasing cynicism among investors about stock buybacks, companies have started to increase dividend yields as a way to support share prices and keep on the good side of capital markets.

Gold mining companies have an added incentive. The rising popularity of gold bullion ETFs (Exchange Traded Funds) has come at the expense of gold mining shares. Investors who want to create a hedge on inflation or currency depreciation can use ETFs as their vehicle instead of buying shares of gold mining companies. The demand for gold ETFs has cut into the demand for gold mining shares so much that gold mining stocks have lagged increases in the price of gold. So, for example, while gold is 46% higher than it was in December 2009 (as of the close on December 13), shares of American Barrick (ABX) are just 26% higher.

But neither physical gold nor gold bullion ETFs pay a dividend and this seems to be how gold mining companies—some of them anyway—have decided that they can compete. Goldcorp (GG), for instance has increased its monthly payout to 3.4 cents a share from 3 cents in November 2010 from 1.5 cents a share in 2009. IAMgold (IAG) raised its dividend on December 9 to an annual 25 cents a share from last year’s 6 cents a share payout.

The most ambitious effort comes from Newmont Mining (NEM), which has pledged to link its dividend payout to the price of gold. Read more

Dividends are back in style.

Of course, for some companies they never stopped being a key way to return profits to shareholders. For example, when food distributor Sysco (SYY) raised its dividend this quarter by 3.8%, it marked the company’s tenth consecutive annual dividend increase. The 9% increase in its annual dividend declared on November 21 by Lancaster Colony (LANC), a manufacturer of candles and specialty foods, beat even that record of consistency. Lancaster Colony is one of only 16 U.S. companies to have increased cash dividends every year for 49 years or more.

But I’m talking about something very different than those examples of dividend consistency. This quarter I’m seeing companies that have been relative dividend tightwads decide not only to up their payments but to up them big time. I’m seeing 12%, 15%, and even 50% and 67% dividend increases. I’ve even seen one company raise its regular annual dividend payout twice this year.

For these companies this isn’t business as usual—and it signals something new in the way that these companies have decided to support their share prices in a very rough stock market. The good news for investors, of course, is that these dividend increases are coming at a time when lasting price appreciation has become extremely hard to come by.

What’s going on? Read more

You can certainly find stocks with a higher dividend yield than the 3.4% that Abbott Laboratories (ABT) paid when I added it to my dividend income portfolio http://jubakam.com/portfolios/ on May 6. (It closed that day at $52.52) But I think you’ll be hard pressed to find a stock paying that much that has the same potential for very safe and steady growth. (See my post http://jubakpicks.com/2011/05/06/do-dividends-suddenly-seem-attractive-as-the-market-tumbles-where-ya-been-all-my-life-check-out-the-latest-update-to-my-dividend-income-portfolio/ for my latest update of that portfolio.)

Abbott Laboratories is among the most balanced of the big U.S. drug companies. Read more

Update ONEOK Partners (OKS)

As bad news goes, this isn’t a big dose of bad news, but it should be a reminder to investors looking for extra yield in today’s ultra-low yield environment that higher yields always come with higher risk.

ONEOK Partners (OKS) is one of my favorites for getting a good deal more yield with only slightly more risk. The master limited partnership pays a yield of 5.96% versus the 2.34% yield on the 10-year Treasury.

But “only slightly more” doesn’t mean “no more.”

On September 30, ONEOK Partners announced that it would record 2010 net income of $450 million to $470 million instead of the previously projected net income of $450 million to $490 million. The change, the partnership said, was a result of higher earnings in the natural gas pipeline segment of its business and lower earnings in the natural gas gathering and processing segment.

The critical number, since ONEOK Partners is a master limited partnership that passes along the bulk of its earnings tax-free to investors, is the 2010 distributable cash flow. That, the partnership said, would be an estimated $570 million to $590 million instead of the previous range of $580 million to $620 million.

The drop in distributable cash flow from earlier estimates isn’t going to lead to any slashing of the cash paid to investors. Master limited partnerships have the ability to keep distributions steady for some time even if cash flow hits a bump. But it does mean that the distribution to investors, which has grown by more than 6% a year over the last five years, isn’t going up much this year. The company estimates that the distribution to unit holders (since this is a master limited partnership investors own units instead of shares) will increase by just a penny in 2010.

I don’t think this is any reason to sell. These shares are in my Dividend Income portfolio on JubakPicks.com (http://jubakpicks.com/jubak-dividend-income-portfolio/ ) and I’m going to keep them in that portfolio.  It’s not easy finding a near 6% yield in this market with “only slightly more risk.”

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

It’s raining dividends. Or at least thoughts of dividends.

First time ever dividends from companies that have never offered dividends. On September 14, Cisco Systems (CSCO) CEO John Chambers said the company is considering a 1% to 2% dividend for the fiscal year that ends in July 2011

Restored dividends from companies that cut or eliminated their dividends in the financial crisis and Great Recession. At a September 14 analyst meeting JPMorgan Chase (JPM) CEO Jamie Dimon said that the company would restore its dividend, probably in the first quarter of 2011, at a payout ratio of 30% to 40% of normalized earnings. JPMorgan Chase cut its dividend to 20 cents a share from $1.52 a share in the financial crisis.

Higher dividends from companies with histories of paying dividends: Yum! Brands (YUM), and Paccar (PCAR) both announced on September 14 that they would raise their dividends by 19% and 33%, respectively.

Why? Three reasons. And you can probably figure out all three. No rocket science here.

First, companies cut dividends—big time—in the Great Recession. In 2008, the companies in the Standard & Poor’s 500 Index cut their dividends by $42.6 billion, a record for any year. But that record stood only until the numbers were in for 2009, when companies in the &P 500 cut their dividends by $52.9 billion. Now that the future doesn’t look quite so dark, companies are either restoring their dividends or raising them again.

Second, companies are sitting on a tremendous amount of cash. Cisco Systems, for example, had $39.9 billion in cash at the end of the company’s July quarter. A 2% dividend comes to roughly $2.4 billion on the company’s 5.7 billion shares. That’s about 6% of the company’s current cash on hand and roughly equal to the company’s pre-tax operating income last quarter.

But neither of these first two reasons would be quite so compelling from a CEO’ point of view if not for the last reason.

Third, with interest rates so low—a 2-year Treasury yielded just 0.49% and a 5-year note just 1.42% on September 14–and investors so desperate for yield, a relatively modest dividend payout gets a lot of attention and has a big effect on a stock’s price. The day that Cisco Systems announced that was considering a 1% to 2% dividend, Cisco’s shares, which had been in decline from $24.77 on August 8 to $21.26 on September 13 popped 19 cents adding $1.3 billion to the company’s market value. Another 23-cent gain in the stock price and the dividend will have paid for itself.

The rain of dividends and the reasons behind it, though, aren’t an unmixed blessing. Read more