Stocks to Help You Avoid the 7 Deadly Sins of Income Investors 25 comments
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<< Part 1: Seven Deadly Sins of Income Investors
Here I'll briefly review the stocks that help you avoid the Seven Deadly Sins of Income Investors.
What Makes a High Yield Stock USD Inflation Resistant?
In short, we’re seeking stocks of strong companies that have:
- Strong earnings (or in certain cases funds from operations) that can sustain the dividends
- High dividend yields
- Earn and distribute a high dividend in a non-USD currency and /or has a dominant position in a market for an essential product or service that allows it to pass on US dollar price increases to its customers
Review of the Best Stocks Covered Thus Far
Perhaps the one distinct upside of a world-wide stock market collapse is that prices get so beaten down that the previously modest yields of many blue chip companies suddenly become high, as scared investors demand a higher risk premium. For the best of these, their price declines are not due to deteriorating fundamentals, but mostly due to hedge and mutual funds dumping shares to meet redemption and/or other requirements. The below list is not comprehensive, merely the stocks which I’ve found thus far. Suggestions for additional combination high dividend and U.S. dollar hedge stocks are welcomed.
ALL AMOUNTS QUOTED ARE IN U.S. DOLLARS (USD) UNLESS OTHERWISE NOTED. ALL STOCK SYMBOLS ARE NEW YORK STOCK EXCHANGE UNLESS OTHERWISE NOTED.
A. International
Because one of our criteria is that the stock price and distribution must be pegged to a non-USD currency, no surprise that most of the best USD hedge high yield stocks are based outside of the U.S.
1. Energy
The return of high oil and gas prices is a matter of when, not if. Some of the best income plays are in energy, and the stock prices and dividends of many have been beaten down along with oil and gas prices.
Big Integrated Oil: Yes, definite risk of further price and even dividend cuts while oil prices remain low. At the below recommended buy prices, most of that risk is priced in, and far outweighed by the rewards when energy prices resume their long term uptrends.
· BP, plc (BP): Unique as the only big integrated oil with a large, reasonably safe (barring further deterioration of energy prices). Yield is among the highest of the big oils.
· CNOOC Ltd. (CEO): A subsidiary of China National Offshore Oil Company, CNOOC is a unique triple combination play on income, China and energy, so I’ll accept the lower dividend. The dividend is only around 5%, and even then only when price is around 87. Volatile price can move very fast either way along with oil prices, and its yield is lower than we normally accept, so don’t chase this one much above $85. However, likely fast appreciation when oil prices recover makes this stock worthwhile as a combined income / growth play.
· Eni SpA (E): This Italian integrated oil can profit on both production (upstream) and the refining, marketing, and distribution (downstream) side. Expects to grow output around 3% per year, debt manageable.
2. Communications
Cellcom Israel Ltd. (CEL): Operating income up, profits up, dividends up, free cash and domestic demand steady despite weakening Israeli economy. Benefiting from growing sales of more advanced phones, which offer more services and revenue opportunities.
France Telecom (FTE): Expanding into South American Internet market, payout ratio about 90%
Telefonica (TEF): Expanding into Czechoslovakia, still able to get credit as sign of financial strength
3. Utilities
Veolia Environmental SA (VE): It operates in four segments: Water, Environmental Services, Energy Services, and Transportation.
This French firm is unique because it’s the only serious dividend in the high potential growth international water sector. A dominant player in a hot sector, price beaten down with the market transforms its formerly modest yield into a generous one. Struggling with earnings growth like many companies in this environment, it’s a good long term play.
One of the largest integrated water infrastructure companies in the world, with solid financials, it is a prime beneficiary of the increasing investment in water world-wide, including the U.S. Based in France, it earns all over the world. VE provides solutions to every water infrastructure issue, from supply to conservation to wastewater processing and recycling. Steadily rising but modest dividend, combined with a stock price that has fallen harder than the overall market, (from around 90 to about 20), has transformed this formerly modest yield into a generous one close to 10%, based on last May’s 1.89 dividend (it only distributes once a year) though Yahoo! Finance for some reason has it set at about 15%.
ENEL-SOCIETA PER AZI (ENLAY.PK): An Italian utility with interests in Spain as well, Enel Spa is the short name for Ente Nazionale per l’energia Elettrica - Societa Per Azioni. Price has dropped over 50% over the past year, due mostly to euro weakness, debt used to buy the huge Spanish utility Edsa (OTC: ELEZF), and a dividend heavily cut. Thinly traded on the OTC market. Profits for 2008 were up 45%, debt is declining, and the firm as stated it will maintain its dividend in 2009.
B. Canada
Due to the abundance of stocks with solid fundamentals, low tax structures, and their CAD denominated prices and very high yields I give “my Canadians” their own category. The CAD is a prime commodity based currency backed by one of the healthier banking systems. In addition to their share prices being down with the overall market, these carry an extra discount due to the CAD’s recent decline against the USD. They have not expanded money supply as much as the US, and the ultimate recovery in energy will be very bullish for the CAD. Prices quoted are in USD.
