My Favorite Dividend Paying Stocks

For those investors seeking large sustainable dividends, there is a high likelihood you would best be served investing out of the U.S. Though it is obvious, many companies will be forced to reduce or cut their dividends as one of the following two scenarios will inevitably play out.

• The most likely scenario in my opinion is that this will be the greatest depression (remember "The Great Depression" earned this title not because of the magnitude of economic contraction, but because of the duration). The media propaganda has obviously convinced the average person we are out or about to come out of the turbulence that was the last two years. Consumer spending has once again shot back up to an unsustainable level especially when you take into account how debt ridden many people are. If this truly is a recovery, I think it may have defied gravity as unemployment reached another new high yet that current mantra is being touted at a "jobless recovery". Can you say oxymoron? Getting back to my point, many high paying dividend stocks will necessarily be forced to cut their dividends as more uncertainty floods the market over the next year
• If we do somehow defy gravity and resume economic growth while unemployment continues to increase, The government WILL have to raise taxes in an attempt to dig their way out of the hole they have been digging for themselves over the last decade (referring to our record debt levels and record deficit spending). Marginal tax rates, both on personal and corporate will have to increase which has historically driven capital to those places that will provide the highest after tax return. As for corporations when deciding to engage in new projects, they always choose that which will ( or at least is projected) to produce the highest Internal Rate Of Return. This return will not be nearly as lucrative if say the same company was in a tax friendly country such as Singapore (which by the way now ranks higher in terms of “economic freedom”, which is not to be confused with “political freedom, the former meaning the ease of starting a business as well as the proportion of net operating profit being extremely high). The latest survey (yes it is only a survey) I read now has the U.S ranked 10^th in term of economic freedom as opposed to 1^st a couple of years back. In other words, the new formation of capital will become increasingly less likely to be allocated in the U.S. New capital investment will be drawn towards those places that reward an entrepreneur for his foresight (profit) as opposed to the U.S which will likely engage in a more severe progressive tax system or in simple terms, punishing productivity and innovation.

The point I’m trying to make it that should an investor be dividend oriented, one must look deeper into the true sustainability as well as the ability to grow dividends, which is easier said than done. Obviously there are several companies in the U.S that will be of the minority and reward investors for years to come, but it is worth noting that dividends and payout ratios currently seen are likely to evaporate in response to one, two or a combination of the aforementioned scenarios. I know there will be plenty to add, but I will give my favorite dividend paying stocks for the next decade (or at least try to mention a few).

If you want to invest in companies incorporated in the U.S, they will obviously need a very diverse revenue stream in the sense that the less income earned domestically will likely transfer to higher profits (after the foreign exchange conversion). I say this due to the fact I believe Inflation will become a huge problem sometime over the next 2-5+ years, therefore those who have a diverse revenue stream most certainly have currencies that both have and I believe will continue to appreciate against the dollar.

SEE: The USDX (dollar Index), which is only about 6% above it’s all time low set back in 2008 and only temporarily appreciated to the worldwide deleveraging. In my opinion this low will definitely be taken out and I think could be in the 30’s, 40’s, 50’s in a few years if the Fed decides to keep flooding the system with capital. Like Jim Rogers says “ Large increases in the money supply has always led to inflation” and I’m no one to argue with him. One personal favorite of mine and has been for a long time is Philip Morris (PM), as it already boasts a huge dividend and long term high single to double digit sales growth.

Had I written this a few months ago, the much smaller but still more than adequate 4.9% dividend yield, would have been nearly 7%. PM, which is spinoff of the old Altria, derives all their revenue internationally thus providing them with a much overlooked future in regards to net income growth when converted to U.S dollars. Many prefer the domestic counterpart as it yields 7%, but I believe higher tax rates or a sluggish inflationary economy is extremely detrimental to the real costs of such things as an increase in excise tax, corporate tax as well as their ability to pay down debt. Philip Morris Int’l on the other hand will hardly be affected by these things in addition to current debt held on their balance sheet being repatriated in depreciated dollars.

Another favorite Industry of mine in this regard are the Canadian Oil Trusts, which have been misunderstood by the market ( thus the beating their share prices took earlier this year). People think the dividends yields are unsustainable for companies such as Enerplus (ERF), Pennwest (PWE), PenGrowth (PGH) (which currently sport an 8%, 11.5%, 11.9% yield) as the tax-exempt status for these trusts runs out in 2011. But putting things into perspective, these companies have more than enough catalysts to negate the impact of taxation. Enerplus recently acquired assets in the Marcellus shale, Pengrowth is doing exactly what the name suggests and Pennwest has a growth oriented outlook, though to a lesser degree.

Not to mention the fact oil prices are destined to at least make it back to $100/barrel by 2011, if not higher. I believe it is also very possible to take out the old $150 high as early as 2012 as inflation rears its head combined with the fact peak oil has been reached. On one last note, these three companies (though there are several others) have already cut their dividend is response to the commodity collapse earlier in the year. These are companies that will insulate you from questionable dividend paying companies or at the very least are worth a look.

