Once upon a time, I worked in an office beneath a sign that read: “We’re a non-profit company…but we didn’t plan it that way.”
I feel a similar emotion as I write today about all the wonderful buys this market correction has created for dividend income investors.
I’m a dividend income bargain hunter…but I didn’t plan it that way.
Nonetheless and despite my chagrin, I think the bargains in this market are too amazing to pass up. The 12% drop (as of May 25) in the Standard & Poor’s 500 Stock Index from the April 23 high pushed up yields to the point that some stocks I never thought I’d ever put in a dividend income are begging to join the Jubak Dividend Income portfolio https://jubakpicks.com/jubak-dividend-income-portfolio )
Intel (INTC) yielding 3.1%. Nucor (NUE) at 3.4%. Nokia at 4.3%. Taiwan Semiconductor Manufacturing (TSM) at 3.7%. When a 10-year Treasury is yielding just 3.15%.?
Now if I can find yields like that by just rolling out of bed and over to my computer, think what a little digging will do.
You remember the rules of the Dividend Income Portfolio, right? The goal was to beat the yield on the 10-year Treasury with the dividend from a common stock (or its near equivalent.) By sticking to common stocks where the dividend rises over time (if you pick the right stock) unlike a bond where the coupon interest rate is fixed at issue I gained an edge against any return of inflation or higher interest rates. A stock like Verizon (VZ), for example, which has grown its dividend payout by almost 4% a year over the last five years, provides good protection for income investors against rising interest rates.
Of course, while the rules of the portfolio may not change, market conditions do. Right now, thanks to the euro debt crisis, it doesn’t look like income investors need to worry about inflation or higher interest rates any time soon. And right now equities are demonstrating, for anyone who had forgotten (hah!), that stocks are risky and volatile. So in adding to the portfolio now I’m a little less concerned about avoiding interest rate increases and a little more concerned with getting more yield, a lot more yield, than I’d get with a much less risky Treasury note.
So I’m looking for a stock or two that will beat not the 3.15% yield on the 10-year Treasury but the 4.28% yield on Dividend Income portfolio member Rayonier (RYN) and the 4.63% yield on E.I. du Pont (DD). They’re the two lowest yielding stocks in the portfolio. (Well, except for Telkom Indonesia (TLK), but I think that stock has more upside in any end of 2010 recovery from the current emerging market selloff.)
Ok. If I’m selling Rayonier and du Pont out of the Dividend Income portfolio what am I replacing them with? (I’m also selling Rayonier out of the Jubak’s Picks portfolio with today. You’ll find more detail on that sell in a post later today.)
There are high yielding stocks that I think are just too risky. Deutsche Telekom (DT), for example, yields 9.6% right now but its wireless business is struggling and I don’t see a turn around as likely, Barnes & Noble (BKS) yields 5.2%, but, well, you know what’s going on in the book business these days.
On the other hand, I would say that Spain’s Banco Santander (STD) isn’t as risky as it seems and the ADR’s 8.5% yield amply compensates me for that risk. Banco Santander looks like it’s going to emerge as one of the winners of Spain’s banking crisis. Spain’s big banks have lost market share in the last two years to regional banks that have kept on making real estate loans even as the risk of those loans defaulting was climbing. Now those regional banks are in deep, deep trouble and the Bank of Spain has begun shutting the worst of them and forcing others to combine. I think that will put business back in the hands of Banco Santander and Banco Bilbao Vizcaya Argentaria (BBVA). The dividend yield on Banco Bilbao is just 6.2%. (For more on the state of banking in Spain in particular and Europe in general see my post https://jubakpicks.com/2010/05/24/worry-over-shaky-euro-banks-pushes-up-interest-rates-threatening-the-global-economic-recovery/ )
(Most U.S. banks haven’t yet restored the dividends on their common stock that they were forced to cut when they took taxpayer cash in the post-Lehman Bros. bailout of the sector. I have found one interesting play among the U.S. group—although since it’s not a common stock, it doesn’t fit in the Jubak Dividend Income portfolio. But it might fit in yours so let me mention it. The stock is JPMorgan Chase, 8.625% Non-Cumulative Preferred Stock, Series (JPM-I). The symbol on Yahoo Finance is JPM-PI; at Charles Schwab, where I bought some recently, the symbol is JPM+I. The CUSIP is 46625H621. The preferred shares were issued with a coupon rate of 8.625%. On May 25 they were trading slightly above the par value of $25 so the yield was about 7.9%. The shares have traded as high as $29 recently and I wouldn’t buy there since they can be called away from investors at $25 as early as September 2013. But if you can buy the shares near $25 or $26, I think the yield and the potential capital gain from any reduction in sector risk make the shares attractive.)
