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

Update Banco Santander (STD)

Shares of Banco Santander (SAN.SM) are down 3.9% in Madrid today and the U.S. ADRs (American Depositary Receipts) are down 3% (STD) in New York as of 1 p.m. Eastern Time on a big increase in shares outstanding as a result of the conversion of non-listed preferred shares into ordinary shares that count as core capital. The new shares started trading today and represent an increase in shares outstanding of about 3.8%. The conversion is part of Banco Santander’s efforts to raise capital to meet the regulatory requirements set down by the most recent stress test conducted by the European Banking Authority. The conversion increases the bank’s core capital to 10% under the old Basel II global banking rules, 8.9% under the new Basel III rules, and 8.7% under the European Banking Authority rules.

In its December 8 announcement of the results of its latest round of stress tests the European Banking Authority calculated that Banco Santander had a risk-adjusted core capital ratio of 6.77%. Since then Banco Santander has sold off parts of its Brazilian and Chilean operations, sold its entire Colombian subsidiary, and conducted a conversion of preferred to ordinary shares that have brought the bank to within striking distance of the European Bank Authority’s 9% core capital requirement.

To me, the numbers look like Banco Santander will be able to meet the rest of its capital needs—for the moment and pending write downs in its portfolio—from retained earnings.

The ADRs are a member of my Dividend Income Portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ and pay a trailing dividend yield of 11.5%. That yield is attractive, of course, only as long as the bank actually pays out the dividend. That’s not guaranteed but I think it’s more likely than not, especially since about 70% of investors have been willing in recent quarters to take their dividend in shares rather than in cash. The ADRs currently trade at $7.52. I think the ADRs will trade at $9 or better—at $9 that would be roughly a 20% gain from today’s price–once the bank has finished raising capital and has demonstrated that the dividend is secure in the next quarter or two. A longer-term target price would be $12 a share by December 2012.

I think the current ADR price seriously under-estimates the strengths of Banco Santander—and especially the ability of what is still the world’s 11^th largest bank by market capitalization to raise capital. 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

Big news out of Anadarko Petroleum (APC) on November 14. The company announced a huge new reserve in Colorado’s Niobrara shale formation estimated to hold up to 1 billon barrels of recoverable oil.

The best way to take advantage of that—and the expansion of Anadarko’s increasing oil shale production in general—isn’t to buy Anadarko, though. The euro debt crisis and fears of a global economic slowdown are likely to keep oil stocks from moving up in the next six months or so.

Instead I’d look to Western Gas Partners (WES), a master limited partnership, set up by Anadarko in 2008, to manage existing gas gathering systems, gas treatment plants, and natural gas and oil liquids pipelines—and to build new ones. Western Gas Partners will see higher revenue and earnings as it transports the increasing volumes of oil liquids and natural gas being produced by the boom in oil and gas production from shale formations in Wyoming, Utah, Colorado, and Texas.

Unlike Anadarko shares, which pay a dividend yield of just 0.45%, units of Western Gas Partners pay a dividend of 4.4%. I think the units also offer good potential for capital appreciation. Read more

Buy CPFL Energia (CPL)

The recent pull back of about 10% in the Brazilian real versus the U.S. dollar has removed some of the currency risk from owning Brazilian utility CPFL Energia (CPL) for its 6.5% yield. And the recent interest rate cut from the Banco Central do Brasil suggests that interest rates are headed modestly lower in the medium term—which is likely to push up the price of income producing utility stocks as investors in Brazil looks for more income. The combination makes CPFL Energia, which trades as a reasonably liquid ADR in New York, an attractive income-producing total return proposition, in my opinion, for a portfolio such as my Dividend Income portfolio http://jubakam.com/portfolios/ . (I included this stock in my recent post “Lemons into lemonade: High yield stocks from today’s market rout for tomorrow’s retirement portfolio” http://jubakam.com/2011/09/lemons-into-lemonade-high-yield-stocks-from-todays-market-rout-for-tomorrows-retirement-portfolio/ .)

CPFL Energia is Brazil’s largest private power distributor with about 13% of the national market. About 75% of operating income comes from regulated electricity sales, which provides a high measure of revenue predictability. (These rates aren’t set for regulatory review until late 2013.) The company’s customer base is concentrated in the traditionally fast-growing Sao Paulo and Rio Grande do Sul states, which gives CPFL Energia a good shot at growing revenue faster than the national economy. Credit Suisse projects 2011 revenue growth at 7.1%.

Many of Brazil’s electric utilities face a price squeeze as new capacity comes on line at a pace that looks like it will outstrip the growth rate of demand. CPFL Energia is well positioned to avoid that problem because it is not only the most efficient distributing company among publicly-listed utilities (with a return on invested capital for 2011 projected at 15.2% by Credit Suisse), but also has contracted just about all of its generating volume for the next 20 years. In addition the company is moving strongly and quickly into alternative energy production. For example, the company has formed a joint venture with Energias Renovaveis to develop wind, small hydro, and biomass projects.

The New-York-traded ADRs (American Depositary Receipts) selling at $24.48 today, September 20, trade near the bottom of their 52-week range of $22.84 to $30.66. The units pay a yield of 6.5%. The only downside, and this may have an influence on your timing, is that the company will pay out its first half dividend on September 30 to shareholders of record as of August 17.

Full disclosure: I don’t own shares or units of any of the companies or partnerships 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 CPFL Energia as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/