Showing posts with label high-yield. Show all posts
Showing posts with label high-yield. Show all posts

Monday, June 28, 2010

Four High Yield REITs for current income

One asset class that dividend investors could use in order to diversify their portfolios is real estate. The sector includes rental real estate on residential buildings, offices, malls etc. Owning a piece of rental real estate outright however comes with headaches, such as dealing with tenants and not being properly diversified. In order to avoid managing buildings and finding tenants, investors could use real estate investment trusts (REITs).

Real estate investment trusts own different types of real estate, and they offer instant liquidity to investors, since most are publicly traded. In addition to that REITs are required to distribute almost all of their earnings back to shareholders. As a result REITs are not taxed at the corporate level, but distributions from earnings are typically taxed as ordinary income. The rest of distributions from REITs are typically treated as returns of capital, which reduce your basis and would be taxable as a capital gain if you sell your shares.

Real Estate Investment Trusts offer instant diversification to investors, as most of them typically own hundreds of properties across many states. In addition to that, since they distribute all of their earnings to shareholders, their yields are typically much higher than yields on stocks. An important metric for evaluating REITs is Funds from operations (FFO). 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.

Most REITs have rather stable revenues and as a result are able to maintain and even consistently raise distributions over time. I have highlighted four trusts for further research:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. Realty Income is widely known among its investors as the monthly dividend company. The company is a dividend achiever, which has increased its dividend for 15 years in a row by raising its monthly distributions several times per year. (analysis)

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. The company invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. The company is a dividend achiever and has raised distributions for 22 consecutive years. (analysis)

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company invests in health care-related properties and provides mortgage financing on health care facilities. This dividend achiever has raised distributions for 24 consecutive years. (analysis)

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. It provides complete turn-key and built-to-suit development services including market analysis, site selection and acquisition, entitlements, permitting, and construction management. The firm also focuses on purchasing and financing net-leased retail properties. The company is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 20 consecutive years. (analysis)

While I generally find these companies attractive, each one has its own risks. Realty Income (O) has slowed the growth in distributions, and its FFO payout ratio is above 90%. In addition to that the rate of vacancies there has increased over the past few years, as the number of assets under management has increased.

National Retail Properties (NNN) has not raised distributions since 2008. The company does have a lower vacancy rate than Realty Income and in addition to that has a much lower FFO payout ratio. If the company doesn’t raise distributions by the end of 2010, it would lose its dividend achiever status.

Fifty-one percent of Universal Health Realty Income's revenues are derived from leases to Universal Health Services. UHT’s advisor is a subsidiary of UHS, and all officers of Universal Health Realty are employees of UHS, which could create conflicts of interest.

One warning statistic for Health Care Property Investors, Inc. (HCP) is the fact that average occupancy percentage for Senior Housing has dropped from 95% in 2005 to 86% in 2009. This occupancy ratio represents occupancy and unit/bed amounts as reported by the respective tenants or operators. Certain operators in HCP Inc’s hospital portfolio are not required under their respective leases to provide operational data however. The company’s focus on senior living facilities should benefit from increasing demand by retiring baby boomers. There will be a significant increase in the number of people over the age of 65 in the US over the next decade, which would be beneficial to overall healthcare facilities.

Overall, I like the stable income streams generated by real estate investment trusts. I believe that getting exposure to real estate through REITs could not only help in diversifying your income portfolio, but also boost your current yield. In addition to that most REITs also grow distributions, which provides some hedge against inflation.

Full Disclosure: Long O, NNN, UHT

Relevant Articles:

- Realty Income (O) Dividend Stock Analysis
- National Retail Properties (NNN) Dividend Stock Analysis
- Universal Health Realty Income Trust (UHT) Dividend Stock Analysis
- Health Care Property Investors, Inc. (HCP) Dividend Stock Analysis

Monday, June 21, 2010

Highest Yielding Dividend Stocks of S&P 500

Many novice investors get in the world of dividend investing because of the belief that it is possible to generate double digit current yields. They purchase these securities in pursuit of current income, only to see these distributions cut after a few months. The truth is that few companies can afford to pay high dividends, unless they are pass-through entities such as master limited partnerships or real estate investment trusts to name a few.
I have highlighted the top 20 yielding stocks in the S&P 500 index below:



Right off the bat investors could notice that most of these issues are from the telecom, utilities and tobacco sectors. The reason why these companies yield so much is because they are sharing almost all of their profits to shareholders in the form of dividends. This is clearly unsustainable, particularly in the case of telecom carriers, which have high capital expenditure requirements in an industry with high competition. Another risk facing telecom investors is that the wireline (landline) portion of their businesses is destined to decline over the years until its extinction a few years from now. Few households have both a cell phone and a fixed line anymore, and those that still pay for both are beginning to question the benefit of the extra landline phone charges. This dying business would generate less and less in profits, which cannot be offset against cost cuts. The main bright spots for telecom providers is data and cellular phones.