For my second pick, I’m going for a class of stock even more in the dog house than a European bank stock. Total (TOT) is a European oil stock. Shares have dropped from $65 at the beginning of 2010 to $45 now. That’s driven the yield up to 6.5%, considerably above the yields for U.S.-based oil companies such as Chevron (CVX) at 3.8%.
The company increased production in the first quarter by 6% and while its refinery business is running way below capacity (and it being France Total faces intense political pressure not to close any refineries), it’s chemical unit has enjoyed the same cost-savings and demand recovery that have buoyed stocks such as du Pont.
With any oil company these days an income investor has to ask how safe is the dividend if oil prices continue to fall or just stay at current depressed levels. Total finished the first quarter with a very modest 34% debt to equity ratio and with $17 billion in cash and cash equivalents on its balance sheet. That dividend looks secure to me.
Let me spell out the assumptions behind making any picks right now. Yes, stocks can continue to go down in price and my guess is that until the markets can put the euro debt crisis and fears of a growth slowdown in China in the past stocks will have a hard time moving up. (For more on my view of the market right now see my post https://jubakpicks.com/2010/05/21/sell-sure-but-try-to-do-it-on-the-fundamentals-and-not-in-panic/ )
But with a dividend income play you are being paid to wait—as long, at least, as the company is financially sound enough so that it can survive the turmoil without cutting its dividend or worse.
And, of course, if you’ve picked the right high yield stocks—say one that sold off along with the rest of European banks or with the general downturn in commodity stocks—after you’ve waited, collecting your dividends, for long enough you should be rewarded with tasty capital appreciation.
Full disclosure: I own shares of Banco Santander, JPMorgan Chase Preferred, and Rayonier in my personal portfolio.
EdMcGon…savvy? If you took his advise on Total on May 28 you missed a $5 gain in the stock in the very next few days. It is a buy again. Incidently, a high tax rate actually argues in favor of leverage (debt) since it is deductible. A freshman finance student knows that. EdMcGon’s analysis of Total is bunk and should be ignored by long and short term players. Jim is right, it is a terrific buy. Nothing more boring than the guys who are always saying the sky is falling. Don’t fall for it.
With regard to Bernake’s input as to the status of the economy; WHO CAN BELIEVE ANYONE IN THESE TIMES WHO HAS CONNECTIONS WITH THE GOVERNMENT. CONGRATULATIONS, WASHINGTON, YOU HAVE DONE A GREAT JOB IN BUILDING THE DOUBT THAT AMERICANS HAVE TODAY. WHERE ARE WE GOING??????
I too have been watching STD for awhile. And while I love its growing earnings and presence in South America, my concern is its balance sheet (the same concern I have with all financial cos- the only one I have is USB).
Has anyone been able to determine how much it holds in Spanish Gov or corporate bonds, or other European government bonds that are weakening? That’s my concern- if the bonds crash, the bank crashes. (the one overriding lesson of the MBS crash in 2008.)
I’d love to own it. Can anyone offer insight on its balance sheet (and off balance sheet holdings ala Citi in 2008- the opaque shit nobody knew about because they were parked in off balance sheet SIVs)?
Jim… thank you for the elaboration on STD. Will have to look further since I’m also eying ITUB, but for Brazil exposure, not DY.
Jim,
Really like the STD play. Had been researching and almost bought when it was 12.00 a share. Still researching TOT as well.
