Back in late 2008 I was invited to participate in a stock picking competition, where the goal was to pick the best stocks for 2009. The picks that I selected were Kinder Morgan (O), Realty Income (O), Con Edison (ED) and Philip Morris International (PM).
The reason for the selection of these stocks is that each of them paid an above average yield and was trading at attractive valuations. Another reason was that the dividend was well covered from cash flows for all stocks. The most important reason was that two of them, Kinder Morgan (KMP) and Con Edison (ED) were natural monopolies, which had a toll booth type business model with stable cash flows. Philip Morris International’s (PM) business model is characterized by having a globally recognizable brand product, which is addictive and for which consumers are willing to pay higher prices each year. Realty Income (O) also has a rather stable revenue source, since it typically provides long-term leases to its tenants. I do like the companies enough, that I also have a position in them. Including a company on a stock list without having a position there, shows what the real opinion of the author on the stock really is.
The time has come to reveal how the stocks fared in 2009, and also pick the best stocks for 2010. As a long term dividend investor my holding period is forever. Thus I would select the same picks mentioned above as my top picks for 2010. I would explain the reasons behind each selection below:
Realty Income (O) has consistently increased dividends several times per year since it was listed on the NYSE in 1994. This dividend achiever owns 2348 retail properties, which are under long term leases (15-20 years) with tenants from a variety of industries and geographic location. Tenants are typically responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.83/share in 2008. Realty Income distributed $1.66 /share in 2008. FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. The company doesn’t have any debt maturing until 2013 and also has an unused credit facility worth $355 million. Realty Income currently yields 6.50% .Check my analysis of the stock.
Kinder Morgan (KMP) operates a toll-road-like network of diversified and primarily fee-based assets generated a tremendous amount of stable cash flow. This dividend achiever is largely immune to fluctuations in commodity prices and has enough in distributable cash flows per unit to cover distributions, which are expected to increase to $4.40/unit in 2010 up from $4.20 in 2009. Future growth in one of the largest MLPs in the US will be fueled by projects such as the Midcontinent Express Pipeline, Rockies Express-East and Kinder Morgan Louisiana Pipeline. Distributable cash flow includes each period’s earnings before all non-cash depreciation, depletion and amortization expenses, including amortization of excess cost of equity investments, to be an important measure of our success in maximizing returns to our partners. Kinder Morgan’s partnership agreement requires it to distribute 100% of net cash (cash receipts minus cash disbursements less changes in reserves) to unitholders on a quarterly basis. Check my analysis of the partnership.
Consolidated Edison (ED) is a regulated utility which provides electric service to 3.3 million customers and gas service to 1.1 million clients in New York city and Westchester County. The company is a natural monopoly in its geographic area, and thus is able to generate strong and steady revenue streams and enjoy a healthy balance sheet. Do not let the high payout ratio of 70% scare you from the stock – this utility has been able to maintain this high payout of 70% on average over the past decade, while still affording to grow the distributions by about 1% each year. This dividend aristocrat has been able to increase dividends in each of the past 34 years. Check my analysis of the stock.
Philip Morris International (PM) was spun out of cigarette maker Altria Group (MO) in 2008, in order to separate potential US legal liabilities from the international tobacco operations. The company is the largest cigarette manufacturer in the world, with a 15.6% market share worldwide. The company’s strategy includes organic growth and growth through acquisitions. Philip Morris International (PM) is in the middle of expanding its sales to China, which represents about one-third of the global tobacco market. The company has announced its intent to repurchase up to $13 billion of its shares over the next two years. In addition to that it has raised distributions twice since it became a separate public company in 2008. Check my analysis of the stock.
