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3 High-Yield MLPs to Buy Amid the Crude Oil Rout

A few weeks ago, on one particularly rough day for the MLP sector, I wondered to myself who had just blown up. With even blue-chip names down 4% or more on the day, the only explanation I could come up with was that a leveraged MLP hedge fund must have “blown up” and been forced to liquidate its holdings due to margin calls, pushing down prices. Nothing else made sense.

I never got an answer to that question, and I will probably never know. But when I see the continued meltdown in the MLP space, I’m still left wondering: What, exactly, are investors thinking when they dump MLPs at today’s prices?

When they can get a 5% current yield or better and distribution growth of 5% to 10% per year for the foreseeable future… where exactly do they expect to find better bargains?

Hey, I get it. The collapse in the price of crude oil is scary. I wouldn’t particularly want to own an upstream exploration and production MLP like Linn Energy (LINE) in this environment. But most of the larger MLPs get most of their revenues from midstream transportation and are mostly insensitive to energy prices. And whatever modest exposure to energy prices they have right now can’t quite justify the 22% decline in the JPMorgan Alerian MLP ETF (AMJ) since early May.

Today, I’m going to take a look at three midstream MLPs that have taken an unjustified beating. All pay fantastic dividends or distributions, and all are expected to see significant growth over the next several years.

Enterprise Products Partners

I’ll start with Enterprise Products Partners (EPD), considered by many, including myself, to be the bluest of blue-chip MLPs. Enterprise Products operates 51,000 miles of oil and gas pipelines in additional to extensive salt-dome storage capacity and marine transportation.

By management estimates, about 85% of Enterprise Products’ income is fee-based, depending on the volume of oil and gas transported rather than the price. And most of EPD’s price sensitivity is due to its natural gas liquids business.

Enterprise Products is down about 23% since early May on no real news. Distributable cash flow for the first half of the year was roughly flat with the same period from 2014.That might have been modestly disappointing to investors hoping for growth, but it’s hardly devastating news.

At today’s prices, Enterprise Products yields 5.9%, and that distribution is about as safe as they come. Its distributable cash flow covers its current distribution by 1.3 times, giving Enterprise plenty of room to grow its distribution even if cash flows fail to grow as quickly as in years past.

Kinder Morgan

Up next is Kinder Morgan (KMI), the only MLP that can compete with Enterprise Products in terms of size and scope.

Kinder Morgan is not technically an “MLP.” It’s a corporation. But I’m comfortable including Kinder Morgan here because, up until last year, this sprawling pipeline empire actually included three underlying MLPs in addition to the general partner.

Like Enterprise, Kinder Morgan has gotten slapped around lately, down about 30% since late April. But this is absurd when you actually take the time read Kinder Morgan’s most recent quarterly earnings release. Kinder Morgan increased its project backlog by $3.7 in the second quarter to $22 billion, meaning that KMI has no shortage of growth prospects in front of it.

During its reorganization last year, management said that it intended to raise KMI’s dividend by at least 10% per year from 2016 to 2020, and they reiterated that call this past quarter. And at today’s prices, the stock yields a whopping 6.4%.

Between the current dividend and the expected growth rate, you should be looking at minimum annual returns of about 16% per year over the next five years. That’s enough to double your money in a market that is expensive and priced to deliver almost nothing in the way of returns over the next decade.

Teekay Corporation

And finally, I get to one of the quirkier companies in the midstream space,Teekay Corporation (TK). Most MLPs own pipelines; Teekay owns tankers. It’s a different vehicle, but it’s the same basic idea. Rather than drill for oil and gas, Teekay simply moves it around.

Like Kinder Morgan, Teekay is technically a corporation and not an MLP. But this is where it gets interesting. Teekay is the general partner of two MLPs, Teekay Offshore Partners (TOO) and Teekay LNG Partners(TGP) and the controlling shareholder of another corporation, Teekay Tankers (TNK).

Rather than continue as an operating entity in its own right, Teekay Corporation is transitioning into a pure-play general partner by dropping its operating assets down into its MLPs. And that can only mean one thing: A big surge in dividend growth.

