3 Retiree Dividend Stocks, 3 Others To Avoid

Includes: AGNC, CHKR, LGCY, PER, PM, T
by: Todd Johnson

Retirees demand a certain threshold of reoccurring money to maintain their lifestyle. Many dividend stocks have problems which could result in a dividend cut. In this article I want to focus on Legacy Reserves LP's (NASDAQ:LGCY) 7.4% distribution yield and four other income stocks. Retirees require safe dividend income. Retirees do not want to return to the work force. Safe dividend income is the big issue for retired folks.


Legacy Reserves owns and operates oil and natural gas production from fields in the Permian Basin in west Texas, the Mid Continent region in Arkansas, Kansas, Louisiana, New Mexico, Oklahoma and Texas, and in the Rocky Mountains. As of December 2011, Legacy Reserves had proven oil and natural gas reserves of 63.4 million barrels oil equivalent (MMBoe).

Business Strategy:

Legacy Reserves' stated business objective is to grow distributable cash flow through sustainable operations at existing properties, acquisition of new properties and development of proven reserves so it can increase cash distributions to unit holders. In 2011 alone, Legacy Reserves closed 28 acquisitions, a key component of its growth strategy. Its strategy also includes ensuring financial flexibility and reducing risk through hedging transactions.


For its fiscal year ended December 31, 2011, Legacy Reserves reported revenue of $264.5 million from oil sales, $53.5 million from natural gas and $18.9 million from natural gas liquids for a total of $336.9 million, up 55% over fiscal 2010. 2011 operating income was up 120% to $84.5 million. Net income jumped to $72 million in 2011 from $10.1 million in 2010 and earnings per share were $1.63. Legacy Reserve reported cash of $3.2 million, total assets of $1 billion, long-term debt of $337 million and unit holders' equity of $488 million.


Legacy Reserves raised distributions 4.8% to 55 cents per unit in the fourth quarter of 2011 from 52.5 cents in 2010. Legacy Reserve has steadily raised distributions from $1.26 in 2007 to $2.14 per unit in 2012. At 55 cents quarterly, Legacy provided a distribution yield of 7.75% as of March 2012.


As of March 15th, Legacy shares closed at $28.96, a market capitalization of $1.36 billion (2.8x book value) and a 52-week range of $22 to $33.71. Barring the dip in 2009, shares have largely traded between $20 and $30.

Retirees should benefit for years to come as the hedges are established in a specific and methodical manner.


Legacy is one of many small oil and natural gas producers in the U.S. and as such does not appear to have any breakaway advantage. Its distribution yield and share price offer retirees growth and stability.

Alternative Retirement Dividend Stocks

American Capital Agency Corp. (NASDAQ:AGNC)

American Capital Agency is an an agency mortgage real estate investment trust. The entity borrows short term funds and buys longer duration agency mortgage backed securities. The recent widening of the gross interest margin will allow American Capital Agency to earn a higher net interest margin. Net interest margin includes the cost of hedging.

American Capital Agency paid $1.25 for the fourth quarter dividend. This equates to a current 16% yield.

Federal Reserve Chairman Ben Bernanke recently gave a presentation about the state of the economy. The longer yielded Treasury Bonds, per the above chart, dropped when the interest rates spiked on March 13th.

If one believes the economy is not deleveraging, and is expanding with meaningful job growth, then the longer dated Treasury Bonds will continue to increase. In my opinion, housing continues to drop. In a deleveraging economy, the country's Gross Domestic Product, constricts. The investor recognizes the country's debt burden and that is an issue not going away any time soon.

Here is the company's dividend history:


I recommend retirees buy American Capital Agency due to the high yield, and the current low Treasury Bond rates. The company has successfully navigated an increase in price appreciation and consistent dividends.

AT&T Inc. (NYSE:T)

AT&T offers telecommunications services to consumers, businesses and third party providers on a global basis. These services include wireless, voice, roaming offerings and telecom equipment sales.

AT&T, on December 16th, increased its dividend by 2.3%. This amounts to an annual dividend of $1.76 from the prior $1.72. Collective group think can push a stock only so high. At some point, the balance sheet and rate of earnings growth became a critical element of due diligence. The above graph shows AT&T has the lowest four-year total annualized rate of return of this article's analysis.


I recommend investors avoid AT&T at this time. The stock is trading at $31.64 and it has a high of $31.94. Investors have clamored into AT&T. The company has a market cap of $187 billion and a debt load of over $60 billion. AT&T offer retirees potential capital losses at these lofty levels. The losses likely will offset the annual $1.76 dividend stock. AT&T is no longer an "orphans and widow" stock. The mid 80s spin off radically changed AT&T.

Philip Morris International Inc (NYSE:PM)

The company sells cigarettes to 180 countries. Key brand names include Virginia Slims, L&M, Chesterfield, Marlboro, Merit and Parliament. Philip Morris International was part of Altria (NYSE:MO) prior to the mid 2000 spin off.

Philip Morris International was highlighted in my November article, Philip Morris: My Favorite 2012 Dividend Stock Idea.


I recommend all retirees invest in Philip Morris. The returns have been outstanding. Per the above graph shareholders have been rewarded with a 26% total annualized rate of return over the past four years. The dividend has increased each year and offers a 3.6% yield.

The company had a great 2011 year. The company raised the dividend by 20.3%. The 2011 diluted earnings were up 23%. In addition, management bought back 80.5 million shares at a cost of $5.4 billion.

Chesapeake Granite Wash Trust (NYSE:CHKR)

Chesapeake Granite Wash Trust is a Delaware statutory trust formed to own royalty interests to be conveyed to the trust by Chesapeake (NYSE:CHK). The trust will be operated as a passive entity with 60 horizontal wells producing from the Colony Granite Wash play and royalty interests in 122 horizontal development wells (as described in "The Trust-Development Agreement and Drilling Support Lien").

Chesapeake Granite Wash Trust has increased more than 30% since their Initial Public Offering. It's time to sell and let new investors buy these trusts. Uninformed investors are likely not to be up to speed on the finite life span, and the early year distributions.


Investors should not consider entering a new position in Chesapeake Granite Wash Trust. If you entered early like we did, then sell and reallocate the proceeds into longer duration assets and not ones with finite life spans.

Chesapeake Granite Wash Trust unit price, in my opinion, is too rich due to their passive trust nature. The yield on new unit purchase costs has dropped dramatically due to the increase in unit price.

SandRidge Permian Trust (NYSE:PER)

SandRidge Permian Trust is a Delaware statutory trust formed to own royalty interests to be conveyed to the trust by SandRidge (NYSE:SD). The trust will be operated as a passive entity with 888 development wells and 509 producing wells.

SandRidge Permian Trust has increased in price per unit of $18 to a current $23.98. This has dramatically reduced the potential distribution yield. Because the quarterly distributions are hedged, the distributions are limited to unit holders. The trust has a 20 year finite life. The unit holder can now sell shares and capitalize on the rise in unit price. This will provide access to capital and capture the potential SandRidge Permian Trust distribution yields for two years in advance.


Retirees should not touch SandRidge Permian Trust. The trust unit price has increased from an $18 IPO pricing to a current $23.98. SandRidge Permian Trust has a finite life span and too much hot money seeking high yields have propped the unit price up.

For retirees who bought in early, I recommend taking profits and reallocate to higher quality dividend stocks. Improve your income portfolio and let others hold onto over priced trusts.

Disclosure: I am long LGCY, AGNC, PM.