The four stocks generated a total return of 26.48% in 2009. The picks from the other bloggers participating in the contest, as well as their performance could be found below:
Intelligent Speculator: 81.55%
WildInvestor: 70.15%
Where does all my money go: 56.14%
The Financial blogger: 44.62%
Four Pillars: 35.26%
Dividend Growth Investor: 26.48%
Million Dollar Journey: 20.27%
My Traders Journal: 0.18%
Zach Stocks: -8.80%
It is important to understand that while these four stocks have the necessary characteristics to grow their distributions over time, they are simply chosen for illustrative purposes only. A real portfolio should include at least 30 different companies from a variety of sectors, sizes and continents. For a list of the best dividend companies for the long run, check here.
Full disclosure: Long KMR, O, PM, MO and ED
Relevant Articles:
- Best High Yield Dividend Stocks for 2009
- Best Dividends Stocks for the Long Run
- Why do I like Dividend Achievers
- Six Dividend Stocks for current income
Monday, January 4, 2010
2010’s Top Dividend Plays
Wednesday, December 30, 2009
Dividend Aristocrats List for 2010
The dividend aristocrats list includes companies which have increased dividends for over 25 years in a row. It is equally weighted and re-balanced once an year. Over the past 3,5 and 7 years the index of elite dividend stocks has managed to outperform the S&P 500 by 5%, 3.7% and 4.40% respectively.
The companies which were added to the index for 2010 include:
Brown-Forman Corporation (BF.B ) engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands.
Cintas Corporation (CTAS) provides corporate identity uniforms and related business services in the United States and Canada. The company operates through four segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety, and Fire Protection Services; and Document Management Services.
I expected that these two companies could be good additions to the index in The New Dividend Aristocrats.
The companies which were removed from the index include:
Avery Dennison Corp (AVY) (analysis)
BB&T Corp (BBT) (analysis)
Gannett Co (GCI) (analysis)
General Electric (GE) (analysis)
Johnson Controls (JCI) (analysis)
Legg Mason (LM) (analysis)
M & T Bank (MTB) (analysis)
Pfizer (PFE) (analysis)
State Street (STT) (analysis)
US Bancorp (USB) (analysis)
In 2008 the dividend aristocrats’ index outperformed the S&P 500 by 15.50 percent. The dividend aristocrats lost 21.55% in 2008 versus the 37.00% loss for the S&P 500. So far in 2009 ( as of December 24) the S&P Dividend Aristocrats index is up 27.82%,, which is better than the 27.70% performance of S&P 500. Over the past 5 years the index has returned 3.81%, versus 0.71% for S&P 500.
Just because a company is on the list does not automatically make it a buy. Investors should make sure not to overpay for stocks, and should not overconcentrate in certain sectors. The complete list for 2010 could be found below:
To view the full list of Dividend Aristocrats in 2009, check out Standard and Poors website.
Full Disclosure: Long MTB
Monday, December 28, 2009
Bristol-Myers Squibb, Two other companies raise dividends
The last two weeks of December are typically characterized by low trading volumes, a lot of market holidays and few news regarding dividend increases. Nevertheless when a company announces its intent to raise distributions, it generally sends a positive message to markets and shareholders, especially when a company is paying at least a decent dividend yield. Several companies announced dividend increases over the past week, including Bristol-Myers Squibb (BMY), which continued the positive momentum of dividend raises that Pfizer (PFE) started earlier in the month.
Bristol-Myers Squibb Company (BMS) engages in the discovery, development, licensing, manufacture, marketing, distribution, and sale of pharmaceuticals and nutritional products worldwide. It operates in two segments, Pharmaceuticals and Nutritionals. The pharmaceuticals giant increased its quarterly dividend by 3.2% to 32 cents per share. Bristol-Myers Squibb does not have a consistent history of dividend increases. The stock currently yields 5.00%.
“This dividend increase reflects our ongoing commitment to deliver shareholder value,” said James M. Cornelius, chairman and chief executive officer of Bristol-Myers Squibb. “We have made excellent progress in executing our strategy and we are confident in the strength of our BioPharma business. Our performance has helped put us in a strong cash position today and we expect solid cash flows to continue in the years ahead.”
