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Dividend Smackdown: Microsoft vs ExxonMobil

Big-tech behemoth Microsoft Corporation (MSFT) leapfrogged ExxonMobil Corporation (XOM) last week to become the second-largest company in the world by market cap. MSFT stock weighs in at a valuation of $405 billion compared to $402 billion for XOM stock.

Both still have a long way to go before catching up with Apple Inc.’s (AAPL) world-leading $671 billion market cap, but the reversal is telling. Just a year ago, Exxon was considered the bluest of blue chips, and Microsoft was a tech dinosaur that had been left in the dust by Apple, Google (GOOG) and others. But today, with crude oil prices in freefall and with Microsoft resurgent under CEO Satya Nadella, MSFT stock has the momentum.

I’m actually bullish on both stocks.  I’ve been long Microsoft for years, and I have indirect exposure to ExxonMobil via a position in the Energy Select SPDR ETF (XLE). Both stocks are monster dividend payers with long histories of rewarding their shareholders. Today, we’re going to put Microsoft and ExxonMobil in the ring for a dividend smackdown. May the best dividend payer win!

XOM-MSFT-Dividend

Exxon Mobil Corporation

We’ll start with ExxonMobil.  XOM stock currently yields 2.8%. This isn’t a monster payout by any stretch, but it is competitive in a world in which the 10-year Treasury yields a pitiful 2.3%.

ExxonMobil pays out only 33% of its earnings as dividends. So, come what may with the price of crude oil, there is still plenty of room for dividend growth in the years ahead.  And indeed, ExxonMobil has been a serial dividend raiser over time, boosting its payout every year for the past 32 years.  Over the past five years, it has raised its dividend at a 10.7% clip.  Over the past ten years—a period that included the 2008 meltdown—it has raised its dividend at a 9.4% clip.  That’s not too shabby!

Let’s take a look at one of my favorite metrics: Yield on cost. Yield on cost is the current annual dividend divided by your original purchase price. This is the cash return that you’d enjoy for buying and holding a dividend stock, and it’s an important consideration for a stock like XOM with a modest current yield but a long history of dividend raising.

If you had bought ExxonMobil five years ago and held it until today, you’d be enjoying a yield on cost of 4.8%. Had you bought it ten years ago, you’d be enjoying a yield on cost of 6.9%.  You’d have a hard time buying junk bonds offering a yield that high today. But such is the compounding power of dividend growth.

Microsoft Corporation

Microsoft sports a slightly lower yield than ExxonMobil at 2.3%.  It also has a slightly higher dividend payout rate at 44%.  But the dividend payout rate is still low enough to suggest that years of healthy dividend boosts are doable for Microsoft.

Microsoft’s dividend growth rate blows ExxonMobil’s out of the water.  Over the past five years, Microsoft has boosted its dividend at a 20.0% annual rate.  And over the past 10 years, it’s grown it at a very impressive  14.3% annual rate.

Part of this is due to Microsoft being newer to the world of dividend paying.  Microsoft declared its first dividend just 11 years ago, and its initial quarterly payout was modest.  But it’s fair to say that Microsoft is making up for lost time with its aggressive dividend hiking.

Can it continue?  Well, let me put it this way: It’s showing no signs of slowing down.  Microsoft grew its dividend at a 21.7% clip over the past year.

Looking at yield on cost, had you bought Microsoft stock five years ago, you’d be enjoying a 5.7% yield today.  Had you bought Microsoft stock ten years ago, you’d be enjoying an 8.6% yield today.  These are the kinds of yields you normally only find in speculative mortgage REITs and business development companies.

So…who wins the dividend smackdown?

I’m giving this round to Microsoft based on its higher dividend growth rates.  But Exxon Mobil is a worthy competitor, and I would recommend both for a diversified income portfolio.

Disclosures: Long MSFT, AAPL

Charles Lewis Sizemore, CFA, is the chief investment officer of the 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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Prospect Capital: Massive Insider Buying in this High-Yielding BDC

A high dividend yield, large-scale buying by company insiders, and recent buying by funds controlled by Joel Greenblatt and George Soros.

Sound interesting?  Then I suggest you take a look at shares of Prospect Capital Corporation (PSEC), a business development company (“BDC”) traded on the Nasdaq.

If you’re unfamiliar with BDCs, you can think of them as publically-traded private equity firms.  BDCs provide financing to small and middle-market companies that are too early in their development to get funding from more traditional sources, such as the bond and equity markets. It’s a high-risk but potentially very high-return financing niche.