As part of Teekay’s strategic shift, it boosted its dividend by 70% earlier this year, and management expects annual dividend growth of 15% to 20% over the next three years. Between that stellar growth rate and Teekay’s current 7% dividend, you’re looking at doubling your money in about three years.

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 Berkshire Hathway Make the Cut as a “Retirement Stock”?

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Warren Buffett has made his investors a lot of money over his career. Over the past 35 years, Berkshire Hathaway (BRK.A) has grown its book value at a compounded rate of return of 19.0%. Over that same period, the S&P 500 has generated total returns of only 11.8%. For a manager as large and as closely followed as Buffett, those returns, spread out over three and a half decades, are nothing short of amazing.

Buffett has evolved over the years, moving from a deep value “cigar butt” investor into one that buys great businesses at reasonable prices. He also transformed Berkshire Hathaway twice: First from a textile mill into a diversified insurance company and then into the vast conglomerate. But while no one questions Buffett’s investment acumen or his ability to transform both himself and his company, whether or not Berkshire Hathaway makes the grade as a retirement stock is another question entirely.

Let’s start with the basics of what makes a good stock a “retirement stock.” To start, it should be a stable company in an industry or industries that are not too susceptible to technological upheaval. Remember, we’re looking for something to hang on to throughout your golden years.

Buffett has said that he buys companies that he would be comfortable holding if the stock market were to close for five years. In the age of smartphones and Uber taxis, those companies are harder to find. But they are definitely out there, and I would include Berkshire Hathaway among them.

Berkshire Hathaway has individual holdings – even large ones – that under attack from evolving technology. Perhaps the most visible is IBM (IBM). As IBM’s businesses has come under attack from cloud-based competitors, its sales have taken a hit, as has its share price.

But here is the beauty of Berkshire Hathaway. While IBM is one of its largest publically-traded holdings, it makes up only 12% of Berkshire Hathaway’s portfolio and only 3.5% of Berkshire’s market cap. (Remember, much of its value comes from its non-publically-traded holdings). The vast majority of Berkshire Hathaway’s holdings are indeed “technology proof” or at least technology resistant. A fine example is Buffett’s latest acquisition, Precision Castparts (PCP). Precision Castparts is…well…exactly what it sounds like: A precision maker of industrial parts and machinery for everything from aircraft to surgical implants. That’s not something a trendy smartphone app out of San Francisco can easily disrupt.

Another nice aspect of Berkshire Hathaway is that Warren Buffett is all too aware of his own mortality and has assembled a fine company that will likely survive and prosper decades after his eventual death or incapacitation. (I intentionally avoided saying “retirement” because there is no retirement for men like Buffett. He will die in the saddle with his boots on, and God bless him for it.) Berkshire’s myriad of subsidiary companies essentially run themselves with minimal oversight from Buffett.

But despite all of this, I can’t in good faith consider Berkshire Hathaway stock a good “retirement stock,” per se because it fails one of my fundamental criteria: It doesn’t pay a dividend.

I don’t fault Mr. Buffett for hoarding his cash. For a man of Buffett’s talents, a dollar doled out as a dividend is a waste of capital. Buffett can reinvest that dollar better than you or I can. But dividends are critical to a retirement portfolio. Without them, you have to sell shares to realize income.

That’s not a problem in a raging bull market. But in a down market, it can massively deplete your capital. Even the mighty BRK.A lost over 40% of its value during the 2008 meltdown, and from June 1998 to August 2003 the shares traded sideways, not earning its shareholder a nickel. Had Berkshire paid a regular dividend, a retired shareholder could have lived off the dividends during those dark times rather than having to sell the stock at fire-sale prices to meet living expenses.

Here’s the thing. I suspect that once Mr. Buffett is no longer running the company, Berkshire Hathaway will initiate a dividend, and it will probably be a handsome one. But that day will (hopefully) be many years from now. So for now, Berkshire Hathaway is not suitable as a retirement stock. It’s still worthwhile to own, mind you, but it’s not one that I would recommend for investors already in retirement unless their income needs are already met elsewhere.

