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While the extremely low-rate environment and the ongoing economic uncertainty is driving more individuals towards investments that pay out dividends, traders should take the time to study and understand what they are getting into. In other words, do not open up a position based on yield alone, or on some so called experts' claims or views. Take the time to do your own diligence. After all, it is your money, and no one cares more about your money than you do. The following metrics could prove to be helpful to individuals in their quest for higher dividends.

Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the market cap.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders than it's making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, it can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique can technically be employed to maintain the dividend for some time.

In the case of MLPs and REITs, the payout ratio is not that important, because MLPs are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on as far as MLPs and REITs are concerned is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

Our favourite play is NuStar Energy (NYSE:NS). It has a quarterly revenue growth rate of 60%, a quarterly earnings growth rate of 2.7%, an ROE of 9.32%, a five-year distribution growth rate of 4.19%, a total three-year return of 77%, and has been paying dividends/distributions since 2001. It has a levered free cash flow rate of $49.9 million. Net income for the past three years is as follows: in 2008, it came in at $254 million; in 2009 it dropped down to $224 million; and in 2010, it moved up to $238 million. Net income for 2011 is roughly $191 million. Out of a possible 5 stars, we would assign NS 4 stars.

Two other notable plays are Ferrellgas Pertners (NYSE:FGP) and SeaDrill Limited (NYSE:SDRL), yielding 10.8 and 8.8% respectively.

FGP has an enterprise value of $2.67 billion, a quarterly revenue growth rate of 34.5%, a healthy five-year dividend average of 9.90%, a total rate of return for the last three years of 55% and has been paying dividends since 19948. It also has a positive levered free cash flow rate of $67.56 million. Net income for the past three years is as follows: in 2008, it was $52 million; in 2009 it dropped to $32 million; and in 2010 it turned negative to -$43 million.

FGP also sports the following ratios: Price/sales of 0.55, price to tangible book of -3.22, price to cash flow of 40.60, price to free cash flow of -11.80, a five-year sales growth rate of .98 and a beta of 0.44.

SDRL has an enterprise value of $24 billion, an incredibly strong three year dividend growth rate of 115%, and a quarterly revenue growth rate of -3.7%, a very impressive total rate of return for the last three years of 419%, and has been paying dividends since 2008. A special dividend of 76 cents was announced on the 8th of December.

Even though the quarterly earning's growth rate (year over year) has turned negative (-90%), if it can continue to secure new contracts, it should have no problem making its dividend payments. Demand for its services continues to increase, and this trend should remain, in effect, as demand for oil is not dropping on a worldwide basis. SDRL is growing at an annual rate of 12%, and it is projected that it will be able to maintain this rate for the next five years. SDRL also sports a high beta, which makes it a great candidate to write covered calls. Covered calls open up a second stream of income, and in many cases can generate even more income on annual basis then the dividend payments. Potentially, using this strategy, one could earn in excess of 30% a year.

Stock

Dividend

Mkt Cap

Fwd PE

EBITDA

Qtrly Rev Growth

Beta

Rev

Oper-
ating Cash Flow

MMLP

9.40

761M

23

91.7M

61.90%

0.39

1.15B

52.8M

GNI

20.4%

169M

8

21.91M

7.91%

0.21

24.88M

20.99M

FCX

2.6%

36B

8

12.19B

0.8%

1.61

22.32B

7.93B

CQP

10%

3.08B

---

191.17M

-2.60%

0.1

285M

21.82M

NS

7.61%

3.73

17

500.03M

60.3%

0.47%

5.84B

283.5M

Martin Midstream Partners LP (NASDAQ:MMLP)

It has an enterprise value of $1.20 billion, a quarterly earning's growth rate of 16.5%, a quarterly revenue growth of 61.90%, a ROE of 9.6%, a five-year dividend growth rate of 4.6%, and the total three-year return of 127%. It has a levered free cash flow rate of -$22.69 million.

Net income for the past three years is as follows: in 2008, it was $42 million; in 2009 it dropped to $22 million; in 2010, it dropped even more to 16 million. For 2011, it stands at $21.3 million; total net income for 2011 could surge to the $26-$29 million range.

