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Twitter Musings on McDonald’s

Barron’s had some interesting comments on McDonald’s (MCD) this past weekend (see “Trouble on the Menu at McDonald’s). Though mostly bearish on the stock, Barron’s noted that just 7 out of 29 Wall Street analysts were bullish on the stock. That’s the sort of one-sided sentiment contrarians dream of.

 

Only 7 of 29 Wall Street analysts rate $MCD a buy, according to Barrons. If that's not a contrarian signal…

— Charles Sizemore (@CharlesSizemore) May. 11 at 04:28 PM

The last time sentiment was anywhere NEAR that pessimistic was 2002, when only 4 of 11 analysts rated it a buy.

— Charles Sizemore (@CharlesSizemore) May. 11 at 04:29 PM

$MCD cannot realistically have a run like it did starting in 2002 because starting valuations are so much higher.

— Charles Sizemore (@CharlesSizemore) May. 11 at 04:30 PM

But with a 3.5% dividend yield, a commitment to shareholder yield, and MASSIVE pessimism by the Street, I'm lovin' it. $MCD

— Charles Sizemore (@CharlesSizemore) May. 11 at 04:31 PM

This little diatribe made me hungry. I kinda want a Big Mac now.

— Charles Sizemore (@CharlesSizemore) May. 11 at 04:32 PM

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5 Solid Dividend Stocks With 5%-Plus Yields

Remember when you could get a 5% yield on a CD?

Ah, those were the good old days. Today, you’d be lucky to get 5% on a relatively safe “high-yield” junk bond with a 10-year maturity, let alone something creditworthy and with a shorter duration. And yes, these days it is regrettably necessary to put quotation marks around “high-yield.”

But despite the lack of yield in the bond market, you can still find a respectably high yield among dividend stocks.

Sure, when choosing high-dividend stocks over bonds you have a little more volatility to contend with. And stock dividends — unlike bond interest — can be cut by a company’s board of directors with no warning and with no legal liability.

But if my options are to accept a “risk-free” 2% in government bonds, a risky 5% in junk bonds, or an only modestly risky 5% or more in dividend stocks, the choice is pretty clear. And when you add dividend growth into the mix, dividend stocks are a no-brainer for investors hunting for income.

Today, I’m going to highlight five solid dividend stocks with high yields of 5% or more.

HCP, Inc. (NYSE:HCP)

I’ll start with HCP, Inc. (HCP), a blue-chip REIT included in both the S&P 500 Index and the Dividend Aristocrats Index following its 30 consecutive years of dividend hikes. At current prices, HCP pays a very competitive 5.1%.

HCP is backed by some very attractive long-term demographic trends, most notably the aging of the Baby Boomers. At 37%, senior housing makes up the largest segment of HCP’s portfolio, followed by post-acute facilities at 31%. Life sciences, medical offices and hospitals fill out the rest of the portfolio at 14%, 13% and 5%, respectively.

HCP is by no means a sexy stock. In fact, it’s about as boring as they come. But that boring predictability is precisely what makes HCP so attractive as a dividend stock. Over the past 10 years, HCP has grown its dividend at a 4% annual clip, a rate I consider reasonable going forward.

Between the current dividend yield above 5% and the growth rate of 4%, investors in HCP can expect something in the ballpark of 9%-10% annual returns going forward. That’s not amazing … but it certainly isn’t bad in this market.

If possible, it’s a good idea to hold HCN in an IRA or Roth IRA because REIT dividends are not always taxed at the more favorable 15%-20% qualified dividend rate. In the quirky world that is REIT taxation, some of a REIT’s dividend may be considered a tax-free return of capital, but most of the dividend will be taxed as ordinary income at the investor’s highest marginal rate. So as a general rule, it’s good to hold REITs in a tax-advantaged account like an IRA or Roth IRA.

Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA)

Next up is the first of two Spanish stocks I wanted to mention, banking giant Banco Bilbao Vizcaya Argentaria (BBVA). BBVA yields a very respectable 5.3% based on the past four payouts, and I expect BBVA’s stock price to benefit from a major revaluation of the entire Spanish market over the next several quarters.

Spanish stocks are some of the most attractively priced in the world. Spanish stocks trade at a cyclically-adjusted price/earnings ratio (“CAPE”) of just 12.7, according to Research Affiliates, giving the market as a whole an expected return in excess of 7% per year over the next decade. This compares to a CAPE of more than 27 in the United States and flat expected returns.

BBVA is attractive for several reasons. First, despite being in beaten-down Europe, it is not exclusively in Europe. Some of its biggest markets are the United States, Mexico and South America. BBVA is a global bank whose stock is treated as if it were completely dependent on Spain’s broken economy.