Disclosure: Long PenGrowth, Pennwest

Comments

[dcxman:]

I was with him until I realized that he thinks facts and opinions are synonymous. Peak oil is a theory and should be treated as such. No one knows how much oil is out there. The rest of his article has merit.oplol

Oct 06 08:52 AM

[MikeyLV:]

You know Pengrowth just slashed its dividend.

Oct 06 09:51 AM

[Manohar Men...:]

Peak oil will be there in future because 1) America is just a little % of the whole globe. Today China has been selling about a million cars/month or about 11-12 million cars which this year is more than US & so are other countries the autos are increasing.
2) New oil fields that are found are at deeper in the ground or oceans which means like TUPI in Brazil the cost to drill /day for a 450 million $ rig is 600,000/day & think of drilling about 20-30,000 ft depth in ocean with monster waves.
This all relates to higher cost to take out & more demand i.e. higher prices at the pump.

Oct 06 10:15 AM

[David Van K...:]

Immature and uninformed article. Missed a recently cut dividend in an article on dividend stocks for the next 10 years. Few facts to back up claims. One-word opinions masquerading as facts.

Dividend investing is not like writing a term paper. It requires real research, fact-based decisions, strategies, and the ability and discipline to execute those strategies. Articles like this are of no help.

Oct 06 11:01 AM

[El Jefe:]

Peak oil - bah humbug - We just don't want to upset the wildlife.

At 3.3 trillion tonnes, the oil shale deposits in the United States are easily the largest in the world. There are two major deposits: the eastern US deposits, in Devonian-Mississippian shales, cover 250,000 square miles (650,000 km2); the western US deposits of the Green River Formation in Colorado, Wyoming, and Utah, are among the richest oil shale deposits in the world. In Canada 19 deposits have been identified. The best-examined deposits are in Nova Scotia and New Brunswick.

Oct 06 12:02 PM

[Stock Gambler:]

Dividends for the next 10 years based on Smoking & Canadian Oil stocks. Will give you credit for "guts" (rhymes with "nuts") if not for facts.

Oct 06 02:22 PM

[casey00001:]

David Van Knapp:

You must have read a different article than I did? He clearly mentioned the divided cuts in the Canroy stocks. Nothing wrong with his writing style or the article itself. Much better than the usual drivel on S.A.


On Oct 06 11:01 AM David Van Knapp wrote:

> Immature and uninformed article. Missed a recently cut dividend in
> an article on dividend stocks for the next 10 years. Few facts to
> back up claims. One-word opinions masquerading as facts.
>
> Dividend investing is not like writing a term paper. It requires
> real research, fact-based decisions, strategies, and the ability
> and discipline to execute those strategies. Articles like this are
> of no help.

Oct 06 04:30 PM

[Hyperinflation:]

I mentioned the dividend cuts, but I think this will be a short lived story. These dividend stock picks have great underlying fundamentals, 3 of which I have mentioned in previous articles and gone into much more detail about their prospects and a justification for them. You also have to take into account the fact I meant these as long term equity picks to hold to avoid a debate about the short term fluctuations in the monthly dividend. Of course you have to believe oil is going higher, which I do not so much because of the peak oil debate but the fact countries around the world are debasing their currencies at a rate never seen before and the oil price will increase faster than inflation due to the crucial role expectations play.
On another note, the Canadian Dollar, which was trading at 1.10 to the USD before the crisis has bounced back substantially to .96-.97 or so. I think the CAD.USD will surpass the 1.1 ratio last year, thus making the oil trusts mentioned above even more lucrative as investors are repatriated in CAD. So depending my conservative estimate for 2010-2011 is 1.2-1.3 CAD.USD, or in other words they real value of the dividend received would be 20-30% higher than the yield shown on sites such as yahoo finance.

Oct 06 08:20 PM

[Hyperinflation:]

I hate to tell you this, but many things in the investment world are based upon opinion, deductive reasoning and Individual foresight. I see you wrote a couple of books. Do you warn against investing in financial stocks? In particular money center banks despite the fact the banking industry has historically boasted an above average yield with high payout ratios? I'm just curious because if you don't warn your readers about that, I find that not only of no use but detrimental to any investment philosophy. Fractional reserve banking made this current financial crisis inevitable at some point in time. (See: Henry Hazlitt's : From Bretton Woods To World Inflation , Murray Rothbard's: The Case Against The FED or The Mystery Of Banking)
Of course if you do inform your readers the dangers inherent in our banking system the kudos to you. Otherwise criticizing an article while at the same time publishing a book that doesn't inform your readers the dangers of that mentioned above is immature and reckless. By the way, SA changed the title to what it currently is, my point was to incorporate the macro-economic scenarios that will play out in your decisions if focusing on dividend investing.


On Oct 06 11:01 AM David Van Knapp wrote:

> Immature and uninformed article. Missed a recently cut dividend in
> an article on dividend stocks for the next 10 years. Few facts to
> back up claims. One-word opinions masquerading as facts.
>
> Dividend investing is not like writing a term paper. It requires
> real research, fact-based decisions, strategies, and the ability
> and discipline to execute those strategies. Articles like this are
> of no help.

