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.
CIM @ 17%
The Scottrade symbol for JPM-I is JPMpI
I rarely buy any stock that doesn’t pay a good dividend and only buy if it looks like the stock will be able to pay the dividend for a long time. I am more a less a swing trader and play the dips and bounces. If I get caught in a stock (it goes down after I buy it) I at least get a dividend while waiting for it to recover or to try and cost average out of it. Well the year is nearly half over. How am I doing? I am currently down 5% for the year, including current holdings, but made 30% last year and over 20% the year before in that bad market. I got caught early this year in an oily; it went down quickly and immediately after I bought it and it took me thru April to finally cost average out of it. I hate to sell at a loss, but I should have taken my lumps as soon as the oily stock went down as it seemed obvious it was going down further in the near term, but that loss aversion thing kicked in and I just couldn’t let go until I got out of it even, but that consumed 4 long months. And we all know what May has been like.
swilson60,
The Scottrade symbol is:
JPMpI
ogowan,
I’m both. I try to be a trader with an investor’s outlook. Generally speaking, I try to backstop my short term plays with long term value. That way, if the short term doesn’t play out as I expect, I can hold long term to get my returns. In more generic terms, I like value AND growth in my stocks. However, I also like to add commodity trades (physical ETF’s preferably) when economic conditions warrant it (they don’t right now).
Unfortunately, long term value is questionable in the market right now (which is why I’m currently out of equities).
swilson60
That symbol is JPMpI at Scottrade.
The problem with foreign companies is that their dividends are not reliable. They are not discplined.
Both TOT and STO cut dividend this year according to my broker’s website.
run26.2
VOD called its India venture a “fiasco” and not possible to make money in an recent report on reuter. (Only few days ago.)
Foreign companies that rushed to India with the thinking of India is China have all run into tremendous problems. There are many such reports out there.
Ed,
Do you consider yourself a trader or investor?
You seem to be quite active!
nmac,
ETJ looks ok on just a quick glance. I may look at it closer when I’m ready to go back into equities. Thanks for the tip!
BenWobbles,
If you’re trying to offset losses on your equities, that’s a smart move. But I wouldn’t buy the index shorts right now as a play in itself. There is some bullish risk heading into June (when you’re shorting, bullish risk is a bad thing).
I think there’s a pretty good chance the COP raises dividends a bit over the next two years. Yield hit 4.4% @ $50 a couple days ago. Now it’s 4.23%.
NUE pays special dividends when times are good. That way you get a nice, stable base throughout downturns plus a bonus when conditions are good. And it quite possibly has the best management in the USA–I can’t ever say that enough.
I hear ya, Ed
I bought a huge insurance policy late yesterday of SDS.
Like the dividend play, not so hot on europe.
OFF TOPIC A BIT:
Worst may since 1962.
http://www.newsplayer.com/Stock-Market-Crash-1962-Video
All,
I wonder has anyone investigated funds like ETJ, it invests in stocks and writes put and call options on those stocks to earn extra income. Just started looking at this product but appears at first glance an excellent div income play….this fund currently pays 11.3% . Perhaps Jim or Ed have traded these before?
Apologies in advance if this has been covered elsewhere
grindy2424,
I’m not buying equities at the moment. There is too much risk of losing principal for any dividend payment to outweigh.
If we make it through next week without a crash, ask me again. 😉
Can anyone help me figure out what the ticker is for the JPM-I reccomendation with Scottrade?
Off topic:
“Citigroup: Sell-off in oil service stocks not proportionate to EPS impact
Citigroup believes the sell-off in shares of Oil Service & Equipment companies is out of proportion with the EPS impacts from the Gulf of Mexico oil spill. The firm expects growth in international markets to drive earnings growth for oil service and drilling companies in the years ahead and recommends owning Halliburton (HAL), Transocean (RIG), Diamond Offshore (DO) and Superior Energy (SPN). :theflyonthewall.com “
Ed,
What other players you think are better in the area?
dnwyo – dividend yield is as defined by ruters78; as for your question, look at a stock chart showing dividend payouts (like over the past year), check the yield and correlate that with the actual payout (in other words, the actual payout amount and the history – increasing/decreasing, steady or sometimes suspended – are all important to consider.) Also important is tax treatment (obviated when the stock is held in a retirement account, but very important if the security is held in a taxable/trading/brokerage account.)
