Back in 2009 I was invited to participate in a stock picking competition, where I had to submit my top four stocks for 2010. The companies which I thought included high yielding companies from four sectors of the economy, which also were characterized with consistent cash flows and stable but rising dividend payments. The sectors covered include real estate, utilities, energy transportation and tobacco.
The companies which I selected for 2010 include:
Consolidated Edison (ED) provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised annual distributions for 36 years in a row. The last dividend increase was in January 2010. The company is a natural monopoly in its geographic area, and thus is able to generate strong and steady revenue streams. The stock spots a yield of 5.3%, which a good compensation if you seek current income for the next 5 - 10 years. The stock is unchanged year to date. Check my analysis of Consolidated Edison.
Kinder Morgan (KMP) owns and manages energy transportation and storage assets in North America. This dividend achiever has raised annual distributions for the past 13 years. The last dividend increase occurred in 2009 however. Master Limited Partnerships like Kinder Morgan (KMP) typically receive a fixed fee for moving a product over a certain distance through their pipelines. In addition to that there is little competition between pipeline companies for business, as they are almost monopoly like businesses. Thus, their revenues tend to be rather stable. Kinder Morgan is eyeing expansion, which would be accretive to distributable cash flows per unit for the near future. The stock currently yields 6.50% and is up 9.40% year to date. Check my analysis of Kinder Morgan.
Philip Morris International (PM) engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company has raised distributions each year since it was spun-off from Altria Group (MO) in 2008. While it does face declining demand in Western Europe, which accounted for a little less than 50% of its operating income, the company could benefit from growth in emerging markets such as China or India as well as from strategic acquisitions. Add in to that the strong shareholder focused culture of Altria Group, which has always tried to deliver strong and consistent dividend growth and buybacks, and you have a recipe for success. Tobacco usage is not going to stop just like that no matter how much taxes are being levied on the products. The stock currently yields 4.4%, and is up 9.40% year to date. Check my analysis of Philip Morris International.
Realty Income (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. This dividend achiever has raised distributions for sixteen consecutive years. The last dividend increase occurred in March 2010. Some investors are concerned that Realty Income has a high dividend payout ratio, which stops them from purchasing its shares. The truth is that real-estate investment trusts have to distribute all of their earnings to shareholders in order to avoid being taxed by the IRS. Thus, a more useful gauge for Realty Income’s dividend coverage is its Funds from Operations, which includes earnings per share and certain non cash items such as depreciation expense for example.Realty Income (O) currently yields 5.60%, and is up 19.90% year to date. Check my analysis of Realty Income.
The four stocks that I selected have delivered a total return of 9.60% year to date, which so far is better than the returns from the rest of the investors participating in the competition:
Dividend Growth Investor: 9.58%
My Traders Journal: 5.78%
Where does all my money go: 5.45%
The Financial blogger: 2.87%
Zach Stocks: 2.55%
Four Pillars: -1.01%
Intelligent Speculator: -1.27%
Million Dollar Journey: -11.83%
While the four stocks are ideal for investors seeking current income, in order to reduce risk one has to hold a diversified portfolio of income stocks. At a minimum a diversified dividend portfolio should hold at least 30 securities representative from the ten sectors in the S&P 1500. In addition to that a well diversified income portfolio should also have at least a 25% allocation to fixed income.
Full Disclosure: Long ED, KMP, PM and O
- Six Dividend Stocks for current income
- Four Percent Rule for Dividend Investing in Retirement
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- 2010’s Top Dividend Plays
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