Long gone are the days when telecom companies had a natural monopoly in the territories they served, which was why they were included in the list of stodgy utilities. Customers can nowadays switch carriers on a whim, once their contracts expire. Customer service is uniformly the same for the major carriers such as AT&T (T), Verizon (VZ), Sprint-Nextel (S) and T-Mobile, part of Deutsche Telecom (DT). Most customers are looking for the next “cool” phone, such as the iPhone, made by Apple (AAPL). The number of cell phone customers in the US has reached its saturation point, and most of the carriers are fighting hard for customers. Most of the additions for AT&T (T) and Verizon (VZ) seem to have been at the expense of losses at Sprint-Nextel (S). Once Sprint stops bleeding, it could potentially make it harder for competitors to take customers away.

I am generally a believer in utility stocks, since they have relatively safe cash flows and are natural monopolies in their designated areas. That being said, even when utilities cut dividends, they typically start raising them again after a few years. Utilities are subject to interest rate risk however, which would make cost of capital expensive for them at a time when investors will demand a higher yield on new stock or bond issuances.

Tobacco is also a dying business, where companies direct all of their cash flows to investors in the form of dividends and stock buybacks. The one positive for tobacco companies is that because of the ban on advertising, it is virtually impossible for new companies to enter the market. In addition to that the product is addictive, and the price increases have so far offset the declines in the number of smokers in the US. The major risk is legislation banning the use of tobacco in the US, which seems to already be priced into the shares of tobacco companies such as Altria (MO). The states need revenues, and the steep excise taxes generated by tobacco products make it very unlikely that these products would be banned in the next decade.

In general investors should not have an excessive allocation to a particular sector of the market, regardless of the high current yields. An above average allocation to high yielding sectors could lead to steep losses in current income when distributions are cut. If you purchase a $100 worth of stock yielding 8%, your expectations are for an annual dividend income of $8. If the company cuts distributions by 50% however, your dividend income would fall to $4. Many investors in financial shares suffered steep losses in income and capital after buying shares of Bank of America (BAC) or Citigroup (C ) when they had high yields.

While holding a high yielder could boost your overall portfolio yield, it is essential to create a diversified dividend portfolio representative of most sectors in the economy. This would reduce risk to the dividend income stream, and to the capital base. For ideas on companies with sustainable dividends with long histories of dividend growth check the dividend aristocrats and the dividend achievers lists.

Full Disclosure: Long MO and T
This article was included in the Carnival of Personal Finance 264th Edition

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Friday, April 16, 2010

Health Care Property Investors, Inc. (HCP) Dividend Stock Analysis

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company invests in health care-related properties and provides mortgage financing on health care facilities. This dividend achiever has raised distributions for 24 consecutive years.

Over the past decade the stock has delivered a total return of 18.20% per annum to its shareholders.

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). Over the past decade FFO has increased by 3% on average. The fund has a diversified portfolio of healthcare properties by tenants, type of asset or geography. The major tenants include Sunrise Senior Living, Brookdale Senior Living, HCA, Tenet Healthcare, HCR ManorCare, Covenant Care In addition to that the trust has approximately 14% of total assets invested in debt issued by high-quality healthcare operators, secured by their real estate, rather than in the real estate itself.

The company’s focus on senior living facilities should benefit from increasing demand by retiring baby boomers. There will be a significant increase in the number of people over the age of 65 in the US over the next decade, which would be beneficial to overall healthcare facilities.
The company’s assets produce a relatively stable stream of income, which is predictable and resilient in times of recessions. There won’t be much growth however asides from general rate increases on its leases, unless management starts acquiring more properties. The trust routinely disposes or acquires properties in order to enhance shareholder value.
One warning statistic is the fact that average occupancy percentage for Senior Housing has dropped from 95% in 2005 to 86% in 2009. This occupancy ratio represents occupancy and unit/bed amounts as reported by the respective tenants or operators. Certain operators in HCP Inc’s hospital portfolio are not required under their respective leases to provide operational data however

In terms of lease expirations, only Medical Office properties face a steep expirations cycle of leases until 2014. For Senior Housing segment, there aren’t any major lease expirations until 2016.

The company doesn’t face any major debt maturities until 2013, when it has a total of $1.225 billion in Mortgage debt and senior unsecured notes maturing.

Analysts expect FFO to reach $2.15 and $2.24 for 2010 and 2011 respectively. HCP Inc’s leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Substantially all of their senior housing, life science, and skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs.

Over the past decade distributions have increased by 2.50% per annum. A 2.5% annual growth in distributions translates into dividends doubling every 29 years. In 2009 the company raised quarterly distributions by 1.00%.

As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 86%, which was the first increase in this indicator since it exceeded 100% in 2003. Overall a lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.

Overall I find HCP Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 15, which is one of the lowest in the past decade. I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.

