The last week of 2011 has arrived. I firmly believe in building a dividend portfolio with over achievers. This requires pruning stocks that are under performing their dividend stock peers. I recommend, for 2012, dividend investors avoid the following 3 stocks and consider buying the following 4 stocks.
Avoid General Electric (GE)
Times have changed, and General Electric investors need to determine if the stock fits within their dividend portfolios. I argue the stock has failed for 15 years to deliver acceptable returns. General Electric shareholders have not achieved the returns of the Standard and Poor's 500 Index (NYSEARCA:SPY). The past 3 years indicate an under performance of 7.3% per year.
December 13th Investor Presentation
General Electric's business model, per its recent investor presentation, highlights (pdf) the lack of accountability. The company lacks a sense of direction. The company, annually, is spinning off business units and buying the hottest sector of the year business unit.
The Energy Infrastructure and Transportation segments did well, but the wind turbine profits were met with soft pricing power. The global economy should put pressure on commercial and military engines. The European markets are likely to place pressure on the company's healthcare offerings.
$140 Billion Bailout
The company has 70% of its capital structure backed by debt. This, in part, is why General Electric needed a $140 billion bailout 3 years ago. Triple A rated companies do not require a financial bailout the size of their market cap.
The company is still relying upon GE Capital as a primary source of profits. Since the $140 billion bailout, investors need to be concerned about oversight on credit risk exposure.
I recommend investors avoid General Electric. Focus upon a company with a balance sheet rich with cash and lacking in debt.
Avoid Kinder Morgan Energy Partners LP (KMP)
Kinder Morgan Energy Partners LP is one of the largest publicly traded pipeline master limited partnerships in the U.S. The partnership operates or owns approximately 37,000 miles of pipelines and approximately 180 terminals. These assets transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products. The terminals store petroleum products and chemicals.
Due to Kinder Morgan owning General Partner Incentive Distribution Rights, the Kinder Morgan Energy Partners LP has less cash to pay out to its unit holders.
Per page 25 of Enterprise Products Partners LP's December 6th presentation, Kinder Morgan's 45% share of current partnership distributions is the industry's highest. Investors should avoid Kinder Morgan Energy Partners LP due to the excessive General Partner Incentive Distribution Rights. Kinder Morgan Energy Partners LP should be entitled to more than 55% of its earnings. Partnerships without a General Partner Incentive Distribution Rights receive 100% of earnings to distribute as dividends.
Kinder Morgan Energy Partners LP has gathered steam due to the General Partners purchase of El Paso (pdf) Corporation. This deal should be complete in 2012. Investors expect the General Partner to drop down assets into Kinder Morgan Energy Partners LP. This would allow the distributions to grow.
Buy Kinder Morgan (KMI)
Kinder Morgan owns the General Partner Incentive Distribution Rights for Kinder Morgan Energy Partners LP. A key aspect is the cost of capital (pdf) for a master limited partnership. Kinder Morgan financially benefits because of its Incentive Distribution Rights ownership. For every $1 distribution increase in Kinder Morgan Energy Partners LP, the General Partner receives approximately $2 for its own dividend payout. In essence, owning the General Partner Incentive Distribution Rights provides a leveraged dividend payout opportunity.
Kinder Morgan, the General Partner, previously was a publicly traded general partner. The company was bought out in 2006. The company returned with a new initial public offering in early (pdf) 2011. On October 16, 2011, KMI and El Paso Corporation announced a definitive merger agreement. Kinder Morgan will acquire all of the outstanding shares of El Paso in a transaction having an enterprise value of approximately $94 billion and 80,000 miles of pipelines. The total purchase price, including the assumption of debt outstanding at both El Paso Corporation and El Paso Pipeline Partners, L.P., is approximately $38 billion. The transaction is expected to close by June 30th, 2012.
The stock currently trades at $31.37 and pays a $1.20 dividend. This represents a 4.10% yield. I believe in waiting for the equity to pullback to the $27 range before acquiring shares.
Buy Enterprise Products Partners LP (EPD)
Enterprise Products Partners LP is an integrated provider of natural gas and natural gas liquids processing, fractionation, and storage services transportation. The company does not have a General Partner. These were repurchased in November 2010. The company has provided the benefits, of not paying General Partner Incentive Distribution Rights, in the investor presentation over the past 10 months.
The elimination of the Incentive Distribution Rights allows the company to have a lower cost of equity capital. Dividends have increased for the past 28 quarters. Management is aligned with investors with a significant ownership position.
