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 https://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 https://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 https://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 https://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.
Yes, MLPs provide diversification into energy, and great stable dividends. And, not mentioned here, they also have tax advantages – you don’t report the income! Distributions do reduce your cost basis so you pay more capital gains when you sell, but if you hold for many years, it’s free money! If you don’t like K-1s, use Turbo Tax, it does it all for you.l
Two other nice rocks to look under: Preferred Stocks and Health Care REITs. I own HCN-D, a combination of both paying almost 8%. Preferred stocks rarely appreciate much if at all, but they almost never go down either. Wells Fargo (WCO) pays 7.8%.
phillip,
I do all my investing through a retirement brokerage account (IRA). There’s no tax impact until I withdraw it.
RM,
CEF’s aren’t that much different from company stocks. Frankly, I prefer them to mutual funds, as CEF’s are what they are. They don’t grow unless their investment strategy works. In theory, one could argue that Berkshire Hathaway is a CEF, although it certainly isn’t set up that way legally.
As for the premium price, nearly anything that pays a dividend today comes at a premium price. Just consider NMM for a moment. It’s price/book is 2.25, which would translate as a 125% premium for a CEF. I know that is an apples to oranges comparison, but my point is that a CEF’s NAV can gain in value too (although generally not like most company stocks can).
NMM is a partnership that is treated as a C corp. It sends 1099 div. not K-1s. Info on their website.
K-1 filings are horrible.
I suggest ARCC for the leading BDC with a strong cash position that just picked up Allied Capital at distressed pricing.
Go with RSO for more dividend yield and a play on commercial real estate stabilization.
YX, waylon01, ed
Have you had to file non-resident state income tax filings for you MLP stocks?
Any comments or links would be much appreciated.
Thanks in advance.
The extra dividend offset by the extra tax works when it comes to partnership.
Great read, but man I hate those K-1 forms!
Ed, lost my butt on AGD (similar to AOD) awhile back. Have a hard time trusting Alpine again. Keep an eye on it.
Ed and STL – thanks for the feedback.
Yes Ed – What’s with high-premium CEFs? Some folks won’t touch them. What expertise is required to get into and gain from them like you do?
Jim, nice analysis, as always. NMM may be a growth play, as you assert, but it is nearing its all-time high from 2007. I might add it to my retirement accounts (for tax reasons) — after it becomes less frothy.
Jim – BTW – do you believe NMM’s average 3.9-year lease term allows increasing revenue going forward? (Analysts are calling for EPS to decline by some 7 percent in FY2011)
Ed – GOF’s chart looks like a lot of charts right now; you sure do like buying CE funds at a premium, though.
aareding,
AGNC is mortgage-backed. If you want to own someone else’s mortgage, that’s your investment! We all know how well that worked for Fannie and Freddie…
PSEC is one I owned last year. They do mezzanine financing (unsecured) for small businesses. I like their company, but I would like to see their financials settle down before I buy back into it.
AGNC has a dividend yield above 20% and a StockScouter rating of 10. What is the catch on this? The downside/risk?
PSEC similarly has a yield above 13% and a StockScouter rating of 10. What gives? Why are these not being snapped up by the market?
Shavdog…
You’re holding two of the top 5 dividend stocks that were recommended in this article that I read earlier today…
http://www.investorplace.com/experts/jeff_reeves/dividend-stocks-att-t-verizon-vz-altria-mo-merck-mrk-centurytel-ctl.html
Ed:
AOD’s premium seems more than 25% When I checked last week. I am hesitated to buy at that level. You probably bought when it was much lower.
Jim:
The tax filing of partnership distribution is quite a hassle. The extra yield seems got killed by extra tax works. Any suggestion or advice to make it more worthy?
RM…
I bought AOD two months ago and have been very pleased with the uptick and the monthly dividends. Urge you to look at GOF like EdMcGon says…
Hi, everyone!
What effect would a default by the Greek government have on NMM?
Thanks.
C.
Another good dividend payer with steady growth: Claymore/Guggenheim Strategic Opportunities Fund (GOF). Current DY is 9.9%, paid out monthly. It also has the sweetest chart you ever saw:
http://finviz.com/quote.ashx?t=gof
RM,
I’m still holding it. I bought it at a premium, and the premium has gone up, probably because of the DY. I’m actually getting a 16.6% DY because I got it at a cheaper price. The premium has been worth it.
Most of the other dividend payers in that DY range are real estate-based. I prefer AOD because of it’s equity-based strategy.
My original strategy was to hold it for a short period, but that short period is looking like maybe next fall.
EdMcGon,
AOD 15.72% yield , but sells at a big premium (NYSE $09.16 NAV $06.91). Still ok?
If I remember correctly, you and SeaTurtleLady bought this a while back and you were in it for a short term.
Thanks for the dividend stock ideas…I own mo..at 6.7%……ctl…at 8.2% a couple mlp’s….hcs preferred at 7.5% wfcpj at 7.5% and a few bonds…bac 7% bond has held up despite the rise in the 10yr…dont know what happens if it goes to 5%…if interest rates rise to far and too fast, that’ll be a stiff headwind for stocks and I believe my dividends will look pretty good…time will tell..
Jim,
I have one symbol for you: AOD. Look it up. You’ll like what you see.
Even with it’s appreciating price, it still pays a stellar DY (currently 15.72%).