Similar to REITs, BDCs pay no taxes at the company level on the condition that they distribute at least 90% of their income to their investors via dividends.  This makes BDCs some of the highest-yielding investments on the market, but—as is the case with REITs and MLPs—their inability to retain earnings for future growth also means that they regularly have to issue new shares, which dilutes current shareholders. That’s not necessarily a bad thing if new investments are accretive to earnings.  But it means that management has to be extremely disciplined.

Let’s dig into the details of Prospect Capital.  PSEC invests primarily in first-lien and second-lien senior loans and mezzanine debt and provides financing for leveraged buyouts, acquisitions, recapitalizations, and capital expenditures for growth. PSEC also invests in the higher-risk but potentially much higher-return equity tranches of collateralized loan obligations. Most of PSEC’s individual investments would have to be considered risky given the early stages of the companies involved, but the portfolio is diversified across a wide variety of industries.

PSEC pays an absolutely massive dividend, sporting a current dividend yield of 13.7%.  Now, normally, that would make me pause.  An exceptionally high yield is often a major red flag for an income investment, as it is often a prelude to a dividend cut.

In PSEC’s case, our risk is mitigated by three major factors.  First, the company managed to sail through the 2008 meltdown without slashing its dividend. The company survived Armageddon with its dividend intact; that says a lot about its staying power.  Secondly, the company has continued to modestly raise its dividend throughout 2014.  And finally, the company’s management team has been aggressively buying the stock on the open market.  If a dividend cut were likely, I have a hard time believing the people running the company would be putting millions of their own dollars into the stock.

Speaking of the insiders, let’s take a deeper look at what exactly they have been up to:

InsiderPositionDateSharesTrade Price ($)Cost ($)
John F BarryCEO9/16/2014100,00010.171,017,000
Eliasek M GrierCOO9/16/20145,00010.1050,500
Eliasek M GrierCOO8/29/201420,00010.26205,200
Eugene StarkDirector8/28/20144,00010.3241,300
Brian OswaldCFO 8/27/201427,30010.40283,900
John F BarryCEO6/13/2014100,00010.371,037,000
Eliasek M GrierCOO6/12/201424,00010.28246,700
John F BarryCEO6/12/2014100,00010.331,033,000
Brian OswaldCFO 6/12/201430,00010.25307,500
Eugene StarkDirector6/12/20141,00010.2710,300
John F BarryCEO3/20/2014100,00010.861,086,000
Eugene StarkDirector2/6/20141,00011.1011,100

Four company insiders—including the CEO, CFO and COO—have collectively poured $5.3 million into PSEC stock in 2014, and all at prices higher than those we see today.  CEO John Barry made a mill-on-dollar purchase as recently as a month ago.

Oh, and as an added sweetener, funds controlled by hedge fund gurus Joel Greenblatt and George Soros have recently taken positions in the stock.

Are there any risks we should be concerned about here?

Sure.  PSEC’s dividend payout ratio is currently 125%, which means that PSEC is effectively issuing debt and new equity to fund its current dividend. That is sustainable in normal, healthy capital markets.  If we were to see the markets seize up again as they did in 2008, PSEC’s dividend would be at risk.  But I consider that risk small enough to safely ignore for the time being.

PSEC’s stock currently trades at a 10% discount to book value.  This means that you could hypothetically sell the company for spare parts and come away with a decent profit.  While PSEC is mostly an income play, the discounted stock price makes respectable capital gains over the next year likely as well.

Disclosures: Charles is currently long PSEC in his Dividend Growth portfolio.

Charles Lewis Sizemore, CFA, is the chief investment officer of the 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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Update on the DRIP and Forget Portfolio

One of my most popular portfolios in the Sizemore Investment Letter and Macro Trend Investor was the “DRIP and Forget” portfolio, also called the “Core Dividend Portfolio.”  I’ve created a landing page here to track the portfolio’s continued progress, and I will periodically post updates in Sizemore Insights.

I’ve also added a new column–“yield on cost”–which calculates what your effective dividend yield today would be based on the original price at which I recommended the stock.  I realize that most people reading this today will not have purchased the stock at my original recommendation date.  I’m ok with that.  This is for illustrative purposes only.  My goal here is merely to show you how a solid dividend portfolio can provide for your income needs in retirement.

The DRIP and Forget portoflio is a supplementary list of recommendations that I consider a substitute for fixed income. As with all investments in the stock market, it will have more short-term volatility than a fixed income portfolio, but taken as a group, I consider the investments in this list a viable substitute for retirement income. Unlike bond interest, their dividend payments can be expected to rise over time. The DRIP and Forget stocks are intended to be held long-term in a dividend reinvestment program (“DRIP”), hence the name “DRIP and Forget.”

Total returns are cumulative and include capital appreciation and dividends assuming the buy price and buy date shown.