Secondly, after multiple rounds of stress tests and capital reviews, BBVA finally capitulated and cut its dividend a little over a year ago. With that cut out of the way — an increasingly a distant memory — I expect income investors to gravitate towards BBVA’s 5.3% yield. And finally, as I mentioned above, Spanish stocks as a whole are very inexpensive, and I expect a general revaluation of the entire market.

You’ll also want to read on for an important note about European dividends and taxation.

Telefonica S.A. (NYSE:TEF)

Much of my rationale for BBVA is solid advice for fellow Spanish large-cap Telefonica S.A. (TEF).

Telefonica is one of the largest telecom companies in the world, with an empire sprawling across 21 countries in Europe, Latin America and even China via its partnership with Chinese carrierChina Unicom (CHU). Telefonica’s businesses cover everything from mobile phone and internet service to paid TV.

Telecom is a brutally competitive business these days, particularly in the developed world where internet, cable TV, and mobile phone market penetration reached the saturation point years ago. But Telefonica’s strong presence in the emerging world gives it built-in growth.

As consumers continue to move from prepaid mobile plans to contract and data plans, Telefonica stands to increase its revenues per user without the heavy marketing costs associated with pulling users away from competitors.

Today, Telefonica’s biggest risks come from currency fluctuations in Brazil rather than instability in Europe. This is a problem that may get a worse before getting better, as Brazil’s political crisis stemming from the Petrobras bribery scandal shows no signs of abating. But I believe most of the bad news was priced in a long time ago.

Like BBVA, Telefonica found it necessary to cut its dividend due to fallout from the Eurozone debt crisis. In fact, in 2012 Telefonica slashed its dividend to zero. But after the market stabilized, Telefonica reinstated its dividend and hasn’t looked back since.

At today’s prices, Telefonica yields a very respectable 6.2%.

Total SA (NYSE:TOT)

Next up, we have another solid European stock pick, French energy major Total SA (TOT).

Energy stocks as a sector have gotten absolutely pounded over the past nine months due to the falling price of crude oil, and Total is no exception. Compounding the problem for U.S. investors is the fact that Total is a European company whose shares are priced in depreciating euros.

Still, if you believe as I do that both the crude oil decline and the euro decline have mostly run their course for now, then the European oil majors are an intriguing value proposition. At current prices, Total sports a very impressive 5.9% dividend yield. Total has also been steadily increasing its dividend over the past three years.

Interestingly, in a bid to become more shareholder friendly, in 2011 Total moved away from the European norm of paying dividends semiannually to the American norm of paying quarterly. While this may seem minor, I applaud any attempt by management to be more responsive to shareholder needs.

Statoil ASA (NYSE:STO)

Finally, we have Norwegian oil major Statoil ASA (STO), a company that has really emerged in recent years as a shareholder-friendly dividend payer.

Statoil is an International Dividend Achiever, meaning that it has raised its dividend for a minimum of five consecutive years. Indeed, Statoil has raised its dividend for six years running and currently sports a yield of 5.4%.

Statoil, which is majority owned by the Norwegian government, is best known for its role in bringing North Sea oil to market. But as the North Sea fields have matured, Statoil has aggressively expanded internationally and now has operations in 36 countries. And Statoil is continuing to invest in Russia, even amidst international sanctions.

Statoil’s production costs are a little higher than some of the larger oil majors, and with crude prices under $90 per barrel, the company has to borrow to sustain its dividend and capital expenditures, according to Norway-based Sparebank.

Yet management has repeatedly reiterated its commitment to its dividend and has indicated that it would sacrifice capital spending on growth projects if that is what was needed to preserve the dividend. And Statoil’s manageable debt load allows it the flexibility to borrow if crude prices stay depressed for longer than expected.

Statoil’s dividend has to be considered a little riskier than the others I’ve covered here, but I still consider it safe enough to warrant investment.

Now, you’re actually better off holding the European shares in a taxable brokerage account rather than an IRA if possible. That’s because most European countries withhold taxes on dividends paid to U.S. investors. For example, BBVA and Telefonica are subject to a 21% Spanish withholding tax, and Total is subject to a 30% French withholding tax. Statoil is subject to a lower 15% Norwegian withholding tax.

But while these taxes are a major irritant, all is not lost. You can recoup a lot of the foreign taxes paid via the Foreign Tax Credit. The math here is a little complicated, but I’ll try to keep it simple. The credit is equal to whatever you would have paid in the U.S. So, if you would have paid 15% on a U.S. stock, you can get a credit for 15% paid to a foreign country. Using France as an example, you’d recoup half of the 30% dividend tax withheld in France. But to take advantage of this, the shares have to be held in a taxable account.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Does Cisco Systems Belong in a Dividend Stock Portfolio?