Key ratios:

  • Price to sale 0.66
  • Price to tangible book 2.90
  • Price to cash flow 9.90
  • Price to free cash flow -4.80
  • 5 year sales growth 10.17%
  • Inventory turnover 13.60
  • Asset turnover 1.40

  • ROE 9.61%
  • Return on assets 3.63%
  • 200 day moving average $35.08
  • Total debt $ 440
  • Book value $14.37
  • Dividend yield 5 year Average 9.3%
  • Dividend rate $3.05
  • Payout ratio 262%
  • Dividend growth rate 5 year average 4.63%
  • Consecutive dividend increases 1 year
  • Paying dividends since 2003
  • Total return last 3 years 127%
  • Total return last 5 years 55%

Great Northern Iron Ore Proper (NYSE:GNI)

It has an enterprise value of $164 million, a quarterly revenue growth rate of 7.9%, a ROE of 186%, a total three-year return of 80%, a five dividend growth rate average of 8.9% and a five year dividend average of 11%. It has a levered free cash flow rate of $13.79 million.

Net income for the past three years is as follows: in 2008, it came in at $17.6 million; in 2009 it dropped to $11.4 million; in 2010, it rose to $17.4 million. Net income for 2011 is roughly $15.6 million, and total net income for 2011 could top the $21 million mark.

Potential Warnings

On April 6, 2015, the properties of the company will be transferred to ConocoPhillips; the trust will be dissolved, and the stock shares retired. There are approximately 17 quarters left for GNI to make regular distributions. Assuming that every distribution for the next 17 quarters is at its current peak of $4.50 works out to 76.5; add in the final distribution of $8.53 per share and you get a price of $85.03 which is well below the current share price of $114. This play is not for long term investors. Only short term to intermediate term players willing to take on a bit of extra risk should consider this play. The rest would be best served by looking for better alternatives.

  • Price to sales 6.81
  • Price to tangible book 13.79
  • Price to cash flow 7.70
  • Price to free cash flow 92.60
  • 5 year sales growth 5.58
  • Inventory turnover 9.30
  • Asset turnover 1.30

  • ROE 186.58%
  • Return on assets 71.9%
  • 200 day moving average $106.92
  • Total debt $0.00
  • Book value $8.19
  • Dividend yield 5 year Average 11%
  • Dividend rate $15.00
  • Payout ratio 105%
  • Dividend growth rate 5 year average 8.98%
  • Consecutive dividend increases 2 years
  • Paying dividends since 1990
  • Total return last 3 years 80%
  • Total return last 5 years 49%

Freeport-McMoRan Copper & Gold (NYSE:FCX)

It has an enterprise value of $39.23 billion, a quarterly revenue growth rate of 0.8%, a ROE of 43.09%, three and five-year dividend growth rates of 41.52% and 9.6% respectively, a total three-year return of 169%, and it has been paying dividends/distributions since 1994. It has a very strong levered free cash flow rate of $5.49 billion.

Net income for the past three years is as follows: in 2008, it came in at -$11 billion; in 2009 it surged to $2.5 billion; in 2010, it rose by almost 80% to $4.2 billion. Net income for 2011 is roughly $3.86 billion, and total net income for 2011 could top the $5 billion mark. Total cash flow from operating activities was more than enough to cover dividend payments for 2008, 2009, 2010, and 2011. FCX should have no problem meeting all its dividend obligations for 2012.

  • Price to sales 1.65
  • Price to tangible book 4.20
  • Price to cash flow 5.60
  • Price to free cash flow 12.20
  • 5 year sales growth 23,.80%
  • Inventory turnover 2.80
  • Asset turnover 0.70

  • ROE 43.09%
  • Return on assets 22.9%
  • 200 day moving average $42.35
  • Total debt $3.5B
  • Book value $16.20
  • Dividend yield 5 year Average 3.40%
  • Dividend rate $1.00
  • Payout ratio 47%
  • Dividend growth rate 5 year average 9.67%
  • Consecutive dividend increases 0 years
  • Paying dividends since 1994
  • Total return last 3 years 169%
  • Total return last 5 years 67%

Cheniere Energy Partners LP (NYSEMKT:CQP)

It has an enterprise value of $5.17 billion, a quarterly revenue growth rate of -2.60%, a ROE of 9.32%, a total three-year return of 366%, and has been paying dividends/distributions since 2007. It has a levered free cash flow rate of $27.63 million.