1. Energy Income Trusts
All will continue to suffer price and dividend declines along with energy prices, but will soar when they recover, even with the higher taxes from 2011 onward. These are priced so low, (many at the assumption of oil at much lower prices) that the risk is worth the reward. Yields are so high that investors already appear to have priced in further substantial dividend cuts that will still leave us with yields over 9%. Take only partial positions until energy prices appear to have stabilized, but be ready to load up on these as the market begins to show interest.
Claymore/SWM Canadian Energy Income Fund (ENY): For those that want to buy a basket that attempts to mimic this sector. Unfortunately, many good assets are not widely traded enough for this fund, which is why I prefer to cherry pick individual stocks.
- Enerplus Resources Fund (ERF)
- Peyto Energy Trust (PEYUF.PK)
- Provident Energy Trust (PVX)
- Vermillion Energy Trust (VETMF.PK)
2. Clean Energy Income Trusts
- Atlantic Power Corporation (ATPWF.PK),
- Energy Savings Income Fund (ESIUF.PK)
- Innergex Power Income Fund (INRGF.PK)
- Macquarie Power & Infrastructure (MCQPF.PK)
- Great Lakes Hydro Income Fund (GLHIF.PK)
3. Energy Infrastructure Income Trusts
- Altagas Income Trust (ATGFF.PK)
- InterPipeline (IPPLF.PK)
- Keyera Facilities (KEYUF.PK)
- Pembina Pipeline Fund (PMBIF.PK)
To Be Covered in Upcoming Articles
1. Utility Income Trusts:
- Bell Aliant (BLIAF.PK)
2. Healthcare
- CML Healthcare Inc. Fund (CMHIF.PK)
3. Real Estate Income Trusts
- Canadian Apartment Properties REIT (CDPYF.PK)
- Northern Property REIT (NPRUF.PK)
- RIOCAN REIT: (RIOCF.PK)
4. Business Trusts
- Yellow Pages Income Fund (YLWPF.PK)
C. United States
The second tier consists of U.S. based companies that lack the USD hedge in currency but have strong enough businesses dominating vital commodities or services that should allow pricing power to insulate investors against a declining dollar. It’s also worth repeating that while the dollar is in trouble, it’s hardly assured that it will do worse than most others or that it will lose its primacy.
1. Communications
Yes, communications companies depend on credit markets for their substantial capital spending needed for growth, and thus are sensitive to tight credit. However, the dominant players provide critical services and will have the pricing power to prosper in the long run. Below are two pairs of telecoms that represent two valid ways to play this vital industry for income. Will discuss in detail in coming articles.
Two Giant Telecoms: The more conservative approach, with solid dividends rarely seen so high for such blue chip firms.
Two Rural Telecoms: The higher dividend approach, with solid fundamentals to sustain and grow these dividends. Some of the safest 12% plus dividends, plus potential for substantial capital gains as the current fear and risk premium subsides and bids up the share prices.
2. Energy Infrastructure MLPs
To be covered in greater detail in later articles.
All the below offer yields around 9%, which are backed by prospering businesses with reliable cash flows. Their unit prices fluctuate with the market and hence are bargains because while their stock prices have declined with the market, their revenues and yields have held steady.
Also, as noted in my earlier articles, Energy Infrastructure MLPs: Among the Very Best High Dividend Stocks and Top 10 Energy Stocks..., many investors have wrongly believed that revenues of these energy distribution and storage companies are directly tied to energy prices. In fact most revenues come from simple volume moved or stored. Thus shares have been unfairly dragged down both by market sentiment and declining energy prices.
- Buckeye Partners (BPL): Raised dividend 6% over the past year.
- Enterprise Products Partners (EPD): Raised dividend 6% over the past year.
- Energy Transfer Partners (ETP)
- Kinder Morgan Energy Partners (KMP): Raised dividend 14% over the past year.
- Linn Energy Partners (LINE): Linn posted an adjusted fourth-quarter loss from continuing operations of $435,000, or break-even per share, below the average analyst estimate of earnings of 32 cents a share, as it was hit by a wildfire in its Brea Olinda Field in California and weak production in the Mid-Continent. However, the company said production is 100 percent hedged for 2009, 2010 and 2011, and its shares rose 10.7 percent. Linn halved its 2009 capital expenditure budgets, joining a long list of exploration and production companies to do so as the sector has been hit hard by the drastic fall in oil and gas prices and the credit crunch.
- Magellan Midstream Partners (MMP): Raised dividend 8% over the past year.
- Nustar Energy (NS): Raised dividend 7.4% over the past year.
- ONEOK Partners (OKS): Raised dividend 5.3% over the past year.For 2009, projecting lower net income between $3.15 and $3.75 for ONEOK Partners about 25 percent less than 2008. http://newsok.com/oklahoma-energy-briefs...
- Sunoco Logistics Partners (SXL)
- TEPPCO Partners (TPP)
- Tortoise Energy Infrastructure Partners (TYG) Actually a fund of MLPs.
3. Coal MLPs
In addition to a depressed overall market and energy prices, coal is not an especially clean fuel source and President Obama specifically warned utilities not to build new coal fired plants. Nonetheless, coal demand is not fading anytime soon, and is more likely to grow due to lack of alternatives and improved environmental technologies, even under the current economic climate. Coal prices and the below stocks will soar as energy recovers, or if events in the Middle East or elsewhere make energy imports more problematic.