*Last updated October 14, 2014

CompanyTickerBuy DateBuy PriceCurrent PriceCurrent YieldYield on CostTotal Dividends RecievedTotal Return
Abbott LaboratoriesABT11/5/201230.8141.312.15%2.86%$1.4438.04%
Colgate-PalmoliveCL11/8/201036.4164.042.24%3.95%$4.7588.93%
DiageoDEO10/8/201070.8109.923.75%4.88%$11.7668.81%
IntelINTC7/21/201021.2631.892.86%4.23%$3.5466.65%
Johnson & JohnsonJNJ7/7/201059.0896.862.74%4.74%$9.6880.33%
Kimberly-ClarkKMB8/6/201065.29106.553.12%5.15%$12.8481.57%
Altria GroupMO7/7/201020.5446.134.52%10.13%$7.36157.89%
MicrosoftMSFT7/7/201023.8244.182.84%4.70%$3.61100.63%
National Retail PropertiesNNN7/8/201034.9736.634.66%4.80%$0.817.06%
NestleNSRGY12/8/201056.0670.933.39%4.32%$8.624.19%
Realty IncomeO7/8/201342.6543.345.15%5.15%$2.556.75%
Procter & GamblePG7/7/201059.3483.33.09%4.34%$9.4956.37%
Philip Morris InternationalPM4/8/201052.5284.284.76%7.62%$14.4286.02%
UnileverUL12/8/201029.4340.113.78%5.22%$5.0153.31%
Wal-MartWMT6/7/201376.3377.942.48%2.52%$2.385.23%

Note: These returns are presented for illustrative purposes only and do not correspond to a real-money portfolio. My objective here is to illustrate the power of rising dividends and the superiority of dividend-paying stocks over bonds as long-term income investments.

Charles Lewis Sizemore, CFA, is the chief investment officer of the 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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Three Stocks for a Worry-Free Retirement

After a terrible start to the quarter, stocks are showing signs of life again.  Perhaps it was the unexpectedly strong showing of pro-market candidate Aecio Neves in the first round of Brazil’s presidential election, or last Friday’s stronger than expected jobs report, but investors seem to be getting over their third-quarter jitters and looking to a strong finish to the year.

But here’s the truth: If you in or near retirement, you have no business worrying over every squiggle the market takes.  First and foremost, you need a portfolio that allows you to sleep well at night, one that will provide stable, if not necessarily spectacular, returns.

A good retirement stock should have the following characteristics.  To start, its underlying business should be stable and predictable.  You don’t want to bet your retirement on a faddish new technology or on a hit-or-miss biotech gamble.  Secondly, the company should be financed responsibly.  As we saw in 2008, otherwise stable business ran into severe distress when their access to the lending markets was cut off during the crisis.  And finally, you want stocks with a long history of taking care of their shareholders, ideally through regular dividend hikes but also potentially via share buybacks.

So, with that said, let’s jump into three of my favorite stocks for a worry-free retirement.

Unilever PLC

I’ll start with what is possibly the most boring company in the Europe: consumer products giant Unilever PLC (UL).

If you’ve ever set foot in a supermarket anywhere in the world, then you are familiar with Unilever’s brands.  Among many others, they include: Axe, Ben & Jerry’s, Bertolli, Dove, Lipton, St Ives, VO5, and Vaseline.  If there was ever a set of products that was unlikely to fall to technological obsolescence or a black swan event, it would  be Unilever’s.

But while its products may be mundane consumer staples in the West, Unilever has excellent growth prospects abroad.  Unilever gets nearly 60% of its revenues from emerging markets, and while that has hurt the company over the past few years of emerging-market currency volatility, it ensures that it has a bright future as living standards continue to rise.

Unilever has one of the strangest share structures of any company on the planet.  It’s listed in both London and Amsterdam as two separate companies, Unilever PLC and Unilever NV, respectively, and both trade in the U.S. as ADRs under the tickers UL and UN.  Back in the 1930s, management found it easier and cheaper to do a “business merger” rather than a “legal merger” between the British and Dutch companies that today make up the Unilever Group.

Don’t be distracted by any of this.  For all intents and purposes, UL and UN are the same.  The only effective difference is that UN is subject to 15% withholding taxes on dividends in the Netherlands, whereas UL is not.  This matters, as the dividend is an important part of Unilever’s returns.  The company has raised its dividend every year for over 25 years and currently yields 3.9%. For this reason, I recommend UL over UN.

Realty Income

Next on the list is one of my very favorite long-term income holdings, triple-net retail REIT Realty Income (O).

I’ve commented in the past that I own shares of Realty Income that I intend to hold forever and pass on to my kids someday.  If they are smart, they’ll pass the shares on to their own children someday as well.