Disclosures: None.

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

Photo credit: DonkeyHotey

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Kinder Morgan is On Sale Again With a 6% Dividend

It’s been an absolute bloodletting in the midstream oil and gas MLP space. As the bear market in oil prices has taken another leg down, everything even tangentially related to energy has gotten crushed. Even the blue chips with minimal exposure to prices have been left for dead. Kinder Morgan (KMI) and Enterprise Products Partners (EPD) are down 23% and 28%, respectively, since late April. Seaborne midstream MLP general partner Teekay Corp (TK) is down by about a third.

Whenever I see destruction like that, it gets my attention. A stock is not always a bargain because it has fallen in value. Sometimes a cheap stock is cheap for a reason. But as often as not, the market really does overreact and presents us with a good buying opportunity. Let’s take a look at Kinder Morgan and see if we have one of those opportunities today.

The selloff in Kinder Morgan and other MLPs this summer has been peculiar because KMI stock mostly avoided the pain that hit the rest of the energy sector a year ago when the price of crude oil first began falling. The massive declines are happening now, months after the oil supply glut should have been old news. Some of this is due to belated fears that U.S. domestic production – which has been slowing in recent weeks – will crimp the volume growth that drives pipeline profits. That’s a legitimate concern. But hardly one that would justify this kind of move in the stock price.

Particularly when you consider Kinder Morgan’s most recent quarterly earnings release. Kinder Morgan increased its project backlog by $3.7 in the second quarter to $22.0 billion, meaning that KMI has no shortage of growth prospects in front of it.

Lower energy prices are a problem, to be sure. While KMI gets the vast majority of its revenues from fee-based contracts that are not sensitive to energy prices, the company is not completely immune. KMI estimates that every $1 change in the price of crude oil lowers distributable cash flow by $10 million. That sounds like a lot of money, but remember that Kinder Morgan produces over $15 billion per year in sales. Even at today’s depressed priced, KMI generated enough distributable cash flow in the first half of the year to cover its dividend with $226 million to spare.

And speaking of that dividend…last month Kinder Morgan raised its dividend by 14%. And management reaffirmed that it intended to raise KMI’s dividend by at least 10% per year from 2016 to 2020.

At today’s prices, KMI’s $1.96 per share dividend works out to a yield of 6.1%. If KMI is able to follow through on its promise of 10% annual dividend growth, by 2020 its annual dividend will be a cool $3.16. That works out to a yield on today’s price of 9.8%.

Between the current dividend and the expected growth rate, you should be looking at minimum annual returns of about 16% per year over the next five years. That’s enough to double your money.

And don’t take my word for it. Watch what the company insiders are doing.

Richard Kinder, the founder and chairman of Kinder Morgan, bought over $11 million in KMI stock in June and July. And since December of 2013, Mr. Kinder has spent $56 million of his own money buying shares.

And he’s not the only one. Board member Fayez Sarofim dropped $17 million last month buying shares, and since December of 2013 various Kinder Morgan insiders have plowed nearly $90 million into company stock.

It’s worth noting that Richard Kinder takes no salary for his work as chairman. His only compensation is via the dividend on his vast holdings of KMI stock. So it’s in his best interests – as well as ours – to keep the dividend checks growing.

After the recent rout, KMI stock is a steal. Use this lull as a buying opportunity.

Disclosures: Long KMI, EPD, TK

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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7 Stocks to Fund a Happy Retirement

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I spend a lot time thinking about my investments. It sort of comes with the job description. But when I eventually retire, I don’t intend to spend my days with my eyes glued to a monitor. I want to retire with my mind at ease and with a steady stream of cash coming in.

To start, it absolutely must pay a respectable dividend. I buy plenty of stocks that do not pay dividends, and there is nothing wrong with that.So, what are some of the qualities I would look for in an ideal retirement stock?

Young, fast-growing companies generally have more pressing needs for their cash. But any stock I would feel comfortable holding in retirement needs to be mature enough to pay a dividend — potentially for decades.

Furthermore, that dividend should grow every year, or at least very regularly. A stock that doesn’t grow its dividend is essentially a risky bond with no set maturity date. The income it throws off won’t keep pace with inflation.

