Update ONEOK (OKS)

I’ve received a lot of email lately about the big unit offering by ONEOK Partners (OKS), a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/

I understand the anxiety—this master limited partnership is selling 8 million units in a public offering and another 8 million units in a private placement (to its general partner). That will put 11% more units on the market. The fear, of course, is that this dilution will cut the price of the units because it will cut into the cash payout ONEOK can make to its unit holders.

I wouldn’t worry—if fact, while dilution generally isn’t something to embrace with open arms, in this case I think it’s a sign that ONEOK has identified new investment opportunities that make raising cash a smart move here. And with management saying that it will ask the board of directors to approve a 2.5 cents a quarter increase in distributions, I don’t think investors need to worry about a drop in cash distributions because of the offering.

Here’s what I think is going on. Read more

Why I added Kinder Morgan Energy Partners to my dividend portfolio on February 3

In my February 3 post 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 Energy Partners (KMP) while dropping Potlatch (PCH), Merck (MRK) and Abbott Laboratories (ABT).

Today I’m going to give you more detail on one of those adds, Kinder Morgan Energy Partners (and also actually make the change on the dividend portfolio page. The remaining three changes will follow in what I will try to make short order.)

Deciding to invest in an income vehicle such as a real estate investment trust (REIT) or a master limited partnership (MLP) is, in concept: you want to see that the trust or partnership has the cash flow to keep up current payments to unit holders, and you want to see a path forward that would let the trust or partnership increase payments over time.

The Great Recession was a big test for Kinder Morgan Energy Partners. Read more

Why I dropped Potlatch (PCH) from my dividend income portfolio on February 3

In my February 3 post 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).

Today I’m going to give you more detail on one of those drops, Potlatch (and also actually make the change on the dividend portfolio page. (The remainder of these six changes will follow in what I will try to make short order.)

In 2010 Potlatch saw cash flow from operations of $125 million and the company paid out $82 million in dividends. Read more

Why I added General Electric (GE) to my dividend portfolio on February 3

In my February 3 post 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).

Today I’m going to give you more detail on one of those adds, General Electric (and also actually make the change on the dividend portfolio page. (The rest of these six changes will follow in what I will try to make short order.)

On June 11. 2010 General Electric’s board of directors voted a quarterly dividend of 10 cents a share. That’s where the dividend had been stuck for a year—ever since in the aftermath of the financial crisis General Electric had cut its quarterly dividend from 31 cents a share in 2009.

Since June 2010, however, General Electric has raised its quarterly dividend by 70%. 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