Why my enthusiasm for Realty Income?

Simplicity. Realty Income has what is perhaps the simplest business model of any stock trading today.  It buys high-quality properties in high-traffic areas and rents them to high-quality tenants; its “typical” property is a pharmacy run by Walgreens (WAG) or CVS Caremark (CVS).

Realty Income has been in business for 45 years and has paid 530 monthly dividends since going public in 1994.  Realty Income has also raised its dividend 77 times in that span.

I wrote last month that Realty Income is on sale again, and I would reiterate that point today. Realty Income, along with most income-focused stocks, took a pounding in the third quarter on fears that the Fed would be tightening sooner rather than later.  But bond yields have sense eased, and Realty Income now yields and attractive 5.3%.

Buy Realty Income, collect the dividend, and sleep well at night.

Apple

My last retirement stock recommendation is Apple (AAPL).  This is a stock I wouldn’t have recommended for a staid retirement portfolio a few years ago because, frankly, its core product markets were too new to warrant consideration for conservative investors.

Apple spent most of the 2000s and 2010s as an explosive growth stock, and investors who got in early made a fortune. But as the smartphone and tablet markets have matured, Apple as a company has matured as well. Today, Apple is a profitable company with an unrivaled hoard of cash, no net debt, and a strong recent history of dividend hikes and share repurchases.  While Apple, as a tech and consumer electronics company, is less predictable than Unilever or Realty Income, at this stage I am comfortable including it in our list of retirement stocks.

Will the iPhone 6 outsell its Android rivals?  Maybe, maybe not.  I’m not too concerned about the performance of any single product iteration because Apple has managed to do for mobile devices what Microsoft (MSFT) did with PCs in the 1980s and 1990s: They’ve built a platform.  And via their new partnership with IBM (IBM), Apple is elbowing its way into the longer-lasting, less-fickle world of corporate enterprise relationships.

Smartphones and tablets are no longer explosive growth businesses.  In fact, in the developed world, they are close to the saturation point.  But these are also products with relatively short life cycles; most users replace their phones every 1-2 years.

Apple has major competition from Samsung (SSNLF) and other makers of Google (GOOG) Android devices.  Over time, Apple may have trouble maintaining its fat profit margins in the face of such worthy competition.  But given that Apple trades at a significant discount to the broader S&P 500, a fair amount of margin compression appears to be baked into current prices.

Buy Apple and collect its 1.9% dividend, which I expect to double in the next five years.

Charles Lewis Sizemore, CFA, is the chief investment officer of the 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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Realty Income Is On Sale Again

Here we go again.  Hand-wringing over the Fed’s tightening schedule has caused a sell-off in bonds and all things income related.  After falling for most of July and August, the 10-year Treasury yield has jumped to over 2.6% on speculation that the Fed may start tightening monetary policy sooner than previously thought.

We’ll see. The Fed may indeed start to raise short-term rates as soon as the first quarter of next year.  But that by now means guarantees that longer-term rates will follow suit. Long-term yields have drifted lower for most of 2014, even as the Fed has continued to taper its quantitative easing program from $85 billion per month to just $15 billion per month.  Meanwhile yields in much of Europe are sitting at multi-century lows—yes, as in multiple hundreds of years—and the 10-year yield in Japan is less than 60 basis points.  Inflation remains below target across the developed world, and demand for fixed income is stronger than ever due to the aging of the baby boomers.

My prediction? The market consensus that the Fed will begin raising short-term rates by the end of the first quarter is probably “about right.”  But I do not expect longer-term yields to follow.  In my view, a range of about 2.2% to 3.2% on the 10-year Treasury over the next 4-5 years is the most realistic scenario.

So, what’s the trade?  Buy bonds?

No.  Even at a yield of 3.2%, at the upper end of my range, your real, inflation-adjusted yield will be about 1% at best, with no potential for income growth or capital appreciation.  A better option would be to buy the shares of “bond substitutes” like safe, triple-net REITs.

I’ve recommended Realty Income (O) before, and I would do so again today.  This is a stock I would feel comfortable recommending whenever bond yields drift towards the upper end of my range.  At current prices, Realty Income yields 5.2%, and the REIT has a long history of raising its dividend every year—and sometimes multiple times in a year (see chart).

chart

Realty Income is down about 9% from its 2014 highs to a current price of $41.76 as of Thursday’s close.  I would recommend accumulating shares whenever they fall below $43.00.

Are you going to double your money in Realty Income?  I would seriously doubt it.  But if you’re looking for retirement income, I would consider it a strong substitute for fixed income at current prices.

This piece first appeared on TraderPlanet.

Charles Lewis Sizemore, CFA, is the chief investment officer of the 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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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.