I plan on adding a small position in HCP Inc. on dips over the next month. My ideal starter yield however would be 6%, indicating an entry price of $31 however. I would not settle for a current yield of less than 5% on this investment however.

Full Disclosure: None

Relevant Articles:

Thursday, April 1, 2010

Top Dividend Stocks for 2010, 1Q update

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%

WildInvestor: 9.30%

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

Relevant Articles:

- Six Dividend Stocks for current income
- Four Percent Rule for Dividend Investing in Retirement
- Dividend Investors are getting paid for waiting
- 2010’s Top Dividend Plays

Monday, January 4, 2010

2010’s Top Dividend Plays

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

Thursday, October 1, 2009

Best Dividend Picks for 2009, 3Q update

Back at the end of 2008, I was invited to participate in a stock picking competition by selecting 4 stocks. At the time I simply included the highest yielding stocks in my portfolio – Con Edison (ED), Realty Income (O), Phillip Morris International (PM) and Kinder Morgan (KMP). I believe that as a whole, these stocks would provide dependable income for individuals seeking high current income today. These stocks also possess strong dividend growth characteristics as well, which is essential for investors to keep up with inflation if they spend all of their distributions in a given year.

You could find the reasons for my stock selections below:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is widely held among dividend investors, and is known as the “Monthly Dividend Company”. Since Realty Income went public in 1994 it has raised dividends consistently, often more than three times per year. 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.
This dividend achiever currently yields 6.5%, and is up 18.8% year to date.

Consolidated Edison, Inc., (ED) through its subsidiaries, provides electric, gas, and steam utility services in the United States. People still keep using electricity at the same rate even during recessions, as do businesses as well. This being said, Con Edison’s revenues so far this year have been lower, in comparison to their levels from last year due to the overall weakness in New York’s economy as a whole. The company also recently managed to receive a lower than anticipated increase in its rates to customers. In addition to that there is some uncertainly about the utilities sector as a whole and the smart grid project, which would turn out to be very costly, especially if government subsidies do not cover a major part of those projects. I do like the fact that Con Ed has raised dividends for 35 consecutive years, despite the fact that raises have come at a 1% annual rate as of recently. This dividend aristocrat also spots a healthy 5.7% yield, which a good compensation if you seek current income for the next 5 - 10 years. The stock is up 11.0% year to date.

Philip Morris International Inc (PM) manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. The company was spun out of 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 4.8%, and is up 16.4% year to date.

Kinder Morgan, L.P. (KMP) owns and manages energy transportation and storage assets in North America. The company’s business is all about transporting oil and natural gas in the US, and thus it is not as affected from the rise and fall of energy prices as major producers such as Exxon (XOM) or Chevron (CVX) typically are affected. MLP’s in general are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities. MLP’s 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.
Kinder Morgan has raised distributions for over a decade, and as such it has been included in the dividend achievers index. The company’s units currently yield 7.7%, and are up 25.7% year to date.

Year to date the portfolio has produced a total return of 17.99%, which is not too bad for a conservative basket of stocks. The price return is only 12% however, which goes on to show that holding dividend stocks during a downturn could be especially rewarding if distributions get reinvested at lower prices.

Check out the performance of the other bloggers year to date returns in the table below:


Rank Return

Intelligent Speculator 73.05%

WildInvestor 56.78%

Four Pillars 44.26%

Wheredoesallmymoneygo 43.01%

The Financial Blogger 24.49%

Dividend Growth Investor 12.00%

Million Dollar Journey 8.49%

My Traders Journal -3.16%

ZachStocks -13.17%

I would like to emphasize the fact that successful dividend investing is a long-term process. I strongly doubt that a time frame of less than 15 years is indicative of whether the performance of the stock picks above is sustainable or not. Having a diversified portfolio of at least 30 individual companies from several sectors, sizes and locations is essential in order to be diversified and avoid taking unnecessary risks. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

This post was included in the Carnival of Personal Finance Edition #227

Relevant Articles:

- Best Yielding Stocks for 2009 2Q Update
- Best High Yield Dividend Stocks for 2009-1Q Update
- Best High Yield Dividend Stocks for 2009
- Best Dividends Stocks for the Long Run

Wednesday, September 30, 2009

Utility dividends for current income

Electric, Gas and Water utilities have always been traditionally regarded as income stocks by investors. Their high current yields, and the relative stability of their distributions made them a preferred choice for investors who are seeking current income from their assets.

Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantees almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.

A main risk factor for many utilities is government legislation in regards to greenhouse gases, which could increase their costs over time. Such legislation could force utilities to purchase CO2 pollution allowances, which could cut into earnings. The heavy government regulation could be the driving force behind future growth however. A recent phenomenon has been the smart grid initiative.

