4 Dividend Stocks for 2009: Q2 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, you can’t go back and change them. Check out my original post for the rationale behind my picks.

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.

1. 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.
2. 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.
   
3. 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.
4. 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 (S&P 500: +3.16%):

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%

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 your mouth is.

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.

Full Disclosure: Long PM,O, ED and KMP

Comments

[nathanredondo:]

KMP I might agree with, but I wouldn't touch anything with commercial real estate with a 38 and a half foot pole right now- particularly for a puny 7% dividend.

Even at 21/share, ERF is still paying 15 cents every MONTH. Most Can Roys follow a similar model. CPL (Brazilian utility) is another good one, with a ~3.00 dividend and rising- though I'd wait for the price to drop a little. Also recommend Aberdeen International (.035 per month dividend) if prices go back down below 5.25 per share. Bought in at 4.20 and thought it was a steal!

Jul 02 12:07 PM

[Four Pillars:]

<i>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.</i>

I don't know about sustainable but clearly 6 months is long enough to determine stock picking skill level (given that I'm in first place). :)

Jul 02 12:41 PM

[bolt turner:]

if you have 30 stocks in your portfolio you already rich - you just need to keep your money

if you got less than 25k in the market you cant spread out like that - you have to be ready to lock in some gains and rotate and then spread out

Jul 03 12:26 AM

[donzelion:]

While I concur with the dividend strategy, I'm thinking entry points matter tremendously for the overall success of the strategy. Certain dividend paying sectors are likely to have a bad year or two, but could maintain healthy fundamentals that suggest a turnaround at some point in the future.

I generally like your list, but would suggest adding Intel (not much of a dividend grower, but a stable dividend payer with a massive moat, and your list seems under-diversified in tech).

Jul 03 05:23 AM

[David Van K...:]

What kind of a contest is it that doesn't include dividend returns in the total returns for scoring? Entering dividend stocks in a short-term price-only contest is never going to win. Dividend strategies take years to play out. This makes no more sense than judging baseball players on the results of Home Run Derby, or NBA players on the results of the dunking contest.

Jul 03 08:27 AM

[Dividend Gr...:]

Not necessarily. I hold about 38 stocks in my portfolio and I wouldn't call myself rich. If you have a $25,000 portfolio you can easily get several free trades/month at places like Zecco.

While it sounds easier to be risky with $10,000 than with $100,000, since I am in the early stages of the accumulation game I don't want to lose it all by reckless concentration in 10-15 stocks.

On Jul 03 12:26 AM bolt turner wrote:

> if you have 30 stocks in your portfolio you already rich - you just
> need to keep your money
>
> if you got less than 25k in the market you cant spread out like that
> - you have to be ready to lock in some gains and rotate and then
> spread out

Jul 03 01:11 PM

[Dividend Gr...:]

The contest is purely educational Dave. I would most certainly have the four stocks picked next year as well if we decided to hold the competition again.

The competition has shown some interesting results however which confirm my earlier research- during a bear market dividend stocks fall less than the market or other riskier stocks. The dividend gives some support and investors are less likely to sell.
When markets hit a bottom, the riskiest stocks shoot up to the moon mainly due to short covering. Dividend stocks trail in the initial stages of the rally, but after it is exhausted the next round of bullish support for the markets come from the quality companies. I think that now is still a good time to initiate positions in the four stocks above.

Last but not least, the list shows a benchmark for investors to check if I am worth following or not. While dividend investing is a long term process, there usually are minor setbacks which could result to investors panicking and selling out at the worst possible moment. A quarterly review of investment performance is helpful in that it lets you write down your strategy and keep sticking to it through good and bad periods.




On Jul 03 08:27 AM David Van Knapp wrote:

> What kind of a contest is it that doesn't include dividend returns
> in the total returns for scoring? Entering dividend stocks in a short-term
> price-only contest is never going to win. Dividend strategies take
> years to play out. This makes no more sense than judging baseball
> players on the results of Home Run Derby, or NBA players on the results
> of the dunking contest.

Jul 03 01:19 PM

[indefinitelee:]

why do you prefer PM to MO?

Jul 03 01:28 PM

[Lightway:]

I applaud DGI for his transparency with his picks.

You have to keep in mind the time frame of this contest. If it started at the end of 2008, the stock market has appreciated like crazy over that time until now. An income oriented portfolio SHOULD have been the one to make the least amount of capital gains (by percentage) during a run like this. David is correct, dividend strategy in a stock picking contest will never win. But this contest does have a tremendous educational value, as it shows not only time frame, but market conditions as well.

Dividend stocks by nature don't fluctuate as much as non-dividend payers. This is a good thing for an income investing oriented portfolio, as you want to capital preservation and increasing income over time. A dividend portfolio is much less volatile, and guarantees returns though dividend payments, which generate wealth and compound.

A capital appreciation only portfolio has the chance to skyrocket, but it also has the chance to fall off a cliff when things go bad. Look at any emerging markets or international equity fund over the past 10 years. When things are going well, these take off and you make a killing. But when they tank, they tank big time. Swings of 60% or more are common.

Was there a May 2008-November 2008 contest? It would be interesting to see the results of that one.

Jul 03 04:25 PM

[Lightway:]

Check out Eddy's article here, there is a great graph which shows the curve of dividend returns over a 20 year time frame, and compares it with the fluctuation of stock prices:

seekingalpha.com/artic...

Jul 03 04:30 PM