The Nasdaq Composite crossed 5,000 this year, reaching that threshold for the first time in 15 years. It’s been a long road, but investors in the index can finally put the dot-com boom and bust behind them.

But not all of the high flyers from the late 1990s have regained their former glory. It’s hard to believe now, but Cisco Systems, Inc. (CSCO) was one the most valuable company in the world. Today, it doesn’t rank in the top 50.

And while Cisco stock has been rallying for the past four years, more than doubling since bottoming out in mid-2011, the price of Cisco still is 65% below its old bubble high.

Cisco Systems stopped exciting momentum investors a long time ago, and CSCO probably will never again be a growth dynamo. Its routers and switches have become commoditized products and face increasing pressure from cheaper software-based alternatives. But this slower-growing, more-mature Cisco stock is starting to get attention from a different corner of the market: Dividend hunters.

Cisco Stock: A Friendly Face for Income Investors

Cisco declared and paid its first quarterly dividend in 2011, at 6 cents per share, and has since become a dividend-raising machine. This quarter, Cisco raised its dividend for the fifth time in four years, to 21 cents per share. That’s a 250% increase in just four years.

chart4 CSCO: Does Cisco Systems Belong in a Dividend Stock Portfolio?

Let’s play with the numbers a little here. Cisco’s annual dividend of 84 cents works out to a current dividend yield of 3%. Had you bought shares of Cisco stock just before its first dividend in 2011 and held on to it until today, your yield on cost would be just shy of 5%. (For those unfamiliar with the term, “yield on cost” is the current annual dividend divided by the original purchase price. It’s a useful metric for long-term dividend investors investing primarily for income.)

Seen by itself, Cisco’s 3% dividend is not wildly compelling. Yes, it is significantly better than the 10-year Treasury yield and the dividend yield on the S&P 500, both of which offer about 1.9% these days. But it is also significantly below the level of many REITs, MLPs oil majors and other higher-yielding corners of the market. So, if you’re buying Cisco stock for its dividend, you had better be confident that its high rate of dividend growth will continue.

Well, we may not see 250% growth every four years going forward, but I do expect Cisco to be one of the biggest raisers among its large-cap peers.

When Cisco decided to pay its first dividend, it essentially made a new pact with shareholders. Henceforth, Cisco would be committed to rewarding its patient shareholders with dividends equal to at least 50% of its annual free cash flow.

On this count, Cisco stock actually has a little catching up to do. Over the trailing 12 months, its free cash flow has totaled $2.12 per share. That puts its current dividend at about 40% of free cash flow. Another popular metric for dividend sustainability, the dividend payout ratio, also indicates Cisco has a little wiggle room to keep raising its dividend. Cisco’s current dividend payout ratio is a very reasonable 45%.

Of course, ultimately Cisco’s ability to keep raising its dividend will hinge on its ability to grow its earnings. And on this count, Cisco’s prospects aren’t looking bad. Last quarter, Cisco beat analyst earnings estimates and offered upbeat guidance going forward. Even in a more competitive environment, Cisco has managed to double its revenues over the past decade.

Bottom Line

Cisco’s competitive pressures will not be going away overnight, and Cisco will probably see continued margin erosion for the foreseeable future.  I should emphasize again that this is not a high-growth company. But Cisco stock would make a nice addition to a diversified dividend stock portfolio.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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Equity REITs: Still Worth Buying?

Equity REITs, which invest typically in commercial buildings, apartments and other properties, have been a hot asset class over the past 14 months. As a sector, REITs are up about 30% since January of last year, including dividends. That’s about double the S&P 500’s total return over that period.

After a run like that, are REITs still cheap enough to consider buying?

You bet they are.

As I wrote last week, mainstream U.S. stocks are very expensive at today’s prices, trading at a cyclically-adjusted price earnings ratio of 27. This is more expensive than they were in 1929 and 2007 — both before their respective meltdowns.

But looking at REIT dividend yields, we see a very different story. Apart from the brief spike in yields that happened during the 2008 meltdown — remember, falling prices mean rising yields — REIT dividend yields have barely budged over the past decade. Since 2006, they’ve essentially bounced around in a range of about 3.2% to 4.0%:

are REITS a good buy

As you can see, that’s a far cry from the 8% yields that were the norm for the 1970s, ‘80s and even parts of the ‘90s. But remember, we’re in a very different world today, one in which bond yields scrape along at lows that few ever believed possible.

In 1980, CPI inflation was 13.9% and the 10-year Treasury yielded over 12%. That made the 8% dividends offered by REITs look terrible by comparison.

Today, REITs as an asset class may yield only 3.4%, but that looks pretty good in a world where CPI inflation and the 10-year Treasury yield are both below 2%.

