By Siraj Sarwar
Retirees have several options outside of bonds, if they are investing for income. In fact, given the low interest rates, high-dividend stocks offer much higher returns than government bonds. While investing in stocks generally entails more risk than bonds, investors can better position themselves by carefully picking companies with strong fundamentals.
High dividend stocks should have solid cash flows to support the dividends. The capital appreciation in these stocks can be less, but income-oriented investors should benefit from stable cash flows. These sorts of stocks also tend to reduce the volatility of a portfolio. Their dividends provide a hedge against market downturns. Therefore, dividend stocks are valuable assets in one's portfolio, particularly when the markets turn bearish.
In this article, I pick three companies with solid dividends. Over the years, these companies have been returning substantial value to shareholders. They have displayed solid financial performance and distributed a substantial portion of their cash flows to the shareholders. They also have the potential to raise dividends in future. These stocks are BreitBurn Energy Partners (NASDAQ:BBEP), ConocoPhillips (NYSE:COP), and Main Street Capital Corporation (NYSE:MAIN).
BreitBurn Energy Partners is an independent oil and gas partnership. BreitBurn is concentrating primarily on the exploitation, acquisition, and development of oil and gas properties in the U .S. Recently, the partnership announced a quarterly dividend of 47 cents/share, yielding at 9.48%. The company has a history of consistently increasing dividends. Some Master Limited Partnerships [MLPs] had financial problems last year, because the price of Natural Gas Liquids [NGL] has recently been unusually low. However, the partnership has a very small exposure to NGL, which makes it even more attractive for income-seekers.
The company has been showing a sustained solid financial performance over the years. At the end of Q3, the company generated record adjusted EBITDA of $90.1 million. The partnership's adjusted EBITDA showed an increase of 34% over the previous quarter and a 70% increase over the previous year quarter.
Furthermore, the partnership has been benefiting by its acquisitions. At the end of Q3, the partnership's total production stands at 2,166 Million Barrels of Oil Equivalent [MBOE] compared to 1,953 MBOE by the end of Q2. Moreover, the company displayed a significant improvement in the Oil and NGL segment mainly due to its aggressive acquisitions. The partnership's natural gas production stands at 7,161 Million Cubic Feet [MMCF] compared to 6,824 MMCF in the earlier quarter.
Cash flows of the company remain in a strong condition. By the end of 2011, BreitBurn produced $129 million in cash flows from operations. However, in the trailing twelve months, cash flows from operations have risen to $166 million. The company's capital expenditures have been significantly high for the previous two years. Therefore, free cash flows were negative at $288 million in 2011 and a negative $509 million during the previous twelve months.
With a price-to-book ratio of 1.0, the partnership seems like a safe pick for dividend seeking investors. Currently, BreitBurn is focusing more on acquisitions in order to increase production. The partnership is making massive capital expenditures to attain the required level of growth. I am expecting a hefty raise in the company's distributions as BreitBurn completes its expansion program.
ConocoPhillips works as an integrated energy corporation. ConocoPhillips' businesses are organized into Exploration and Production, Refining and Marketing and Midstream Businesses segments.
Over the years, ConocoPhillips has been providing substantial returns to shareholders. Recently, the company announced a quarterly dividend of 66 cents/share, yielding at 4.63%. The company has not been increasing dividends over the previous two years because it is seriously engaged in assets acquisitions and dispositions. Nonetheless, the company offers one of the best annual dividends of $2.64 per/share.
On the other hand, the company has been showing phenomenal growth in both revenue and earnings. Since 2009, the company increased its revenue by nearly $100 billion to $247 billion by the end of 2011. Recently, ConocoPhillips announced full year earnings of $8.4 billion. The company had a difficult year, and earnings were short by $4 billion. However, the company still achieved its production targets and continues to successfully execute drilling programs and growth projects.
Over the past decade, ConocoPhillips has sought to expand its size. Therefore, the company made considerable acquisitions to increase its production and reserves. The expansion plan worked for the company. However, the fall in commodity prices created some challenges. The depressed economy damaged the expansion plan to some extent. Therefore, the company needs to stop making more acquisitions and start focusing on growth instead.
Moreover, the company made significant progress on its asset disposition program. Recently, it announced an agreement to sell Cedar Creek Anticline Properties for $1.05 billion. In addition, the company's business plans focus on organic growth and the strength of its resource base.
At the end of Q4, ConocoPhillips improved its production from continuing operations and made a strong organic reserves replacement. The company attained significant growth and is ready to return value to the shareholders. The company is well-positioned for hefty raises in dividends. ConocoPhillips is a safe stock for income portfolios.
Main Street Capital Corporation is a principal investment firm that provides equity capital and long-term debt to lower middle market companies. Main Street also offers debt capital to middle market companies.
Currently, the company pays a monthly dividend of 15 cents/share. In addition to the monthly dividend, the company announced a special dividend of 35 cents/share. For the first quarter of 2013, the shareholders will receive a dividend of 45 cents/share and a special dividend of 35 cents/share.
The company has displayed strong growth in revenue and profits. Since 2009, the company has increased its revenue from $16 million to $84 million in the last twelve months. Recently, Main Street documented a Q3 distributable investment income of 51 cents per share, demonstrating a year-over-year increase of 11% and 34% over the previous year's quarter. Total distributable investment income for the corporation was elevated by 48% from the same quarter last year.
Presently, the stock is trading at attractive multiples. Over the year, the company returned substantial value on price to the shareholders. The company returned 37.82% to investors in the last year alone. On a P/S basis, the stock is trading at 10.6 and carries a dividend yield of 6.51%. Main Street has strong fundamentals and the company's valuation seems justified.
The stock's performance has pushed the yield down from previous levels despite the dividend exhibiting solid growth over the years. Nonetheless, Main Street offers one of the best yields in the industry. Main Street looks like a stable monthly dividend stock to include to an income portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.