Income investors have current opportunities and risks in the dividend stock universe. Some companies thrive in specific market cycles. Other companies have difficulty in challenging economic times. In this article I'll focus upon five dividend stocks to buy and two to avoid.
Avoid Enerplus Corporation (ERF)
Enerplus is a North American energy producer with a diversified asset base of high-quality, low-decline oil and gas assets. The monthly dividend payer also has growth projects within its business model. Here is the third quarter (pdf) production data between oil and natural gas volumes:
Henry hub spot prices, as of January 20, closed at $2.25 per MMBtu. The market has experienced warm weather, increased production, and the future looks like low prices may be here for an extended period of time. Investors should avoid Enerplus. The stock has returned 13.9% over the past four years. There are obvious danger signs currently in place. I did sell my position earlier this year.
Buy Linn Energy, LLC (LINE)
Linn Energy is an independent oil and natural gas company, engages in the development and acquisition of oil and gas properties in the U.S. The energy and production company focuses upon oil and natural gas properties that offer long life, high-quality production. Management seeks assets with predictable decline curves and low risk development opportunities. Asset acquisitions focus upon decline profile, reserve life, operational efficiency, field cash flow and wellhead development costs.
Management has been proactive in hedging oil and natural costs. As highlighted in this prior article, "3 Reasons To Buy Linn Energy This Week," Linn Energy has 100% of natural gas production hedged at prices exceeding $5.45 Mcf. The natural gas hedges are through 2015. At least 80% of oil prices, through 2015, are hedged at prices exceeding $97 per barrel.
The yield is attractive at 7.3% and is a compelling buy at current levels.
Avoid San Juan Basin Royalty Trust Co (SJT)
San Juan Basin Royalty Trust operates as an express (pdf) trust, established more than 30 years ago. The trust has a 75% net overriding royalty interest extracted out of Burlington Resources Oil & Gas Company LP's oil and gas leasehold and royalty interests. These properties are based in north western New Mexico.
San Juan Basin Royalty is a position I personally sold in various accounts. The reasons are clear in this natural gas table:
The fundamentals are very unattractive for future periods. The trust, in my opinion, is held by many income investors who believe the current monthly distributions will continue at current levels.
Per the company's most recently monthly SEC 8K, there is reason to avoid San Juan Basin Trust Shares.
On December 19, 2011, San Juan Basin Royalty Trust declared a monthly cash distribution of $0.149018 per unit. This was based primarily on production during the month of October 2011. The distribution will be paid on January 17, 2012.
Gas production included 3,147,573 MMBtu. This amounts to royalties of $4.43 per MMBtu for September 2011. Gas prices have declined dramatically since this latest filing. Investors are best served to exit their position unless they can accept a likely decreased monthly distribution in upcoming months.
Buy Annaly Capital Management Inc (NLY)
Annaly is a mortgage real estate investment trust (mREIT) that owns and manages a portfolio of mortgage pass-through certificates, collateralized mortgage obligations, and derivatives to hedge against Federal Fund interest rate swings.
Annaly yields an annual 13.8% dividend. Per the below table investors can note that the short-term Treasury Bill and long-term Treasury Bond rates have widened in recent days. This is beneficial to mREITs. Annaly earns its money by borrowing at short-term rates and buying longer duration Government Sponsored Entity mortgage backed securities. Leverage is used to expand the gap between borrowing and purchasing yields.
Buy CVR Partners (UAN)
CVR Partners is a limited partnership engaged in the production of nitrogen fertilizers. These fertilizers include ammonia and urea ammonium nitrate. The company had its initial public offering in 2011. The partnership operates as a subsidiary of CVR Energy.
As readers know, CVR Partners has expansion plans in process. The current distribution is 7.9%. This level can be increased by an increase in fertilizer prices and in 2013 when new expansion plans arrive on the market.
Buy Altria Group, Inc. (MO)
Altria is the parent company of Philip Morris USA, John Middleton and Philip Morris Capital Corp. The company has five units: 1) cigarettes (82% of operating profits) ; 2) smokeless products 3) cigars; 4) wine and 5) financial services.
The company offers a reasonable 5.7% dividend yield based upon a 41 cent per quarter dividend. This $1.64 annual dividend is a relatively safe dividend based upon a $28.70 stock price. The company, on January 4, did address a Barron's article that was critical of Altria's risks and its balance sheet issues. These articles do appear once a year, it seems, and the company is always willing to step up and defend the critique with facts.
Altria consistently increases its annual dividend. The 2011 full-year results will be presented January 27.
Buy American Capital Agency Corp. (AGNC)
American Capital Agency is a mortgage real estate investment trust that invests in Government Sponsored Entity (also known as "agency") securities for which the principal and interest payments are guaranteed by the U.S. Federal Government.
Here is a table with American Capital Agency's dividend history:
The yield is a 19.3% annual dividend yield. The company has provided, per the top table, a 28% total annualized rate of return over the past four years. This assumes dividends are not reinvested. I personally am not aware of a stock that has performed better during the past four or five years.
Instead of hoping for an economy recovery or a miracle biotech cure, American Capital Agency management puts up top results quarter in and quarter out.
I recommend adjusting one's portfolio on a regular basis. Remove the stocks likely to perform negatively in the future. Reinvest the funds into stocks with the wind at their backs. This reduces the stress of watching a stock decline and also increases an investors' net performance.
I recommend investors diversify their dividend income stocks in strong industries. Clearly, investors should not put all of their eggs in one basket.