By Brian Tracz
Investing later in life is a different ballgame than investing in one's 30s or 40s. Especially after the recession and the collapse of a variety of several infamous companies (Enron and Lehman Brothers among the bunch), the old advice about income investing still holds. Dividends above about 4 percent, active share repurchasing programs, stable price history and cash flow, and low P/E are the hallmarks of a good income investment.
Here are some of my picks for the income-minded.
BP p.l.c. (BP)
BP is a good start in building an income-oriented portfolio. First, its business scope is in oil and gas production, exploration, refining and distribution--bedrocks of the broader economic picture. BP's management expects cash flow to increase 50 percent by 2014, largely owing to new exploration ventures and the finalization of payments to the Deepwater Horizon oil spill fund (for the Macondo oil disaster that occurred in 2010). The company issues a 4.6 percent annual dividend yield, and it will likely re-initiate share buybacks once the Macondo lawsuits are completely settled. Management's focus is also very amicable to the income investor with its 4.6 percent annual dividend yield. Presently, the company is focusing on risk reduction on its well-drilling segment (the so-called "upstream" segment) and increasing its well exploration efforts. BP is a cornerstone of Seth Klarman's portfolio, occupying 14.2 percent of his $2.9 billion 13F portfolio as of March 31.
Waste Management, Inc. (WM)
Though it takes out the trash, Waste Management shares are an ideal way to bring in the cash. Waste Management has solvent debt, rated at BBB by S&P, and its share price has a 3-year range between $28 and $40. The company maintains a dividend yield of 4.3 percent annually and has approved $500 million in share repurchasing. Though its price is 16 times earnings, this is about average for the industry. With its expanding efforts in other areas of waste removal, including sewage and renewable energy, the company is engaged in a stable business that is realized in its nearly flat share price and low 0.53 beta (meaning its price fluctuations are 53 percent the magnitude of the overall market). This stock is my pick for a "treasury-like" equity.
GlaxoSmithKline is a good healthcare pick as an income generator. Many pharmaceuticals pay dividends to account for cyclic product announcements and patent expirations, but GlaxoSmithKline issues a hefty 4.9 percent annual dividend yield, higher than Pfizer (PFE) and Bristol-Myers Squibb (BMY). This large $115 billion market cap company has a larger arsenal of patented drugs and consumer health products than many smaller pharmaceutical companies, giving the company added stability in the healthcare field. It believes that its research and development groups, focusing on early-stage discovery of therapies for major illnesses, will be able to push 30 major drug developments through the pipeline over the next three years. Additionally, GlaxoSmithKline is a Buffett stock, and Berkshire Hathaway held 1.5 million shares as of March 31.
PG&E Corporation (PCG)
Pacific Gas & Electric Co., which is held by PG&E, provides electric and gas utilities to a northern California customer base. As a utilities company, it has very steady earnings and is not volatile (beta below 0.3). We should see increased earnings of around $3.40 a share next year as the company reinvests much of its free cash flow into long-term earnings ventures. Combined with a 4 percent annual dividend, PG&E shares are attractive for those looking to maintain wealth.
BMO Financial Group (BMO)
Canada's BMO Financial Group (Bank of Montreal) has an excellent 4.8 percent annual dividend yield, higher than JPMorgan's (JPM) 3.5 percent yield and Bank of America's (BAC) measly 0.55 percent yield. With that, you get a stock that has a more stable price historically than Citigroup (C) and Bank of America. Additionally, Bank of Montreal has an A+ debt rating from S&P, which is higher than that for JPMorgan, Citigroup and Bank of America. So, for some financial diversity, it might be best to look north of the border - earnings increased 14 percent year-over-year from 2010 to 2011, and 2012 is also looking similarly optimistic.
Garmin Ltd. (GRMN)
Okay, Garmin might seem odd as a steady income stock. However, Garmin issues a 4.9 percent dividend and is pretty well-mellowed after its boom-and-bust in 2007 and 2008, which was followed by significant restructuring. So I think it is less likely to have the radical shifts in price that other tech companies are likely to undergo. Realizing that the dedicated navigation device is something of a dying breed, Garmin is making new inroads into the other major hardware platforms for other handheld devices so that it can be a leader even on non-dedicated devices. With increasing growth in Asia, Garmin will be able, with adequate management of its patents, to work in the favor of its investors over the coming years.
Vodafone Group plc (VOD)
Vodafone is another tech firm that has already seen its boom and bust. There has been hardly any price fluctuation in the past two years (priced in the mid- to high-$20s per share). The company has a strong balance sheet, and its 16 percent debt-to-equity is below the sector average. Shares are trading at 1.9 times sales, which is well below the sector average of 4 times sales. Top it off with a 5.25 percent annual dividend yield, and you have a solid income-rich investment. Vodafone is also one of David Einhorn's long-term stock picks.