The smart grid initiative integrates information and communication technology into electricity generation, delivery, and consumption, making systems cleaner, safer, and more reliable and efficient. While it would be costly to modernize electric grids, there is some stimulus available from the department of energy. The department of energy plans to distribute $3.9 billion in Recovery Act funds for smart grid projects through two funding opportunities. The first provides $3.3 billion for deploying and implementing smart grid technologies across the country. The second provides $615 million for smart grid pilot projects. (Source: Yahoo Finance)

Because of the stability of their cash flows, utilities could afford increasing their dividends for long periods of time. Most utilities that I have stumbled upon have had a history of dividend increases, followed by a steep dividend cut, which is then followed by another string of dividend increases. More often than not however, dividend cuts in the Utilities Sector are followed by dividend increases for several years until the dividend payment reaches or exceeds the previous levels. Because of this cyclical nature of utility dividends I view the sector as more suitable for current income generation that for solid dividend growth. Thus for a younger investor who has more than 2 decades until they plan on living off their dividend income in retirement, I would not recommend a high exposure to utilities.

While current yields on utilities tend to be higher than the yields on S&P 500, dividend growth is much slower, which could erode the purchasing power of your utility dividend income over time. I view utilities stocks similarly to fixed income, as they are very sensitive to interest rates and have stable distributions.

Utility stocks typically lag during strong bull markets as investors chase higher growth prospects. In flat or bear markets however utility stocks do not decline as much and they are further helped by their generous dividend yields.

While it is true that some utilities don’t have a strong history of raising distributions, there are several utilities, which have raised their distributions for more than 25 consecutive years, and thus are part of the dividend champion’s list:

It is important to look at the dividend payout ratios, the EPS trends and the EBIT to interest expense ratio in order to gauge the sustainability of the dividend payment over time. The EBIT to interest expense or coverage ratio is an important indicator which shows whether utilities could afford servicing their debt obligations. While some investors focus only on the debt to asset ratios, I view the ability to service interest payments as an important factor that shows how sustainable the company’s ability to operate as a going concern actually is.

Because of the slow dividend growth, I would not consider initiating a position in utilities stocks yielding less than 4% to 5%.

Full Disclosure: Long ED

This post was included in the :The Carnival of Personal Finance #226 – The AFM Turn’s 5 Edition

Relevant Articles:

- The case for dividend investing in retirement
- Why should companies pay out dividends?
- Dividend Portfolio Investing for monthly income
- Dividend Conspiracies

Wednesday, September 16, 2009

Are High Dividend Stocks worth it?

As an investor in the accumulation stage, I tend to focus on companies with yields of at least 3% and expectations of future dividend growth. Most of these companies have a history of consistent annual dividend increases which exceeds ten years. I do receive constant criticism from readers however, that I profile very few stocks yielding 5%-6% or more; and then I do feature them I always express my negative opinion on the securities. I am not willing to accept an extremely high dividend payout ratio, which would have been acceptable for a utility or a Master Limited Partnership.

I do realize that most investors want to generate enough income as possible from their nest eggs, which have been accumulated over the spans of several decades’ worth of hard work and sacrifice. The problem with this approach is that investors end up focusing on the end result, without giving much thought about the sustainability and growth of the dividend payment. In other words, although it would take for a 3% yielder 7 years to double your original dividend payment and yield on cost, when the dividend growth is 10%, I believe that investors are better off in a sustainable lower yielder, than in an unsustainable high yielder. The company yielding 6% today that cuts its distributions a few months down the road could end up generating far less income than what you expected.

Some investors also disagree with me that stocks which are yielding 3% – 4% would barely produce enough income to keep up with inflation. The problem with this assumption is that in its goal of chasing the highest yielding stocks, you could end up losing from inflation. For example if you held all of your money in a group of stocks, yielding 8%-10%, and spending all the dividend income produced by your positions, you would lose purchasing power over time. Even worse – if the dividend payment is unsustainable, your yield on cost could even become lower than the current yield on S&P 500, if the company decides to cut distributions. Consider for example Bank of America (BAC), which at the beginning of 2008 would have yielded a cool 6.20%. Fast forward one year later, and the company is currently yielding 0.20%. The worst part is that the yield on your original investment in BAC is now 0.10%.

Compare this to Kimberly-Clark (KMB), which yielded about 3% at the beginning of 2008 but which has raised distributions twice, for a total dividend growth of 13.21%. Your yield on cost is almost 3.5% now, and that is without taking into effect any dividend reinvestment.

A common issue among high yielders is that they have a high dividend payout ratio. This means that the company is paying most of its earnings out as dividends, and doesn’t leave much for reinvestment in the business. If you add in stagnant earnings per share growth, and you basically have a disaster in the making. If that company all of a sudden decides that it needs cash for anything like merger or acquisition or if its earnings drop due to an economic contraction, chances are very high that the dividend payment, which was unsustainable in the first place, would be the first on the management’s chopping block.
Consider Pfizer (PFE) for example. The company spotted a very high payout ratio both in 2007 and 2008. Investors who purchased the stock hoping that this cash rich drug giant would pay a 6%-7% were terribly disappointed when on January 26th Pfizer cut its dividend. The move helped the company save billions, which were much necessary for its acquisition of Wyeth (WYE).