STD besides being a great dividend play has some great upside.
If you want to get paid more than the riskless
Treasury rate (and Treasuries aren’t so riskless these days), you’ve got to take on some risk. The question is Are you getting getting paid for that risk. In the case of STD, most investors think of this as a Spanish bank. Hence the selloff in the euro debt crisis. But Spain only accounts for about 25% of the bank’s operations. Latin America as a region is the banki’s biggest source of profits (about 40%) and Brazil is the biggest piece of that. Those economies provide a good buffer to problems with the Spanish economy. Of course, that emerging market’s exposure hasn’t done much to help the stock price in this correction since emerging markets are selling off too.
Seaturtlelady:
I don’t have a set % when I cost average. I go more by the stock action. If the stock is dropping quickly, I stay out of the way and watch it for awhile until it seems to hit at least a temporary floor and ready for a bounce. I then buy more and try to catch a bounce up. The oily bounced up enough after my last buy, counting the quarterly dividend I collected, to get out even so I sold the entire position.
Ed,
Why don’t we start with some ideas of what we are planning to do after this volatility stops?
I’m about 35% in cash right now. Partly because I am making a bit of a lifestyle change. My holdings are about 20% commodities, 20% dividend stocks, and the rest a mixed bag.
I’ll keep holding the commodities as they have taken a pretty good pounding (but could take more…. All long term plays.
Thanks Jim for discussing the Divident Income Port. possible additions/subtractions. Will hold off on a bank in the euro mess for now and though TOT is a good oil co. but it’s taxes and div. reduction along with again the euro mess, will wait. Had BP for dividend but dumped it the day after the disaster. Anyone have thoughts on CEL, Israeli phone co. with 11.7% yield. thx.
Run26.2
Here is one of the VOD “fiasco” report, though not the one that I read originally. Google it.
http://industry-news.org/2010/05/18/vodafones-colao-tackles-indian-fiasco-as-call-rates-plummet-costs-rise/
Run26.2
It was on either rueter or bloomburg website that I read only few days ago.
“Fiasco” was literately the word of VOD CEO, title of the report. He said in the report, the problem in India is (because of quite number of local providers) the phone rate is getting so cheap for VOD to make money. Meanwhile the spectrum (I guess airway) are getting so expensive to obtain. The CEO called the whole thing “fiasco” in that report.
I’ll search the link later .
vintonbuck:
You have my sympathy. Not exactly same situation, but I’d like to know how do you average out? When a stock is in negative, it does not matter if you sell one sum or average out.
yx… re: VOD, I did read in their quarterly report about some of their challenges in India with competition and policies. I’ve not seen anything recent or about it being a “fiasco”, do you have a link? I searched on Reuters site and came up empty. Thanks!
Ed (and other savvy “short” players),
Can I talk you into taking a little time to help out some of us who are just getting started with “shorting”? I have found a couple of sites that list ETFs out there (including inverse ETFs). But I for one could use some tips on what are the best areas and best ETFs to look at – especially in this volatile risky market. I have learned (somewhat the hard way) how tough it can be to sell out of some stock positions before things have gone too far south – tough to predict and sometimes tough to sell. It seems that when the market is like this and you have some cash available, your best move may be to go short to hedge your bets and limit what could turn into large losses. Thank you very much for any info/resources you could provide.
nmac,
You may want to look at the long term chart on ETJ, as it appears to move in lock step with the overall market.
Vintonbuck…
Just curious…do you have a set percentage loss in mind on a stock when you decide to dollar cost average??
Thanks!
STL,
I answered Grindy’s request. I’m not buying equities right now. Period.
Ask me again next week. 😉
Hey, guys.
I keep hearing about Ford Preferred shares.
After reviewing, which one are they referring to?
There seems to be a number of them out there and I was wondering what the symbol was
AAARRGGGHHHHH…too much information for me to proces! 🙂
Someone mentioned RIG and it sure looked enticing when it was around $54.00 the other day.
I’d like to second Grindy2424’s request Ed when you have time! Thanks!