Oct 06 09:35 PM

[bobbybutte:]

As a person who has made a living investing and has awrittena book and writes an investment newsletter.I do not believe the article is misleading at all

Having said that , there is more to an investment than the amount of thedividend that is paid

Growth safety and predictibility of earnings among others

More explanations about the selected stocks would be more advised but the concept of reinvested dividends are amongst the most powerful concepts in investing

Jeremey Siegel says 97% of the gain in the Dow since 1900 has been reinvested dividends

Oct 07 06:31 AM

[David Van K...:]

Hyperinflation,

My comment was too harsh, and I apologize for it. I did not see sufficient facts + reasoning in this article to explain why the stocks you were recommending were good 10-year investments. That did not justify my sarcasm, which I have criticized others for on this site. My bad.

Yes, in my e-book on dividend stocks, I repeatedly warn against the high and probably unsustainable dividends from many financial services companies. In fact, I warn against high and unsustainable dividends from any company. My view is that dividend investing is a long-term proposition; I don't expect there to be much churn in a dividend portfolio. Therefore, one must perform the best analysis possible to identify stocks likely to deliver sustainable and growing dividends over a long period of time. Very few (if any) bank stocks fit that bill, despite their previous long history of healthy and reliable dividends.

Oct 07 09:22 AM

[mbkelly75:]

The Canroy's dividends will flucuate up and down - it is kinda built into the system since they depend on energy prices. They are still good buys, in spite of that, as their percentages tend to be great ones, the prices go down with the dividend (re-investing the dividend can pay very well over the longer term) AND as a play against (or protection from) dollar weakness. Long-term - I believe energy prices will go up for a number of reasons so these are great buys right now for a long-term hold.

Oct 07 10:50 AM

[Manohar Men...:]

I own PVX & PEYUF along with ERF & PVX & PEYUF give about 12% dividends or 1% monthly. For PEYUF try PEY-UN.to as this is toronto stock. These are reits for gas & oil. They will also give me upside potential with price of oil as well as Canadian dollar will appreciate against US dollar.
so 12% + appreciation in oil + dollar gain in currency about 6% now.

Oct 07 01:54 PM

[metaforge:]

Another plus that should be mentioned: PGH gives a 5% discount to market price on reinvested distributions via it's DRIP program.

Oct 07 03:10 PM

[ArtfulDodger:]

David van:

You're a damn good man. That was an especially graceful apology, and it displayed qualities you rarely see today: manners and humility.

Thank you. I enjoyed that as much as any article I've read lately.

Bravo!


On Oct 07 09:22 AM David Van Knapp wrote:

> Hyperinflation,
>
> My comment was too harsh, and I apologize for it. I did not see sufficient
> facts + reasoning in this article to explain why the stocks you were
> recommending were good 10-year investments. That did not justify
> my sarcasm, which I have criticized others for on this site. My bad.
>
>
> Yes, in my e-book on dividend stocks, I repeatedly warn against the
> high and probably unsustainable dividends from many financial services
> companies. In fact, I warn against high and unsustainable dividends
> from any company. My view is that dividend investing is a long-term
> proposition; I don't expect there to be much churn in a dividend
> portfolio. Therefore, one must perform the best analysis possible
> to identify stocks likely to deliver sustainable and growing dividends
> over a long period of time. Very few (if any) bank stocks fit that
> bill, despite their previous long history of healthy and reliable
> dividends.

Oct 07 07:40 PM

[buoy:]

See...David does have his good points.

Oct 08 08:41 AM

[GotLife:]

Ahh David, come on admit it. Your book hasn't attracted the great looking women Hyperinflation has in his photo.

Good looks, women and dividends. Something to look forward to my man...

Oct 09 01:32 PM

[bobbybutte:]

It takes aBIG man to apologize

As a person who has built a powerful dividend machine remember picking the right stock is 50% art ( instinct) and 50% science ( numbers)

Oct 10 11:46 AM

[samadams:]

Good call on PM, it's growing overseas and already 2 dividend increases since being spun of from MO. However your mention of increased money supply leading to inflation is not the case if the money is being hoarded as it is now. For inflation to take hold it would have to be chasing a fixed basket of goods/services.
Just my 2 cents

Oct 13 02:17 PM

[Hyperinflation:]

Yeh I agree, Inflation won't rear its head until the velocity of money picks up. But the most recent consumer spending statistics shows a sharp spike, and accounted for a near record setting 71% of GDP.


On Oct 13 02:17 PM samadams wrote:

> Good call on PM, it's growing overseas and already 2 dividend increases
> since being spun of from MO. However your mention of increased
> money supply leading to inflation is not the case if the money is
> being hoarded as it is now. For inflation to take hold it would
> have to be chasing a fixed basket of goods/services.
> Just my 2 cents

Oct 18 08:41 PM