I do realize however that dividend growth is not guaranteed as well. But then I have a requirement of an initial minimum yield of 3% as a margin of safety in case this happens. Chances of a dividend cut are much larger for a company with a current yield of 6%, than for a company yielding 3%. The market is efficient in this section, so you have to understand what risk the high yielders represent, before leaping into the unknown.

Just for the sake of comparison, I identified the components of the dividend aristocrat’s index, which currently yield more than 4%. Of the eleven companies presented, only Kimberly-Clark (KMB) and Cincinnati Financial (CINF) had what somewhat sustainable dividend payouts.



Full Disclosure: Long CINF and KMB

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Wednesday, July 29, 2009

Philip Morris International versus Altria

Back in 2008 Altria (MO) spun off its global tobacco operations in order to reduce litigation risk. The global tobacco operations are touted as a growth play on emerging markets such as China and Russia. Just because there might be an opportunity for growth, does not really mean however that this growth would materialize. Check my analysis of Altria Group (MO).

While the US is a mature market, where smoking is a habit where a continuously lower percentage of the population is engaging in, the current legislation has created an environment where it is virtually impossible for new players to enter. That way tobacco companies like Altria (MO) could raise prices almost indefinitely in an effort to combat tax increases and decline in demand. Another way that Altria is dealing with this issue is by acquiring competitors in niches it has little presence, as well as streamlining its efficiencies in order to cut costs to the bone. Excise taxes represent a very high percentage of the price of a pack of cigarettes. Thus Federal and State governments have it in their best interests not to ban the use of tobacco products.

However just because Altria is supposed to be a slow growth company and Philip Morris International (PM) is supposed to be growing its EPS at 10-12% annually, does not mean that Philip Morris International would be a better investment over the long run. Investors, who get excited about future growth, tend to bid up the prices of such assets. Risks to this strategy include failures to the realization of the future growth. Thus buying a stock at inflated valuations simply because one expects growth to continue forever might produce inferior long-term returns, relative to the slower growth asset. Philip Morris International (PM) is on my Best High Yield Dividend Stocks for 2009 list.

Some of the risks for Philip Morris International are that the legislation at some of its large markets like Turkey has some catching up to do. Most recently the country banned smoking outdoors in places like bars and restaurants. If other promising “growth” markets catch up and increase the regulatory burden on tobacco products, Philip Morris International operations could end up spotting similar growth prospects to Altria’s domestic operations. Altria has it easier than PMI, since it mainly has one national government to deal with; with PMI, although the operations are diversified globally, it could end up dealing with several governments all at once catching up to increase hurdles for the company.

Another risk for Philip Morris is tobacco smuggling. In some emerging markets it is “relatively easy” for third parties to sell smuggled products at lower prices or to sell “counterfeit” products. Such products erode tobacco conglomerates market shares and could lead to further increases in taxes.

PMI generates almost 47.5% of its revenues and 45.4% of its operating profits from the European Union. 23.30% of its Revenues and 29.90% of its operating profits are derived from the Eastern Europe, Middle East and Africa region. Asia and Latin America account for 19.2% and 10% of revenues respectively. The former accounted for 19.70% of profits while the latter accounted for only 5% of profits in 2008. While the EU market is mature like the US one, the positive for PMI is that it has a growth kick. If you add in strategic acquisitions and cost initiatives, there is not wonder investors increasingly favor PMI over MO. The data is from Philip Morris International's 2008 Annual Report. (source)

Altria Group has business interests that range beyond tobacco, whereas PMI is mainly concentrated on tobacco products. Altria owns a 28.5% interest in UK based SAB Miller, which is not only the second largest brewer in the world, but also one of the largest bottlers of Coca Cola (KO) products worldwide. Altria could further grow by expanding in other “related” industries such as beverages or food production. PMI could also expand significantly by purchasing leading tobacco companies in different countries. This could provide quick increase in market shares for the company. Altria also owns Ste. Michelle Wine Estates, which is the fastest growing premium top-ten wine producer in the United States.

Over the past 5 years, PMI managed to increase its earnings per share by 53%, while Altria only managed an 18% raise.


At the same time PMI also delivered strong revenue growth of 60%, much better than Altria’s paltry 8%.

Since 2004 the annual EPS growth for PMI stands at 11.20%, and 4.30% for Altria. The cost initiatives that Altria has undertaken have paid off ok, as the US tobacco conglomerate revenues rose only by 2% per annum, while PMI’s revenues rose at a rate of 12.60% per annum.

Overall I am bullish on both stocks, but I do not have a preference for either one of them. While the past 5 years have been great for Philip Morris International, negative legislation could tamper growth in the future. I do like the economics of tobacco businesses, as it costs very little to make cigarettes, which are then sold at much higher prices to the consumer. The product is addictive but there's also an incredible loyalty to brands like Marlboro.

