Interest rates are already very low around most of the world, and yet central banks in Brazil, China and other countries just lowered rates further. The Federal Reserve is expected by many investors to announce a new wave of quantitative easing and possibly extend the duration of low interest rates. This means investor demand for stocks that pay solid dividends is likely to remain very strong and possibly even increase in the coming months.
Another factor that is weighing on many investors is that the global economy is showing signs of weakness in a few areas. That means that investors will increasingly want to own stock in companies that can endure a potential recession. A major looming concern for investors at the end of 2012, is the "fiscal cliff" whereby the U.S. Government is poised to raise taxes and cut spending in order to deal with the growing debt levels. That is why it makes sense to focus on companies that have stable business models, like utilities, pipelines, and select energy companies. One company that appears to fit this model while offering a generous dividend is discussed below:
Linn Energy LLC (LINE) has oil and natural gas projects and interests in the Mid-Continent, Permian Basin, Hugoton Basin, Williston Basin, and other areas. What is different about this company is that it is set up as a limited liability company and it is focused on a high dividend payout for shareholders. This has enabled the company to offer a yield that will beat almost any oil and gas stock. For example, BP PLC (BP) is one of the highest-yielding oil and gas stocks at about 4.6%. Linn Energy tops that by almost another 3 percentage points. That's impressive considering that BP is trading well below the 52-week high and it is considered by many to be very undervalued. Here are a few reasons to consider the stock now:
- This company has been paying quarterly dividends since inception in 2006. Dividend distributions have been on the rise. In 2007, the dividend was $2.07 per share, but now, the dividend stands at $2.76 per share.
- Energy is a basic need, people and businesses will be consuming oil and natural gas even in a tough economy. While oil and gas prices could be weaker in a slow economy, the consumption will continue and eventually trend higher with the world's population growth. Furthermore, oil and natural gas prices have been showing strength recently, even in the face of weak economic data.
- Central banks are poised for more easing and money printing in order to cope with excessive debt levels. When investors see money printing, they tend to seek hard assets like energy, because governments cannot print a barrel of oil.
- Linn Energy has been posting solid financial results. It recently announced second-quarter 2012, earnings of $237 million, or $1.19 per unit. These results include noncash gains of $304 million, or $1.52 per unit, from the change in value of hedges covering future production, an expense of $146 million, on the impairment of long-lived assets, and a gain of $19 million, related to other items. This company has been making acquisitions and plans to expand its Granite Wash drilling program, which could add growth potential.
The combination of a dividend yield near 7.5%, and growth potential through acquisitions and expanded drilling, could allow this stock to outperform the markets going forward.
Key Data Points For Linn Energy From Yahoo Finance:
Current Share Price: $39.61
52-Week Range: $31.03 to $40.80
Dividend: $2.90 per share which yields about 7.5%
2012 Earnings Estimate: $1.41 per share
2013 Earnings Estimate: $2.01 per share
Key Data Points For BP PLC From Yahoo Finance:
Current Share Price: $39.90
52-Week Range: $33.62 to $48.34
Dividend: $1.92 per share which yields about 4.6%
2012 Earnings Estimate: $5.50 per share
2013 Earnings Estimate: $5.57 per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long BP.