For those investors seeking large sustainable dividends, there is a high likelihood you would best be served investing out of the U.S. Though it is obvious, many companies will be forced to reduce or cut their dividends as one of the following two scenarios will inevitably play out.
- The most likely scenario in my opinion is that this will be the greatest depression (remember "The Great Depression" earned this title not because of the magnitude of economic contraction, but because of the duration). The media propaganda has obviously convinced the average person we are out or about to come out of the turbulence that was the last two years. Consumer spending has once again shot back up to an unsustainable level especially when you take into account how debt ridden many people are. If this truly is a recovery, I think it may have defied gravity as unemployment reached another new high yet that current mantra is being touted at a "jobless recovery". Can you say oxymoron? Getting back to my point, many high paying dividend stocks will necessarily be forced to cut their dividends as more uncertainty floods the market over the next year
- If we do somehow defy gravity and resume economic growth while unemployment continues to increase, The government WILL have to raise taxes in an attempt to dig their way out of the hole they have been digging for themselves over the last decade (referring to our record debt levels and record deficit spending). Marginal tax rates, both on personal and corporate will have to increase which has historically driven capital to those places that will provide the highest after tax return. As for corporations when deciding to engage in new projects, they always choose that which will ( or at least is projected) to produce the highest Internal Rate Of Return. This return will not be nearly as lucrative if say the same company was in a tax friendly country such as Singapore (which by the way now ranks higher in terms of “economic freedom”, which is not to be confused with “political freedom, the former meaning the ease of starting a business as well as the proportion of net operating profit being extremely high). The latest survey (yes it is only a survey) I read now has the U.S ranked 10th in term of economic freedom as opposed to 1st a couple of years back. In other words, the new formation of capital will become increasingly less likely to be allocated in the U.S. New capital investment will be drawn towards those places that reward an entrepreneur for his foresight (profit) as opposed to the U.S which will likely engage in a more severe progressive tax system or in simple terms, punishing productivity and innovation.
The point I’m trying to make it that should an investor be dividend oriented, one must look deeper into the true sustainability as well as the ability to grow dividends, which is easier said than done. Obviously there are several companies in the U.S that will be of the minority and reward investors for years to come, but it is worth noting that dividends and payout ratios currently seen are likely to evaporate in response to one, two or a combination of the aforementioned scenarios. I know there will be plenty to add, but I will give my favorite dividend paying stocks for the next decade (or at least try to mention a few).
If you want to invest in companies incorporated in the U.S, they will obviously need a very diverse revenue stream in the sense that the less income earned domestically will likely transfer to higher profits (after the foreign exchange conversion). I say this due to the fact I believe Inflation will become a huge problem sometime over the next 2-5+ years, therefore those who have a diverse revenue stream most certainly have currencies that both have and I believe will continue to appreciate against the dollar.
SEE: The USDX (dollar Index), which is only about 6% above it’s all time low set back in 2008 and only temporarily appreciated to the worldwide deleveraging. In my opinion this low will definitely be taken out and I think could be in the 30’s, 40’s, 50’s in a few years if the Fed decides to keep flooding the system with capital. Like Jim Rogers says “ Large increases in the money supply has always led to inflation” and I’m no one to argue with him. One personal favorite of mine and has been for a long time is Philip Morris (NYSE:PM), as it already boasts a huge dividend and long term high single to double digit sales growth.
Had I written this a few months ago, the much smaller but still more than adequate 4.9% dividend yield, would have been nearly 7%. PM, which is spinoff of the old Altria, derives all their revenue internationally thus providing them with a much overlooked future in regards to net income growth when converted to U.S dollars. Many prefer the domestic counterpart as it yields 7%, but I believe higher tax rates or a sluggish inflationary economy is extremely detrimental to the real costs of such things as an increase in excise tax, corporate tax as well as their ability to pay down debt. Philip Morris Int’l on the other hand will hardly be affected by these things in addition to current debt held on their balance sheet being repatriated in depreciated dollars.
Another favorite Industry of mine in this regard are the Canadian Oil Trusts, which have been misunderstood by the market ( thus the beating their share prices took earlier this year). People think the dividends yields are unsustainable for companies such as Enerplus (NYSE:ERF), Pennwest (PWE), PenGrowth (PGH) (which currently sport an 8%, 11.5%, 11.9% yield) as the tax-exempt status for these trusts runs out in 2011. But putting things into perspective, these companies have more than enough catalysts to negate the impact of taxation. Enerplus recently acquired assets in the Marcellus shale, Pengrowth is doing exactly what the name suggests and Pennwest has a growth oriented outlook, though to a lesser degree.
Not to mention the fact oil prices are destined to at least make it back to $100/barrel by 2011, if not higher. I believe it is also very possible to take out the old $150 high as early as 2012 as inflation rears its head combined with the fact peak oil has been reached. On one last note, these three companies (though there are several others) have already cut their dividend is response to the commodity collapse earlier in the year. These are companies that will insulate you from questionable dividend paying companies or at the very least are worth a look.
Disclosure: Long PenGrowth, Pennwest