Full Disclosure: Long PM, MO and KO

Wednesday, July 1, 2009

Best Yielding Stocks for 2009 2Q Update

At the end of 2008 I was invited to participate in a passive stock-picking contest between several US and Canadian bloggers. The goal of the competition was to select the four best stock ideas from each blogger. The rules did not allow active buying and selling, which means that once you select your picks; one can’t go back and change them. Check out my original post for the rationale behind my picks.

Contests are a tricky thing. Most participants might choose riskier stocks, which could go higher much faster if the market was bullish, versus higher quality issues, which have lower volatility. Thus observing investors making bets without having any funds at risk, is not the same as putting your money where you mouth is.

The companies I selected were representative of four high yielding sectors- real estate, energy transportation, utilities and tobacco. Despite the high yields, the dividend payments seemed sustainable enough even during the financial meltdown. The average yield on the four stocks mentioned below is 6.88%. The riskiest stock of the four seems to be Realty Income (O), since real estate is one of the hardest hit sectors in the US. Kinder Morgan (KMP) and Con Edison (ED) are pretty much utility like investments, while Phillip Morris International (PM) should do fine in a crisis, as smokers find it tougher to quit.

Realty Income (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly dividend company ended 2008 at $23.15 and has distributed $0.85 in dividends so far this year. At the current price of $21.92 the investment is underwater by 1.64%. This dividend achiever, which has consistently increased its distributions several times/year since 1994, currently spots a very attractive 7.90% yield. Check out my analysis of Realty Income.

Consolidated Edison, Inc. (ED), ended 2008 at $38.93. At the current price of $37.42 plus the $1.18 in dividends collected during the first two quarters the investment in this provider electric, gas, and steam utility services has lost 0.85%. Currently this dividend aristocrat yields 6.30%. Check my analysis of Consolidated Edison.

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. One of the largest master limited partnerships in the US has generated a total return of 16.33% in 2009, one third of which came from this dividend achievers generous distributions. The units of this partnership currently yield 8.30%. Check my analysis of Kinder Morgan.

Philip Morris International Inc (PM) manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. The largest publicly traded manufacturer and marketer of tobacco products closed 2008 at $43.51/share and has paid $1.08 in dividends in 2009. At the current price of $43.62 the investment is up by 2.74%. This dividend growth stock currently spots an attractive 5.00% yield and recently announced its expectations to return some $9 billion in cash to its shareholders during 2009 in the form of dividends and share buybacks.

Overall my picks gained 0.70% year to date. If you add in dividends, the total return was 4.10%. Check out the performance of the other bloggers year to date returns in the table below:

Rank

1 Four Pillars 48.83%

2 Intelligent Speculator 43.32%

3 The Wild Investor 41.45%

4 Where does all my money go 28.72%

5 The Financial Blogger 13.29%

6 Million Dollar Journey 4.76%

7 Dividend Growth Investor 0.70%

8 Zach Stocks -3.09%

9 My Traders Journal -11.36%

S & P 500 +3.16%

I would like to emphasize the fact that successful dividend investing is a long-term process. I strongly doubt that a time frame of less than 15 years is indicative of whether the performance of the stock picks above is sustainable or not. Having a diversified portfolio of at least 30 individual companies from several sectors, sizes and locations is essential in order to be diversified and avoid taking unnecessary risks. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

Relevant Articles:

- Best High Yield Dividend Stocks for 2009-1Q Update...

- Best High Yield Dividend Stocks for 2009

- Best Dividends Stocks for the Long Run

- Best International Dividend Stocks

Wednesday, May 20, 2009

General vs Limited Partners in MLP's

There are two types of partners in a Master Limited Partnership structure, a general partner and limited partners.
The general partner manages the master limited partnership and typically holds a 2% economic interest in it. The general partner also receives a percentage of the profits off the top, before the limited partners get their cut. These so called Incentive Distribution Rights allow the general partners to take a higher proportion of incremental amounts over a certain threshold levels. This provides the general partner with a strong motivation to raise distributions to unitholders, which is appealing to them.
The last tier is typically 50/50, which means that general partners receive 50% of any incremental cash flows above a certain threshold level. This could however increase the cost of equity for the MLP and dilute ownership claim of limited partners.

Limited partners are not involved in the day-to-day management of the MLP, and have limited liability. Once the MLPs reach the highest IRD threshold the distribution growth for Limited Partners slows down, while it increases for general partners.
Some MLP's such as Kinder Morgan (KMP), energy Transfer Partners (ETP) and Oneok Partners (OKS) have already reached the top 50% IDR level. Other MLPs such as Entrerprise Products Partners (EPD) have capped their incentive distribution rights threshold to a maximum of 25%. Check my analysis of Kinder Morgan Partners (KMP).
One way to capture the higher distribution growth potential is to purchase the General Partner Units traded on US exchanges. Not a lot of GPs are traded however. One general partner that has reached the 50% incentive distribution rights threshold is Energy Transfer Equity (ETE), which is the GP for Energy Transfer Partners (ETP).

