It’s getting harder and harder to find a stock that pays a decent dividend. At least if you look in the usual places.
What’s that you say? Look in the un-usual places? Couldn’t agree more. That’s exactly what I’m aiming to do here.
The name of the song the market’s singing right now is Where have all the high dividend yields gone?
One of the dividend screens that I run would regularly pull up 50 to 80 stocks before the financial crisis hit and pulled up even more during the depths of the Great Recession. When I ran it on April 6, it came up with just 23 stocks.
My screen isn’t especially innovative. It follows the tried and true formula of looking for the stocks of companies that have raised dividends faster than 75% of their dividend paying peers over the last five years and that have raised their dividends faster than 50% of dividend paying companies in each of the last three years. A big New York investment house, Oppenheimer if you’ve got to have a name, recently ran a similar screen over the last 20 years. It found that among the stocks in the Standard & Poor’s 500, those that ranked in the top fifth for dividend growth beat the S&P 500 Stock Index by seven percentage points a year on average.
It’s not rocket science but it works. Or at least it used to.
What’s happened? The financial crisis and the Great Recession made high dividend stocks extremely popular. (They did the same thing to investment grade corporate bonds.) And you know what happens when a dividend stock becomes popular, don’t you? It goes up in price and down in yield.
Consider PepsiCo (PEP). The stock was up 9.1% in the six months from October 6, 2009 through the close on April 6, 2010. That gain has driven the yield from a none-too-generous 2.96% to an even-less-generous 2.71%.
Dividend stocks like the ones that used to show up on my screens in larger numbers would be especially valuable now. Interest rates on long Treasuries are rising—the yield on the 10-year Treasury broke 4% last week. Now 4% isn’t bad when inflation is so low but if rates keep rising, and I think they will even as the Federal Reserve keeps short-term rates near 0%, then any bond you buy today will be sell for a lower price tomorrow. Of course, you can just hold to maturity and avoid that problem but 10-years is a long time to be content with just 4%. (For more on the rising yield on the 10-year Treasury, including my take on how fast interest rates will rise, see my post http://jubakpicks.com/2010/04/06/treasury-yields-hit-4-but-the-climb-looks-very-gradual-from-here/ )
And actually the picture is even grimmer than my screen indicates. Many of the ol’ reliable dividend stocks are in industries where the cash flows available for dividends are shrinking because companies are facing huge bills for capital spending. Telecommunications companies are looking at huge investments in their networks. If they don’t make them, competitors will leave them in the dust for the crows to pick at. Only the strongest companies in the industry have enough cash flow to cover capital spending plans to continue the high yields that this industry historically delivered. So, yes, Verizon (VZ) still yields 6.04%, but Sprint Nextel (S) pays no dividend at all.
The drug industry and the banking sector, both once a strongholds of high dividend yields, show similar stress
So what do you do if you still want fat dividend yields? You expand your search beyond the usual suspects that stock screens pull up.
You’ve probably already done some searching in new places already. If you follow my Dividend Income Portfolio at http://jubakpicks.com/jubak-dividend-income-portfolio/ , for example, you’ve got a slug of master limited partnerships under your belt. Master limited partnerships pass through the bulk (up to 90%) of their available cash flow tax-free to the investors who own these publicly-traded units. Investors are then responsible for paying the taxes. That eliminates the double-taxation of dividends when a company is required to first pay taxes on its income and then investors are required to pay taxes on their dividend income. (To learn more about the rules that govern master limited partnerships, and especially the tax rules, see the FAQ at the National Association of Publicly Traded Partnerships http://www.naptp.org/Navigation/PTP101/PTP101_Main.htm )
Master limited partnerships are by law limited to companies that receive 90% or more of their income from business in the real estate, commodities, and natural resource sectors. Most are organized around relatively slow growing but very stable activities such as natural gas pipelines—Dividend Income pick Oneok Partners (OKS) is a good example—that provide the steady cash flow to pay a reliable dividend.
That’s not a guarantee against risk, however. A master limited partnership such as Penn Virginia Resource Partners (PVR), another Dividend Income pick, can take a beating if the price of the commodity it produces (coal, in this case) nose drives. The units, which closed at $23.77 on April 6, 2010, traded for just $17.30 on October 5, 2009.
The flip side to that risk in an economic recession is that some master limited partnerships in more cyclical industries can deliver not just high yields but potentially attractive capital gains in an economic recovery.
So, for example, you wouldn’t have wanted to own units of Navios Maritime Partners (NMM) as it went from $19.15 in December 2007 to $7.18 in December 2008 as global demand for commodities such as iron ore, coal, and grain collapsed and took the revenues of a dry bulk shipper like Navios with it.
But the global trade in these commodities has recovered—and with recent economic data I think the global recovery is now firmly established. Revenue at Navios climbed to $93 million in 2009 from $75 million in 2008, and earnings per unit look to have, at worst, stabilized with Wall Street analysts forecasting a mere 1.3% decline for 2010 to $1.64 a unit. That’s enough to cover the $1.62 current distribution that gives the units a 9.1% yield. And with the company’s recently completed (February 3, 2010) follow on offer, which raised $62 million, Navios has capital to use in expanding its asset and revenue base. (Long-term debt has held steady at $195 million from December 2008 to December 2009 while cash climbed to $78 million in December 2009 from $28 million in December 2008.)
I’m adding Navios Maritime Partners to my Dividend Income Portfolio today. I’ll post a fuller write up of this buy in a few hours. Navios Maritime replaces Sysco (SYY) in the portfolio. I sold shares of Sysco on April 7 after the stock hit a 52-week high. (See my sell post http://jubakpicks.com/2010/04/07/sell-sysco-syy/ ) Sysco’s yield of 3.38% was attractive when I wanted the safety of a consumer stock but with the global economic recovery looking more assured, I’m going to go for the higher yield of a riskier name such as Navios.
Extending the boundaries of the kind of master limited partnerships that you include in your dividend portfolio isn’t the end of my search for higher yields in the stock market. Next Tuesday, April 13, I’ll tell you about the increasing number of stocks in developing economies that are paying high dividends. The trend goes well beyond the emerging economy telecommunications stocks I wrote about in my February 12 post http://jubakpicks.com/2010/02/12/when-elephants-fly-dividends-from-emerging-market-stocks/# before I added Telkom Indonesia (TLK) to the Dividend Income portfolio.
Full disclosure: I own shares of Telkom Indonesia in my personal portfolio.