And finally, the stock should have survived a good crisis or two without cutting its dividend. If you’re planning on living off dividends, you need to have faith that they’re going to be there for you when you need them.

So with no more ado, let’s jump into my list of seven stocks to fund a happy retirement.

Realty Income

I’ll start with “the monthly dividend company,” blue-chip retail REIT Realty Income (O).

I write about Realty Income a lot. In fact, I may actually write about Realty Income more than any other stock.

And there is a solid reason for that: I consider it one of the very best dividend stocks a retiree can own. It’s about as stable and conservative as a bond while still offering regular dividend growth. Realty Income has paid 539 consecutive monthly dividends, and has raised its dividend for 71 consecutive quarters.

Not every dividend hike is newsworthy, but Realty Income has managed 5% compound annualized dividend growth for 20 years and running. That’s well ahead of inflation and certainly enough to guarantee a happy retirement.

So, what is the secret to Realty Income’s stability?

Realty Income isn’t really a “company” as you might think of one. It’s a passive landlord with a portfolio of more than 4,300 properties. As a triple-net REIT, the tenants are responsible for all maintenance, taxes and insurance, and Realty Income has a long history of leasing to stable tenants.

Realty Income’s stock price has faltered in 2015, falling in sympathy with bonds and other income-producing assets. If you’re looking to retire happy, use this as a buying opportunity in one of America’s finest divided payers.

Ventas, Inc

Along the same lines, we have one of the bluest of blue-chip REITs, Ventas, Inc. (VTR).

With a market cap of $21 billion, Ventas is one of the largest holdings in most REIT index funds, and it’s one of the few REITs to make it into the S&P 500.

With Ventas’ size comes stability and financial strength, but that doesn’t mean that Ventas is wanting for growth. The stock has generated total returns of about 26% per year over the past 15 years.

As a diversified health REIT, Ventas is a nice play on the aging of the Baby Boomers. About half of Ventas’ portfolio is invested in senior housing. Another 18% and 17%, respectively, is invested in medical office buildings and skilled nursing facilities with the rest invested in hospitals and assorted loans and other properties.

After the general selloff in the REIT sector, Ventas now sports a very attractive dividend yield of 5%. And importantly, Ventas is also a serial dividend raiser. Ventas has grown its dividend at a 7.9% annual clip over the past five years and an 8.0% clip over the past 10 years.

A demographically-favored portfolio with a long history of raising dividends? If that isn’t a stock to help you retire happy, I don’t know what would be.

McDonald’s

My next “happy retirement” stock is the seller of the Happy Meal:McDonald’s (MCD).

In this age of organic eating, McDonald’s has become something of a pariah stock. It hasn’t quite reached the notoriety of Big Tobacco … or even of agribusiness giant Monsanto (MON). But it’s hard to find a company more disdained by the chattering classes than good ol’ Mickey D’s.

But remember, tastes are always changing in America, and this is not the first time that McDonald’s has been distinctly out of style. McDonald’s is a survivor, and as Americans’ tastes have changed, so have McDonald’s menu offerings.

So, why do I like McDonald’s as a happy retirement stock?

More than anything, it comes down to the dividend. McDonald’s has raised its dividend every year since 1977, and its dividend has grown at an eye-popping pace over the past decade. Over the past 10 years, McDonald’s has grown its dividend at a 19.5% clip. Dividend growth has been a little more modest recently, growing at a 9% clip over the past three years.

But 9% growth is just fine in my book. McDonalds is a champion dividend payer, and you can buy it today with a 3.5% dividend yield.

StoneMor Partners

Unless you read about it from me, chances are good that you’ve never heard of StoneMor Partners, LP (STON). StoneMor is in a line of work that a lot of people find downright creepy. It owns and operates 303 cemeteries and 98 funeral homes across the United States and Puerto Rico.

In our golden years, there are a lot of things we’d prefer to think about other than caskets and tombstones, but Stonemor’s dividend is far from gloomy. At current prices, it yields about 8.2%.