Jim..Thanks for your posts on income…I like the preferreds as a way to get into some banks that arent paying a dividend…I own hcs, wfc-pj and bac-ph…if an when the banks gain alittle more respect these may gain in value…they all pay around 8%…
Jim,
While I like your strategy, the choices aren’t impressive (except for possibly the JPMorgan).
A Spanish bank? Do you recommend any good beachfront REIT’s in Louisiana too?
All snark aside, STD is ok on paper. But that stock puts you dead center in the whole sovereign debt risk problem.
As for TOT, did you look at their financials? A 53% effective tax rate. A 6% net profit margin. A 7% ROI.
Even if they increased their profits by 6%, half of that would get sucked out in taxes. But they only increased their production by 6%? By the time that increase reaches their bottom line, you’re looking at a 0.16% increase to earnings.
Also, you said 34% debt/equity for TOT. That is their long term debt/equity. Their total debt to equity is 46%. By comparison, Exxon’s total debt/equity is 8%, BP’s is 31%, Chevron’s is 11%, and Royal Dutch Shell is 27%. On the other end of the spectrum is Petrobras with 61%. Mind you, I am not saying 46% debt/equity is necessarily bad. But when you add a 53% tax rate into the mix, ANY debt load becomes burdensome.
Having said that, I will add that the oil industry tends to have higher tax rates than other industries. But TOT is on the high end of the already highly taxed oil industry. If Europe’s economy deteriorates any, and increases their oil and/or corporate taxes, TOT’s already thin profit margins could become thinner.
I would also add that TOT only pays dividends twice a year, with the next one coming in November if they stay true to history (although they haven’t announced it yet).
bsdgv… I was looking at TEF too, but am backing off for the moment as they may get into a bidding war with Portugal Telecom for Brazilian wireless Vivo.
Jim… thanks for talking about income stocks. I’ve been looking at NUE and recently added to my position of VOD which is yielding 6.5%. I like VOD b/c you get exposure to Verizon Wireless (and the potential for a dividend from it) as well as networks in developing countries like India and in Africa.
Personally, I would not touch STD. After being burned by C and BAC, I don’t trust bank stocks. Also, this seems like a pick that has very little upside and lots of downside, at least at the moment.
How about Telefonica SA (TEF), the Spanish telecom that has a big presence in S. America?
Ruters
Saw your note after I posted. I bought some IGD back when the bottom fell out with some left-over cash I had. I also picked up PHK. I was pretty happy with the results, although when PHK spiked up at the end of last year, I sold it. I looked at the cap gains vs dividend at that point, and took that money elsewhere.
I had looked at STD quite a while ago, and just thought Spain’s problems would eventually affect it. Seems I over estimated this.
In any event, people looking at this need to look at the dividend history. Like many europian stocks, the dividend is much more variable. This is not to say that this is bad. Just different, and over the long run they seem to pay out more than US companies.
Now, getting more to the point, if you look at the STD quarterly dividend history, you will see that there tends to be a large ‘bonus’ type dividend every April, the last one being 0.299/shr [2.9%]. The other three quarters average about 0.180/shr [1.7%]. So you do not get the full 8.5% in a neat little average payment.
Jim,
Finally some focus on the dividend income!!! I’ve got one that I’m interested in, its ING Global Equity Div (IGD), pays monthly and is currently yeilding 13.26%. Anyone wanna check it out and give me their feedback?
dnwyo,
your yield is always based on the price you paid so its the div/purchase price
Here’s a newbie question for you. The dividend rate that a stock pays will change daily as the stock price changes, right? So how do I know what dividend rate I will receive? Is it the one when I bought it or is it the one that is current when the dividend is paid?
Jim, if at all possible I would love to know what you think of the preferred index – PFF. I have short term traded it successfully over the past two weeks but wondering if I should hold on to it for longer? thx!