The Ensign Group, Inc (ENSG), which provides nursing and rehabilitative care services in California, Arizona, Texas, Washington, Utah, Idaho, and Colorado, increased its quarterly dividend by 11% to 5 cents per share. This is the second consecutive dividend increase for the Ensign Group, Inc since the company went public in 2007. The stock currently yields 1.30%.
Franklin Resources, Inc. (BEN), which manages families of equity, fixed income, and balanced mutual funds for its clients, increased its quarterly dividend by 5% to 22 cents per share. The investment manager also declared a special dividend of $3/share. Franklin Resources, Inc. is a dividend champion, which has increased its quarterly dividend in each of the past twenty nine years. The stock currently yields 0.90%.
Full disclosure: None
Relevant Articles:
- AT&T Raises Distributions by 2.4%
- 8 Dividend Achievers Strike Back
- 7 Dividend Raisers for the week
- Eight stocks with positive dividend momentum
Tuesday, December 22, 2009
Capital gains for dividend investors
The market is efficient enough sometimes to discount events and experience moves even before important pieces of information are distributed to all market participants. How many times have we seen a large increase in prices on above average volume for companies on virtually no news, only to find out that the company is going to be acquired at a hefty premium several days later?
At the end of the day, dividend growth investors expect that a company that regularly increases dividends would also lead to a higher stock price. This would leave current yields little changed for many years.
When the market goes up, 80%-90% of all stocks follow its moves. When it goes down 70% of companies go lower in tandem with it. While dividend investors do care mostly about stability and growth of their dividend income, capital gains are important as well.
While dividends have produced about 40% of average annual returns each year over the past 8 decades, capital gains are important as well. If investors believe that the company’s performance over time would improve, they would bid up the stock price. While the dividend payment would have increased roughly at the same rate as the growth in stock prices, the current yield could be unchanged. This would leave many novice investors wondering why anyone would waste their time and effort purchasing a stock which yields 2% - 4%, when other companies offer much higher current dividend yields. What they fail to notice is that the yield on cost on the original investment several years ago is much higher than the current yield.
If markets believed that the dividend growth is sustainable, the stock price would correct itself and bring the yield to about market level. This brings in some capital gains, which further compounds the wealth of the dividend investor. If investors as a group do not expect that the company’s dividend growth is sustainable, they would simply leave the price unchanged or lower over a period of time.
Mr market might be telling you something about a company that successfully increases its dividends while the stock price is down or flat. Let’s look at Pfizer (PFE). The company used to boast a record of 41 consecutive annual dividend increases. The pharmaceuticals giant cut its dividend in 2009, ending this streak. Investors might have expected that Pfizer’s long term position of a dividend growth stock is in jeopardy, as the stock price dropped from 50 to 13, pushing the yield to 10%. At the end of the day investors not only suffered from the reduced dividend income after the cut, but also from capital losses over the past decade.
A similar situation occurred with General Electric (GE), which also had a long streak of dividend increases, until it also cut its distributions in February 2009. The company’s stock price has had a rough decade, falling from 60 to 6 before partially recovering to 16. In the meantime the company’s current yield increased several times to over 10%, until the company cut its distributions by more than 60%. It definitely pays to listen to the collective wisdom of stock prices most of the times, although not at all times.
Procter & Gamble (PG) in the 1970s tells us a completely different story. The company had already established itself as a solid dividend achiever and kept rewarding shareholders with annual raises, while the stock price appeared uninterested in the general improvement of the company’s finances.
At the end of the day it is important to purchase the best dividend stocks that would throw off a rising dividend income stream. It is also important however to not completely ignore capital gains as well.