Net income for the past three years is as follows: in 2008, it came in at -$78 million; in 2009 it surged to186 million; in 2010, it dropped down to $107 million. Net income for 2011 is roughly- $23.5.

New Developments

Cheniere Energy Partners LP entered into three multibillion-dollar contracts, one with the BG Group this October, valued at $8 billion to supply 3.5 million tons per year of LNG from its Sabine Pass Liquefaction project. The second deal was signed with Spain's Natural Fensoa for $9 billion to supply 3.5 million tons of LNG per year for 20 years with the option of extending it for another 10 years.

Cheniere Energy has signed a third long-term deal to export liquefied natural gas from its proposed plant in Louisiana, paving the way for the first U.S. export project of its kind in nearly 50 years. Cheniere will supply state-run Indian energy company Gail India Ltd with 3.5 million tonnes per year (mtpa) of LNG from Sabine Pass for 20 years starting in 2017, pending regulatory approval for the project, the two companies said in a statement. CQP has been bleeding for years, and these two deals should help instil some confidence in investors, because it provides CQP with means to refinance and or pay off some of its existing debt, which is coming due in May 2012.

In total, these 3 new deals could translate into roughly $1.2 billion to $1.35 billion a year in additional income.

  • Price to sales 10.70
  • Price to tangible book -5.90
  • Price to cash flow 129.20
  • Price to free cash flow -85.00
  • 5 year sales growth N/A
  • Inventory turnover 9.30
  • Asset turnover 0.20

  • ROE N/A
  • Return on assets 5.15%
  • 200 day moving average $16.28
  • Total debt $2.19B
  • Book value -$3.09
  • Dividend yield 5 year Average 13.50%
  • Dividend rate $1.70
  • Payout ratio 293%
  • Dividend growth rate 5 year average N/A
  • Consecutive dividend increases 0 years
  • Paying dividends since 2007
  • Total return last 3 years 366%
  • Total return last 5 years N/A

NuStar Energy L.P. (NS)

It has an enterprise value of $6.24 billion, a quarterly revenue growth rate of 60%, a quarterly earnings growth rate of 2.7%, a ROE of 9.32%, a five-year distribution growth rate of 4.19%, a total three-year return of 77%, and has been paying dividends/distributions since 2001. It has a levered free cash flow rate of $49.9 million.

Net income for the past three years is as follows: in 2008, it came in at $254 million; in 2009 it dropped down to $224 million; in 2010, it moved up to $238 million. Net income for 2011 is roughly $191 million. Out of a possible 5 stars, we would assign NS 4 stars.

  • Price to tangible book 2.26
  • Price to sales 0.63
  • Price to cash flow 9.30
  • Price to free cash flow -8.30
  • 5 year sales growth 37.8%
  • Inventory turnover 6.10
  • Asset turnover 1.10

  • ROE 9.32%
  • Return on assets 3.8%
  • 200 day moving average $57.75
  • Total debt $2.97B
  • Book value $37.98
  • Dividend yield 5 year Average 7.30%
  • Dividend rate $4.34
  • Payout ratio 138%
  • Dividend growth rate 5 year average 4.19%
  • Consecutive dividend increases 10 years
  • Paying dividends since 2001
  • Total return last 3 years 54%
  • Total return last 5 years 49%

Conclusion

The charts are indicating that the markets could put in an intermediate top around January 18 to the 21st. The markets have been advancing on rather low volume and on a decreasing number of advancing issues. Long term dividend players would be best served by waiting for a strong pull back before committing large sums of money to this market.

FCX and SDRL sport high betas which make them good candidates for writing covered calls. Covered calls can provide a rather lucrative stream of secondary income, which in many cases can exceed the yearly dividend payments of that specific stock. The higher the beta the higher the premium the stock commands when it comes to selling calls.

Earnings VS expectation graphs sourced from Smartmoney.com; dividend graphs sourced from Dividata.com.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies -- let the buyer beware.

Source: 7 Basic Materials Plays With Yields Up To 20.4%