Wednesday, September 7, 2011

Two High Yield Dividend Growth Stocks I am buying

When it comes to dividend investing, many investors tend to be either yield chasers or pure dividend growth investors. The real world however is not black and white. As a result, a more nuanced strategy where at least some minimum yield is requested before one purchases a stock that regularly raises distributions should deliver solid income over the long term.

I follow a similar strategy in my income portfolio. I purchase stocks with rising distributions which can afford to pay the dividend but I also have a minimum yield requirement of 2.50%. I tend to be skeptical over stocks which have high current yields, unless my individual company analysis proves otherwise. My analysis of the two income plays listed below has identified them as companies with sound business models. The recent downturn in the stock market has made the following dividend growth stocks with high yields attractive at the moment:

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 company generates most of its revenues from outside the US, where the legislation is not as draconian. The company will be able to increase earnings by generating cost efficiencies in its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably. Last but not least, tapping into the growth of emerging markets such as China and India, where it has a low presence could provide another opportunity for future growth. The company has raised distributions in every year since the spin-off from Altria Group (MO) in 2008. Phillip Morris International will be able to keep increasing dividends at the high single digit percentage points in the foreseeable future, while yielding 3.70% today. (analysis)

Kinder Morgan, Inc. (KMI) owns and operates energy infrastructure in the United States and Canada. Kinder Morgan owns the general partner and limited partner units in Kinder Morgan Partners (KMP). KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market. Another valuable asset behind KMI is the Incentive distribution rights behind the general partner, which entitles it to 50% of the distributions above certain thresholds. This is why any growth in KMP distributions would really accelerate growth in KMI dividends. KMI is set up as a corporation, which is why investors should receive a form 1099- DIV at the end of the year and have their dividends taxed at no more than 15%. The company will likely raise distributions at the low double digits for a few years, and currently yields 4.60% (analysis)

Owning these two high income dividend growth stocks makes sense for investors looking for high yield and a rising income stream. Investors should however always understand the risks behind each investments they purchase and try to spread it by obtaining allocation to different sectors in their diversified dividend portfolios.

Full Disclosure: Long PM, MO, KMI

Relevant Articles:


  1. Shouldn't dividend growth investors be interested in beating inflation? Granted there is no shortage of high quality companies that have respectable histories of paying increasing dividends, but if the yield isn't at least 3% if not 4% or more, isn't the investor not even keeping pace with inflation? I can earn 1.1% risk free in an internet savings account. I can easily double that risk free by laddering CDs of varying terms. If we're taking on the risk of playing in the open market, is it reasonable to expect returns in the 4 - 8% range? Is that foolish or greedy?

  2. An investor doesn't need a high yielding stock to match inflation. Investors should not be forgetting about total returns as well.

    Companies that currently yield 2% for example are more likely to increase dividends by double-digit percentage increases. Thus, the increase in dividend income will be higher than the rate of inflation.

    In addition, companies which increase dividends at a double-digit rate of increase are also very likely to be increasing earnings as well. Rising earnings makes businesses more valuable, which leads to increases in stock prices over time. This protects purchasing power of principal.

    Investors can reasonably expect to earn 10% in the stock market for the long run. It is amusing to see how investors are discarding stocks as an investment vehicle after only 10 years of poor returns, right when stocks are at their cheapest valuations in many years.

    The same investors were overly cheerful about stocks in 2000, when stocks were trading at their highest valuations ever.

    As a dividend investor, you should avoid chasing yield and looking only at yield as your main yardstick. A reasonable yield, coupled with a solid business that manages to increase EPS over time will deliver good dividend growth and decent total returns over time.

  3. What is the difference in holding KMI vs KMP?
    This is like holding SE vs SEP. As far as I know pretty much the same companies, but I am not entirely sure what the differences are?!?

  4. hold kmp long and sell covered call options as extra income.

    avoid the x div date when selling the covered calls

    nice div 4 times and several
    times a yr get covered call income as a nice bonus.


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