Full Disclosure: Long PG
Monday, December 21, 2009
AT&T Raises Distributions by 2.4%
Several companies raised distributions last week. I have included my take on most of them below:
AT&T (T), which is one of the top telecommunications companies in the US, increased its quarterly dividend by 2.40% to 42 cents per share. AT&T is a dividend champion, which has increased its quarterly dividend in each of the past twenty-six consecutive years. The stock currently yields 6.00%. (analysis)
“Our 26th consecutive annual dividend increase underscores the Board’s continued commitment to stockholders and confidence in our strong financial position,” said Randall Stephenson, AT&T chairman and chief executive officer." (AT&T press release)
This was the slowest dividend increase for the telecom company in 8 years. The reason could be because it has a very high payout ratio of 83%, which leaves little room for further dividend increases, without a substantial increase in earnings per share. I do own some AT&T stock, as part of my dividend grouping strategy.
Pfizer Inc. (PFE), which engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide, increased its quarterly dividend by 12.5% to 18 cents per share. The stock currently yields 3.90%. The company cut its dividend in early 2009 after announcing its intent to acquire rival Wyeth in a 68 billion deal. Although the dividend appears to be well covered today, the business model which had previously allowed Pfizer to raise dividends for 41 years appears to be broken. Over the past decade the company has acquired new drugs through acquiring rivals and not organically through R&D. Without solid underlying strength in fundamentals, which would propel future earnings growth, the possibility for a long-term sustained dividend growth is low.
Dominion Resources (D), which engages in the generation, transmission, and distribution of electricity. The company generates electricity through coal, nuclear, gas, and oil resources, increased its quarterly dividend by 4.60% to 45.75 cents per share. This is the seventh consecutive year in which Dominion Resources has raised its quarterly dividend. Dominion Resources (D) does look like an interesting utility company, with one of the lowest payout ratios in the industry plus some solid earnings and dividend growth. The only issue is that the company does not have a long history of raising distributions. The stock currently yields 4.50%.
Hatteras Financial Corp (HTS) invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity. The company announced its fourth consecutive distribution increase to $1.20/share. The new dividend is 4.3% higher than its Q3 dividend, and 20% higher than the distribution from this time last year. The stock currently yields 15.80%. While the yield might be tempting it is important to understand that the company makes money by borrowing money using short-term rates and then investing it in long-term government agency bonds, while earning a return in the process. This exposes the company to fluctuations in interest rates. If the FED starts raising rates in 2010, companies like HTS might be negatively affected in the process.
Waste Management, Inc. (WM), which offers collection, transfer, recycling, disposal, and waste-to-energy services, increased its quarterly dividend by 8.60% to 31.5 cents per share. This marks the sixth consecutive year that the Company has increased its quarterly dividend. The stock currently yields 3.50%.
Urstadt Biddle Properties Inc. (UBA), which is a real estate investment trust (REIT), that engages in the acquisition, ownership, and management of commercial real estate properties in the United States, increased its quarterly dividend from 24 to 24.25 cents per share. Urstadt Biddle Properties Inc. is a dividend achiever, which has increased its quarterly dividend for ten years. The stock currently yields 6.20%.
BCE Inc. (BCE), which provides a suite of communication services to residential and business customers in Canada, increased its quarterly dividend by 7% to 43.5 cents per share. This is BCE's third increase to the annual common share dividend since the termination of its proposed privatization agreement in December 2008. The stock currently yields 5.90%.
Moody's (MCO) provides credit ratings and related research, data, and analytical tools; quantitative credit risk measures, risk scoring software, and credit portfolio management solutions; and securities pricing software and valuation models principally in the United States and Europe. The company boosted its quarterly payment by 5% to 10.5 cents per share. This is the first dividend increase for Moody's since the company froze its distributions in 2008. The stock currently yields 1.60%.
General Mills (GIS), which engages in the manufacture and marketing of branded consumer foods worldwide, increased its quarterly dividend by 4.2% to 49 cents per share. General Mills has increased its quarterly dividend in each of the past six consecutive years. The stock currently yields 2.80%.
Full Disclosure: Long AT&T
Relevant Articles:
- AT&T (T) Dividend Stock Analysis
- Is Pfizer (PFE) a value trap for investors?
- Dividend Grouping for Dividend Income
- Twelve Recent Dividend Increasers
