Monday, January 3, 2011

High Yield Stocks in 2010: Slow and Steady Wins the Race

Back in 2009, I selected four high yield dividend stocks in order to participate in a stock picking competition. The companies selected have diversified income streams, high dividend yields and were characterized by stable revenues. Three of the companies had recession proof products or services. This ensured that investors would keep receiving their dividends and earn a return on their investment throughout all market conditions.

The companies I selected include Realty Income (O), Con Edison (ED), Kinder Morgan Energy Partners (KMP) and Philip Morris International (PM).

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company has long term leases with tenants, which ensures stability of revenues over time. In addition to that, the properties it collects revenues from are located in 49 states. This real estate investment trust is one of the few which didn’t cut distributions during the financial crisis. Yield: 5% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. Utility revenues are stable even during recessions, but don’t increase by much during expansions. Utility companies are natural monopolies in their geographic areas, and typically earn a return on their capital investment that is set by the state they are operating in. Yield: 4.80% (analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. Pipelines are regulated by the FERC and the transportation rates for oil and gas that flow through them typically increase at the rate of inflation and are not dependent on the volatile price of the underlying. While energy prices are highly volatile, the amount of oil and gas consumed in the US typically changes by a few percentage points every year. Yield: 6.30%(analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The number of smokers is decreasing in Western Europe, although the price increases have been able to offset any declines in revenues. In addition to that, growth in emerging markets for the brand products the company is producing should boost profitability in the long run. Strategic acquisitions should also add to the bottom line, as would synergies and strategic cost efficiencies are realized over time. Yield: 4.30% (analysis)

2010 could be characterized by the lowest bond yields in several decades. This has caused some investors to shift their portfolios toward dividend stocks. The positive side of most dividend stocks is that unlike fixed income, they could increase their distributions over time. As a result some high dividend stocks such as the ones I selected in 2010 had a very good performance this year. The positive fact of dividend stocks with strong fundamentals is that investors receive a growing stream of dividend income in all market conditions. With even modest capital gains and regular dividend reinvestment, investors could achieve consistent returns over the long haul, which could compound their original investment for many years.

Two of the companies, Con Edison (ED) and Realty Income (O) seem to be trading a little ahead of themselves. As a result I find it difficult to commit new money to them at this moment. The other two companies, Kinder Morgan (KMP) and Philip Morris International (PM) look attractively valued at the moment given their bullish growth prospects and attractive fundamentals. As parto f 2011’s stock picking competition I selected Philip Morris International (PM), Johnson & Johnson (JNJ), Procter & Gamble (PG) and PepsiCo (PEP). You can read the article explaining the reasoning behind these picks here.

Overall, the four stocks delivered a total return of 26.10% in 2010. In comparison, the S&P 500 delivered a total return of 14.60% in 2010. This placed me third in the competition. You could find the results for the other bloggers below:

The Wild Investor +27.15%


Zach Stocks +20.87%

My Traders Journal +10.39%


Intelligent Speculator -0.45%

The Financial Blogger -1.64%

Four Pillars -35.25%

While I own all of the stocks mentioned above, this stock picking competition is not representative of how investors should invest money. I believe that in order to be successful at dividend investing, one has to build a diversified portfolio of stocks, representative of as many sectors as possible. I would also add geographic diversification as a plus, as well as the need to build positions slowly over time, by dollar cost averaging.

Full Disclosure: Long ED, KMP, O, PM

Relevant Articles:

- Best Dividend Stocks for 2011
- Dividend Aristocrats list for 2011
- 2010’s Top Dividend Plays
- The case for dividend investing in retirement

3 comments:

  1. Can you comment on the need for discounting the value of some of these and other high yield dividend stocks to account for their long-term, sustained issuance of new shares to help pay those dividend streams. Seems the resulting dilution to owners in their share value, for some of these and other high yield stocks, is often significant and important to account for.

    ReplyDelete
  2. All well and good for dividend stocks. I've usually found that slow and steady often beats fast and furious. In any case, the ride is smoother.

    However, a 4 stock portfolio is, of course, not a suitable portfolio nor a good measure of performance other than to play this contest with your fellow bloggers.

    I've only done a quick and dirty calc on my portfolio and it comes in around 22%, which speaks volumes about dividend stocks last year. Since I reinvest my dividends, and add funds, some money was only invested for part of the year. I expect my real return was a little bit higher. I'll take it right now for 2011 if given the chance.

    My "smaller" trading account was well over 35%, but the risk factor was much higher as well as the time required to constantly search for new ideas.

    Happy new and best of luck to all 'ye dividend investors. and you too DGI.

    ReplyDelete
  3. Congrats on yet another successful year!

    Keep up the great blogging

    ReplyDelete

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