A key issue to keep in mind is the ultimate impact and benefit of the December 20th announcement:
Enterprise Products Partners L.P. and Enbridge Inc. today announced plans to....reverse the flow direction of the 500-mile, 30-inch diameter Seaway crude oil pipeline, enabling it to transport crude oil from the oversupplied hub in Cushing, Oklahoma to the U.S. Gulf Coast.
This project is needed and should be financially rewarding to Enterprise Products Partners. Although the project is in preliminary stages, the benefits will be substantial as Cushing has been oversupplied and the Seaway pipeline can take advantage of this opportunity.
I believe the stock is attractively priced right now. Investors should attempt to obtain shares in the $41 to $42 price range. The stock trades at $45.60 with a $2.45 dividend. This is a 5.4% dividend yield.
Avoid Terra Nitrogen Company, L.P. (TNH)
I personally recommend dividend investors avoid Terra Nitrogen Company, L.P. The reason is based upon individual portfolio risk management. CF Industries (CF) owns approximately 70% of Terra Nitrogen Company, L.P.
Terra Nitrogen Company, L.P. has a float of 4.61 million shares. A total of about 18.7 million shares are outstanding. Fertilizer prices, up to this point, have remained strong. The latest industry report was a little disturbing. The Farm Futures December 16th report stated (pdf),"...fertilizer costs on international markets plunged again this week, with panic not seen since the collapse of prices in 2008-2009...." Any commodity price can go down. This includes the recent gold decline. As Europe deals with the sovereign debt issue, I would recommend investors identify what their risk exposure is to Terra Nitrogen Company.
Terra Nitrogen Company does not have protective put options available. If commodity prices do fall, the company could fall in sympathy. I prefer to have some knowledge of downside risk. Other investors can tolerate volatility in their portfolios. Options provide one method to reduce overall portfolio risk.
Buy American Capital Agency Corp. (AGNC)
My rationale in buying American Capital Agency is based upon the world around us. The unemployment numbers in the U.S. are rising. Home prices are still in decline. Interest rates remain low. A 30-year Treasury Bond offers a 3.05% yield. 30-year home mortgages are available for sub 4%. Federal, State, county, municipality, and city budgets are expected to receive fewer tax receipts due to the economy. This will carry over into governmental job losses. All of these factors play a factor in why American Capital Agency is providing the returns it is.
The Federal Reserve has stated that interest rates should remain low until mid 2013 at the earliest. American Capital Agency borrows money at short-term rates, invests the proceeds in Government Sponsored Entity mortgage bonds at higher rates. This net yield difference is then leveraged by approximately 7x. The net yield difference, minus hedging expenses, is paid out in quarterly dividends.
American Capital Agency is trading at $28.01. The company went ex-dividend last week for $1.40. The book value per share is approximately $27 per share. I would recommend investors try to purchase the stock near book value per share. On January 27th, management will present the earnings conference call with an update on 4th-quarter ending book value per share.
The yield currently is 19.4%. This is likely to compress if long-term mortgage bond yields remain low. If the longer rates go up, the net yield curve will expand and the dividends can increase. Investors need to pay close attention to the interest rates. This is critical to recognition of the expected agency mREIT dividend payouts.
Buy AT&T, Inc. (T)
AT&T is the former SBC Communications Inc. AT&T is a global leader in the telecom sector. The company continues to offer the traditional wire line services in Texas, Illinois, Michigan, Ohio, Connecticut, Missouri, Indiana, Wisconsin, Oklahoma, Kansas, California, Arkansas, and Nevada. AT&T owns AT&T Wireless and is actively selling the smartphones nationwide.
AT&T officially withdrew its $39 billion merger for T-Mobile. AT&T has already charged $4 billion for the 4th quarter write off. AT&T has approximately $70 billion in debt. The total enterprise value is about $240 billion.
AT&T is currently trading at $29.87 and paying a $1.76 annual dividend. The yield is currently 5.9%. I expect the dividend to remain the same or move up by 4 cents to $1.80 in 2012.
Assuming the 2012 dividend is $1.80 per share, I want an 8% yield on AT&T's relatively stagnant dividend. Although a 5.9% yield is high, there are competing dividend stocks with rapidly increasing dividends. I am looking to enter AT&T at $22.50. A $1.80 dividend would provide an 8% yield on an entry price of $22.50.
As with all dividend stocks, the entry price is crucial and the first key to financial success.