- Alliance Resource Partners (ARLP)
- Northern Resource Partners (NRP)
- Penn Virginia Resources Partners (PVR)
4. Other Sector MLP
- Terra Nitrogen Company, L.P. (TNH): A rare income play on the long term growth in fertilizer demand. Because it only trades a bit over 100,000 shares per day, its price can be very volatile, so don’t chase it much over $100/share in this market. Like any low volume stock, it’s a good stock to leave a low priced order in that can get hit when a few big shareholders need to sell.
- StoneMor Partners (STON): A rare income play on cemeteries.
5. Utilities
All of the below are classic cases of blue chip companies with formerly modest blue chip style dividends beaten down mostly due to wholesale selling across the markets. While they remain at 10 year lows, their dividends, while not huge, have become serious. While major economic downturns will slow down their growth rates, things need to get very bad before their dividends get cut. Buy only when market is down and yields are over 6%.
Upcoming articles will examine individual categories and stocks in greater detail.
Disclosure: I have positions in most of the above-mentioned investments.
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This article has 25 comments:
1. China is bulking up on copper.
2. FCX profits from limited & depleting resources.
3. Copper & foreign currency reserves hedge against latent inflation
4. Pays a 10.2% dividend, which just gets better if copper demand drops.
On Apr 29 12:29 PM yblarrr wrote:
> AAV no longer pays dividends!
The 3 and 5-year dividend growth rate for PGN is less than 2%. Can't even keep up with inflation at those rates - let alone after-tax. I'm a bit puzzled since Cliff mentioned this specific topic earlier. I agree they'll work hard to maintain current dividend amount, but, if it's not growing you are falling behind.
On Apr 29 12:48 PM 31October wrote:
> Try FCX.PR.M:
> 1. China is bulking up on copper.
> 2. FCX profits from limited & depleting resources.
> 3. Copper & foreign currency reserves hedge against latent inflation
>
> 4. Pays a 10.2% dividend, which just gets better if copper demand
> drops.
On Apr 30 12:02 AM Troyone wrote:
> Uh, dude. FCX suspended their div in the fall. You might wanna
> do some more homework.
Great article. Great companies. Excellent advice.
But because I don't have the sense to understand charts, I can't follow that part of your advice.
Well-written and well-laid out. Thank you for your work.
Perhaps I should have repeated that. What 'homework' did I neglect? Curious to know. Thanks for your comments, Cliff
On Apr 30 10:01 AM Living4Dividends wrote:
> Cliff - excellent article, well-written. You certainly picked a list
> of high dividend yielders. As others have pointed out, some have
> already cut their dividends. That's the problem with using stock
> screeners: A company announces a dividend cut, but the yahoo still
> displays the old dividend rate. A little more homework would have
> been in order.
>
On Apr 30 10:55 AM jarco wrote:
> If 5 - 6% dividend income is accaptable with slight cap gains which
> should keep up with inflation, its had to beat the utilities. I'd
> advise steerin away from most of the other sectors unless you're
> able to closely track the market.
You are right. Investors should avoid power companies until we find out what the leftists in power are going to do to them.
Great companies could be destroyed by Obamsa-Pelosi-Reid legislation to pacify the fanatical eco-maniacs who control much of the Devilrat Party.
Thus, the only thing to do is wait and see.
On Apr 30 12:52 PM realold wrote:
> Problem seems to be that utilities will be crushed by cap and trade
> being forced upon us by the Obamanation crowd. You cannot depend
> on these dividends as the companies cannot pass the added costs (50%?)
> on to customers as quickly as energy producers. All should suffer
> as Congress drives us off a cliff.
If I am investing with a roth IRA account is a lower dividend acceptable? If so, how low?
If I am investing with a Roth IRA account is a lower dividend acceptable? If so, how low?
On Apr 30 09:47 AM earljr wrote:
> What is the deal with PMBIF this morning? They canceled the conference
> call. Stock took a small dive. Looks like they are borrowing a
> bunch of money, but they are getting it at 6% which is a very good
> sign of their stability I would think.
The best to your investing!
On May 01 11:11 AM tmorris007 wrote:
> Cliff, thanks for a timely and comprehensive recap! Your writings
> are spot on for a recently retired, income seeker like myself. This
> summary puts perspective on your combined posts for the past several
> months. I will be recommending it to my many friends with whom I
> have discussed your writings. Most have shown a keen interest in
> your approach but have lacked a one-stop shopping spot for your thoughts.
> This provides it! Please keep your thoughts coming, they are making
> a difference in many investor's lives.
On Apr 30 11:42 AM Cliff Wachtel wrote:
> Perhaps I should have repeated that. What 'homework' did I neglect?
> Curious to know. Thanks for your comments, Cliff
Crescent Point Energy Trust
(Public, TSE:CPG.UN)
Their yield is about 9%
On May 01 11:21 AM andypandy wrote:
> Cliff:
>
> If I am investing with a roth IRA account is a lower dividend acceptable?
> If so, how low?