Another major General Partner, whose units could be bought by ordinary investors is Enterprise GP Holdings (EPE). It owns the general partner and limited partner interests in Enterprise Products Partners L.P. (EPE), TEPPCO Partners, L.P (TPP) and Energy Transfer Equity, L.P (ETE). Check my analysis of Teppco Partners L.P..

Full Disclosure: Long Kinder Morgan Partners

Relevant Articles:

- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
- Using DRIPs for faster compounding of dividends
- Best High Yield Dividend Stocks for 2009
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- TEPPCO Partners (TPP) Dividend Analysis

Wednesday, April 1, 2009

Best High Yield Dividend Stocks for 2009-1Q Update

Back in December 2008 several US and Canadian Bloggers provided four of their best stock picks for 2009. The rules of the stock-picking contest do not allow actively trading stocks. The performance of the individual bloggers’ picks is reviewed every quarter.
You might recall that I selected four high yielding dividend stocks from different sectors which I believed have sustainable dividend payments for 2009. Check out my original post for the rationale behind my picks.

Realty Income (O) closed 2008 at $23.15. At the current price of $18.82 plus the $0.42525 in distributions collected during the first quarter the investment in the owner of commercial retail real estate properties in the US is underwater by 16.90%. This dividend achiever, which has consistently increased its distributions multiple times/year since 1994, currently spots a very attractive 9.50% yield. Check out my analysis of Realty Income.

Kinder Morgan Energy Partners (KMP) finished 2008 at $45.75. At the current price of $46.72 plus the $1.05 in distributions collected during the first quarter the investment in the owner of energy transportation and storage assets in the US is up by 4.40%. This dividend achiever, which has consistently increased its distributions several times/year since 1997, currently spots a very appealing 9.00% yield. Check out my analysis of Kinder Morgan.

Consolidated Edison (ED) ended 2008 at $38.93. At the current price of $39.61 plus the $0.59 in dividends collected during the first quarter the investment in this provider electric, gas, and steam utility services has gained 3.30%. This dividend aristocrat, which has consistently increased its distributions several times/year since 1975, currently spots an attractive 6.10% yield. Check out my analysis of Consolidated Edison.

Phillip Morris International (PM) finished the year at $43.51. At the current price of $35.58 plus the $0.54 in dividends collected during the first quarter the investment in manufacturer of cigarettes and other tobacco products in markets outside of the United States of America is underwater by 17%. This dividend stock currently spots an attractive 5.60% yield.

Overall the four dividend stocks that I picked lost 8.30% so far in the first quarter of 2009; if you add in the dividends received over the first quarter of the year the total return improves to a negative 6.50%. In comparison S&P 500 lost 11.25% in the first quarter of 2009.

Check out the performance of the other bloggers year to date returns in the table below:

Rank

1 Intelligent Speculator 4.33%

2 The Financial Blogger -0.94%

3 FourPillars -2.67%

4 Million Dollar Journey -2.96%

5 Dividend Growth Investor -8.27%

6 WildInvestor -8.90%

7 Wheredoesallmymoneygo -21.77%

8 ZachStocks -24.19%

9 My Traders Journal -27.54%

I would like to reiterate the fact that in order to generate dividend income for the long run, a more diversified portfolio consisting of at least 30 stocks should be constructed. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.

Full Disclosure: Long ED, KMP, O, and PM

Relevant Articles:

- Best High Yield Dividend Stocks for 2009
- Best Dividends Stocks for the Long Run
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- Realty Income (O) Dividend Analisys
- Consolidated Edison (ED) Dividend Analysis

Wednesday, March 18, 2009

Master Limited Partnerships (MLPs) – an island of stability for dividend investors

Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. They combine the tax advantages of a partnership and higher dividend yields with the day to day tradability of common stocks.
MLPs consist of a general partner who manages the operations and limited partners who own the rest of the units for the partnership. Unlike corporations MLPs are not subject to double taxation.
Their stocks are called units, while their dividends are called distributions. The units are very easy to buy and sell, as they trade just like any other stock on NYSE, Nasdaq and AMEX.

MLPs mail individualized K-1 tax forms to each unitholder in late February or early March of each year that specifies the tax treatment of the prior year's payouts. A portion of their payouts can be tax-deferred, and it is subtracted from ones cost basis. When you sell your units, some of the gain that comes from certain deductions such as depreciation expense will be taxed as ordinary income. Because of MLPs specific legal structure, investors should consult with their tax advisor before investing in them.

The majority of Master Limited Partnerships engage in the transportation and storage of natural resources such as refined petroleum products and natural gas.