If you believe — as I do — that this period of low inflation and low bond yields still has a few years left to run, then REIT dividends at today’s levels look like a very solid value.

This article first appeared on Economy & Markets.

 

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March Madness Round 3: Kinder Morgan vs Disney

March Madness

This piece is part of InvestorPlace’s 2015 Stock Market March Madness contest. Follow the link and vote for your favorite stocks.

Well, one for two isn’t bad. In Round 2 of Stock Market Madness, I picked pipeline juggernaut Kinder Morgan Inc (KMI) over oil major ExxonMobil Corporation (XOM). It was a tough call, as I consider both stocks to be fine buy-and-hold dividend champions. But readers seemed to agree: Kinder Morgan took 61% of the vote to Exxon’s 39%.

Unfortunately, I shot an air ball with my recommendation of Ford Motor Company (F) over Walt Disney Company (DIS). I still consider Ford the better pick for now, but readers disagreed. Disney took 78% of the vote while Ford could barely manage 22%. The contrarian in me is tempted to call such a lopsided win a contrarian sign, but then, I have often been accused of being a sore loser.

So, in Round 3 we have Kinder Morgan taking the court against Disney. These are two stocks that are both very popular with readers and with good reason. Both have had fantastic runs of late. But only one stock can advance to the next round. Let’s dig into both stocks now.

Kinder Morgan

We’ll start with Kinder Morgan. I’ve made no secret of my enthusiasm for this stock over the last year. It has everything I look for in a good stock. It’s on the right side of at least one durable macro trend, it’s reasonably priced, it’s massively shareholder friendly, and company insiders are pouring millions of their own dollars into the stock. There’s not much to dislike here.

You might be wondering what I mean when I say that Kinder Morgan is on the right side of a major macro trend. After all, crude oil is still in freefall, and America’s domestic production boom would seem at risk.

Well, I agree, actually. In the short-term, America’s onshore drilling industry really is at risk. I expect a lot of drillers to go belly up before all is said and done. But this is actually an opportunity for the blue chips like Kinder Morgan. Earlier this year, Kinder bought $3 billion in quality pipeline assets from a cash-strapped Harold Hamm. (You probably recognize the name. He’s the founder of shale pioneer Continental Resources (CLR) and party to an now infamous billion-dollar divorce…) I expect to see a lot more deals like these from motivated sellers.

When the global economy picks up again, so will the price of crude oil…and so will American onshore production. And leaders like Kinder Morgan will have the assets in place to move their oil and gas where it needs to be.

Meanwhile, Kinder Morgan is reasonably cheap, trading at a dividend yield of 4.4%, and it is a champion of shareholder friendliness. Kinder Morgan has been a serial dividend raiser, and indicated late last year that it expected to see dividend growth of at least 10% per year over the next five years.

But the kicker is Kinder Morgan’s insider buying. CEO Richard Kinder just dumped nearly $4 million into KMI stock…which sounds pretty good. Until you hear that he’s bought nearly $100 million in KMI shares over the past two years. I like CEOs with skin in the game, and it’s safe to say that Mr. Kinder has more skin in the game than almost any CEO of a company this size.

Walt Disney Company

But in Disney, Kinder Morgan has a worthy rival.  Disney is an iconic company with perhaps the best brand of any company in the world. I’d put Mickey Mouse up against Coca-Cola (KO) or even the major beer companies in that respect. Disney’s franchises were a century in the making, and the company has some of the deepest and widest competitive moats you can find.

It’s also a wildly profitable company, and Disney’s earnings per share and revenues per share are sitting at all-time highs. Disney may well enjoy the best summer in its history if the Avengers sequel is as big a hit at the box office as expected.

But as I mentioned in the Round 1 article, Disney is not primarily a movie studio or a theme park operator. It is first and foremost a TV studio. Its media division — which includes broadcast giant ABC and cable sports juggernaut ESPN among others — accounts for close to half of revenues in any given year.

This is a major strategic risk, as Apple (AAPL) and Dish Network (DISH) are potentially upending the current cable TV regime with their streaming content options. Frankly, I don’t know how this will end. Disney and the other major content owners might end up stronger than ever. But revolutions often take on a life of their own, and there is just too much uncertainty. Yet in Disney’s current valuation, investors seem oblivious to these risks. Disney’s stock is very expensive at a cyclically-adjusted price earnings ratio of 35.

My choice in Round 3 is Kinder Morgan. I expect Kinder Morgan to give Disney a serious run for the money in 2015, but I also expect it to be the better—and safer—buy and hold option. If the market were to close for the next decade and you were stuck holding whatever stocks you own today, you’d be in good shape holding Kinder Morgan.

Disclosures: Long KMI

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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