Double-Digit Dividends: Linn Energy, Dow Chemicals, 40|86 Strategic Income Fund

Mango trees will settle into a cropping pattern by the third year after planting and reach peak production in six to eight years. The tree is long-lived with some specimens known to be over 300 years old and still producing fruit. Dividend investing is similar to planting a mango tree. Things start very slowly at first. It appears as if all your efforts are in vain, but ever so surely, the process begins to produce fruit (dividends). Just as picking, fruit from a mango tree does not harm it; living off dividends does not damage the investment's ability to produce future results.

Here are several companies sharing the fruits of their labor with their shareholders via double-digit dividends:

1) Barron's: Linn Energy (LINE) 21% Yielding Dividend Is Safe

Linn Energy, LLC is an independent oil and gas company focused on the development and acquisition of long-lived properties in the United States.

LINE is an astute and disciplined hedger and, as such, was able to lock in favorable prices during this summer's energy-price bubble for its products going out three to four years. In fact, based on its third-quarter distribution of $0.63 per unit (or $2.52 annualized), the company is throwing off a current yield of more than 20%. In a recent report, Citigroup analyst Richard Roy wrote that this distribution level is "relatively secure" for at least the next two years or more, and the company appears to have done a nice job of protecting its distribution levels. Given its current knockdown unit price, Linn also seems poised to deliver some capital gains. You can read the Barron’s article here.

2) Dow Chemical (DOW): Yielding 11% after K-Dow Unravels

The Dow Chemical Company is a diversified chemical company that offers a range of chemical, plastic and agricultural products and services. The company is engaged in the manufacture and sale of chemicals, plastic materials, agricultural and other specialized products and services.

The pressure on DOW shares earlier last week was related to the termination of its multi-billion dollar K-Dow Petrochemicals joint venture. The funds that the deal would have provided to Dow were crucial to the Rohm & Haas (ROH) acquisition. Without access to that cash, Fitch Ratings has warned of possible future downgrades of its credit ratings on DOW and ROH.

DOW has publicly defended the $1.68 per share annual dividend payout, but with a major recession and an unstable merger deal, it might be difficult to maintain.

3) 40|86 Strategic Income Fund (CFD) Increases Dividend (12.75%)

40/86 Strategic Income Fund is a non-diversified, closed-end management investment company. The Fund’s primary objective is to seek high current income. The Fund invests primarily in high-yield bonds, debentures, notes, corporate loans, convertible debentures and other debt instruments rated below investment grade. The Fund’s investment advisor is 40 | 86 Advisors, Inc.

Three very different securities, one thing in common - no dividend cuts.

Disclosure: The author has no positions in the aforementioned securities.

Comments

[market ace:]

I get so sick of people touting these PTP's like LINN as paying high "dividends" when in fact they are losing money and have no profits from which to pay dividends. Any payments they make are therefor just a return of capital or from borrowings, so you are not making any money. Further the tax accounting for these entities is a nightmare and big investors and entities will not touch them so their chance of big gains is limited. You can have your LINN energy.

Jan 04 10:19 AM

[Greg Pinelli:]

Couldn't be MORE incorrect. LINE and many of the other oil/gas equities (LGCY..EPD) all have more than enough cash flows to cover the distributions AND make additional acquisitions. LINE never.as in NOT ever...borrows to pay distributions. It has all of 2009 covered by hedging its production at MUCH higher prices than current spot.
You don't like LINN or LGCY..great..I'll take the 20% and the concurrent run up in share price and the 12 years of proven, readily available reserves and you can take..oh yeah..you NEVER said.

On Jan 04 10:19 AM market ace wrote:

> I get so sick of people touting these PTP's like LINN as paying
> high "dividends" when in fact they are losing money and have no profits
> from which to pay dividends. Any payments they make are therefor
> just a return of capital or from borrowings, so you are not making
> any money. Further the tax accounting for these entities is a nightmare
> and big investors and entities will not touch them so their chance
> of big gains is limited. You can have your LINN energy.

Jan 04 04:23 PM

[NOWHEREMAN:]

Typical GP response, instead of lucid explanation, its wacka mole time.

Market Ace: when you look at the 10k s of these structures, you will find there is a big difference between operating earnings and the amount paid from these earnings than what is shown in the quotes on Yahoo Finance, MSN Money and MarketWatches' Big Charts.

All of them have negative earnings, MSN does give you an Expected forward PE for LINE...8.8.

You will get similar readings down the line. It is an accounting nightmare, but TurboTax should be able to help you out.

Jan 04 04:59 PM

[Duke Wong:]

Barron have been bootted Line in last couple days with the same story. Line has debt=1.7B. Estimate Sale growth decrease by 13% in 2009. Stock goes up almost $4.00 in last few days, Friday close at $15.60.

Stay away to protect your capital or buy put to make a better money than dividend.

Jan 04 07:59 PM

[NOWHEREMAN:]

Hey P: You pump cde which I also like. NXG has a PE of 9.0, CDE has a PE of 30.67

Jan 05 01:24 AM

[amzman:]

You're an idiot and obviously have no clue about hedging and how huge this is for LINE over the next 3-4 years. How do you think Southwest Airlines did so well the past few years? I'll answer it for you as you're clueless... "It was hedging the price of oil, which gave them a HUGE competitive advantage over all other airlines which allowed them to take over HUGE amounts of market share from the traditional airlines"

On Jan 04 10:19 AM market ace wrote:

> I get so sick of people touting these PTP's like LINN as paying high
> "dividends" when in fact they are losing money and have no profits
> from which to pay dividends. Any payments they make are therefor
> just a return of capital or from borrowings, so you are not making
> any money. Further the tax accounting for these entities is a nightmare
> and big investors and entities will not touch them so their chance
> of big gains is limited. You can have your LINN energy.

Jan 30 08:05 PM