Thus MLPs typically enjoy toll-road business models. Thus:

- They do not take title to the commodities transported
- Are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities
- They do not have significant credit risk as commodity prices balloon.
- MLP’s receive a fixed fee for moving a product over a certain distance through their pipelines

Other qualities that enable these stable enterprises to keep increasing their dividends over time include:

-Long Useful Lives of their assets
-Fees are indexed to inflation, which provides an inflation hedge
-Most MLPs have a near monopoly in their area
-There is a high cost of entry and thus there is virtually no competition

There are different types risks to investing in MLPs as well, including Regulatory Risks, Interest Rate Risks and Liability Risks.

MLPs are subject to Regulatory Risks. Currently most partnerships enjoy a pass through taxation of their income to partners, which avoid double taxation of earnings. If the government were to change MLP business structure, unitholders will not be able to enjoy the high yields in the sector for long. In addition to that since the fees that MLP charge for transportation of oil and gas products through their pipelines are regulated by the governments, this could affect the revenue stream negatively.

MLPs also carry some interest rate risks. During increases in the interest rates by the FED in 1994, 1999 and 2004 the partnerships didn’t produce decent returns to shareholders. Because of the ability to grow their cash flow base, MLPs could relatively outperform in a rising interest rate environment.

Liability risk -Unitholders typically have no liability, similar to a corporation's shareholders. Creditors however have the right to seek the return of distributions made to unitholders if the liability in question arose before the distribution was paid. This liability stays attached to the unitholder even after he or she sells the units.

The benchmark for Master Limited Partnerships, the Alerian MLP Index, has enjoyed above average annual total returns of 11.90% from 1995 to 2008. Part of the strong performance could be attributed to the above average distribution yields that most MLPs enjoy, coupled with strong growth in distributions. Master limited partnerships generate predictable and growing cash flows, which are somewhat immune to commodities price volatility and overall economic conditions. Despite the fact that the Alerian MLP Index lost 36.90% in 2008, the index is virtually unchanged so far in 2009.

The five MLPs with highest weights in the index include:

Kinder Morgan Energy Partners (KMP) owns and operates natural gas, gasoline, and other petroleum product pipelines. Also operates coal and other dry-bulk materials terminals and provides CO2 for enhanced oil recovery projects. KMP has managed to increase annual distributions by 13.90% on average since 1993. The partnership’s units currently yield 9.10%. Check out my analysis of Kinder Morgan, which is one of my best high yield stocks to own in 2009.

Enterprise Products Partners (EPD) owns onshore and offshore natural gas, natural gas liquids, crude oil and petrochemical pipelines and associated facilities. EPD has managed to increase annual distributions by 9.60% on average since 1999. The partnership’s units currently yield 9.80%.

Plains All American Pipeline (PAA) owns crude oil and refined products pipelines and associated facilities, primarily in Texas, California, Oklahoma, Louisiana and the Canadian Provinces of Alberta and Saskatchewan. Also involved in the marketing and storage of liquefied petroleum gas. PAA has managed to increase annual distributions by 7.40% on average since 1999. The partnership’s units currently yield 9.30%.

Energy Transfer Partners (ETP) owns natural gas pipelines and associated facilities. ETP also markets propane to retail customers in 40 states. ETP has managed to increase annual distributions by 13.50% on average since 1998. The partnership’s units currently yield 9.90%.
Oneok Partners (OKS) owns natural gas pipelines, processing plants and associated facilities, mostly in the Mid-Continent region. OKS has managed to increase annual distributions by 4.70% on average since 1994. The partnership’s units currently yield 10.20%.

As usual these MLPs are just a starting point for research and should not be taken as recommendations. Because of their unique structure, consult with a tax professional before investing in them.

Full Disclosure: Long KMR




This post appeared on Edition #197 of Carnival of Personal Finance

Relevant Articles:

- Best High Yield Dividend Stocks for 2009
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- TEPPCO Partners (TPP) Dividend Analysis
- No Risk Stock Market Investing
- Edition #197 of Carnival of Personal Finance

Wednesday, January 21, 2009

Dividend Yields for major US indexes

When investing in index funds, Investors typically focus on the dividend yields on the indexes as a barometer for the whole market. With yields on major US indexes rising above the 10 year Treasury Notes for the first time in over 50 years, dividend stocks look more promising to investors seeking current investment income.

















One thing to note however is that not all stocks in major US indexes pay dividends. Only 368 out of 500 stocks in the S&P 500 pay dividends. The average yield on those is 3.73% , which is a full percentage point higher than the yield on the broad market benchmark. (source indexarb). Dow Industrials is the most “dividend friendly” index as 29 out of 30 of its components pay dividends. Furthermore most of the stocks in the Dow Industrials also have had a long history of stable dividend rates or consistent dividend raises. General Motors is the only stock in the Dow Jones that doesn't pay a dividend.

Nasdaq 100 is the tech heavy index which consists of only 31 dividend payers, out of 100 stocks in the index overall. Without the power of dividends, the once high flying index might take much longer to reach its 2000 highs versus the fifteen years that took Dow Industrials to reach its 1929 highs after the Great Depression.

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