StoneMor consistently raises its dividend, though the rate of growth is a little more modest than for some of the other companies I’ve mentioned. Over the past five years, it has raised its dividend at a 1.9% clip. That’s nothing to write home about, but I will add that it is has more than kept pace with inflation over the period.

I expect that the growth rate is about to pick up. Based on current life expectancies, the number of annual deaths in America will rise by more than 80% between 2015 and 2035, due to the aging of the Baby Boomers. Even allowing for an increased preference for cremation over traditional burial, there is an incredible amount of growth all but guaranteed.

If you want to retire happy, buy StoneMor and collect the dividend.

Kinder Morgan Inc

Next up is oil and gas pipeline operator Kinder Morgan Inc (KMI), one of my very favorite dividend stocks.

Kinder Morgan owns and operates the largest network of oil and gas pipelines in North America, and with its size comes stability and diversification. So long as America needs oil and gas moved from point A to point B, Kinder Morgan should do quite nicely.

Whenever I invest, I like to know who’s running the show. No matter how great a company looks on paper, you still have to trust that the people running it are competent and honest.

Well, Kinder Morgan is run by one of smartest men in the energy industry, Richard Kinder, who also happens to be one of the “good guys” in corporate America. Kinder receives no salary for his work as chairman, and he even reimburses the company for his health insurance. His only compensation comes from the dividends he receives as a shareholder, though as the owner of 234 million shares, Mr. Kinder is doing just fine. He takes home $400 million per year in dividends.

At current prices, Kinder Morgan sports a dividend yield of 5.1%, and management expects dividend growth in the ballpark of 10% over the next five years.

Enterprise Products Partners

Along the same lines, we have Enterprise Products Partners (EPD), the only MLP that can rival Kinder Morgan in terms of size, scope, and diversification. Enterprise Products operated 51,000 miles of oil and gas pipelines in additional to extensive salt-dome storage capacity and marine transportation.

Anything energy related is going to give investors heartburn these days, but most of Enterprise Products’ income is fee-based, depending on the volume of oil and gas transported rather than the price.

After a fantastic run since 2008, EPD stock has hit the skids since last September and is now down by more than a quarter from its 52-week high. Given its current size, Enterprise probably can’t realistically generate the kinds of returns going forward that investors have become accustomed to.

But with a current distribution of 5% and a long history of raising that distribution, Enterprise looks like a decent bet at today’s prices.

ExxonMobil

And finally, we get to the ultimate oil major, ExxonMobil (XOM). I should be clear that I don’t expect ExxonMobil stock to do much over the next few months. Exxon is down about 20% from its 52-week highs set before last year’s oil-price collapse, and I expect it to recover nicely … eventually.

But for that to happen, the price of energy needs to stabilize, and that may very well take a while.

In the meantime, investors would be wise to average in to Exxon on any large dips. Exxon is one of the safest dividend payers in existence, having raised its dividend for 32 consecutive years and counting. Exxon even managed to continue growing its dividend during the dark days of the 1980s and 1990s, when energy prices slumped into a two-decade bear market.

At today’s prices, Exxon yields about 3.5%. And over the past decade, Exxon has raised its dividend at a 10% annual clip.

Is that kind of growth realistic with oil priced where it is today? Probably not. But even if dividend growth comes in at half that rate over the next decade, that’s still pretty solid and more than enough to ensure a happy retirement.

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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Target Proves Its Mettle as a Dividend Growth Stock

Target’s (TGT) latest dividend announcement got a lot of attention for its bungled delivery. It published the news of its dividend boost before the board of directors had actually sat down to vote on it.

Oops. I suppose it would have been embarrassing—and detrimental to Target’s stock price—if the board had opted not to approve the dividend hike. But that’s rarely a problem for Target. You see, Target is one of the most reliable dividend raisers in America, which is a major reason I own it in my Dividend Growth Portfolio. Let’s dig into the details.

Target raised its quarterly dividend by 7.7%, from 52 cents per share to 56 cents. This is 44th consecutive year that Target has bumped its dividend. Not a bad run indeed.

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The 7.7% increase isn’t a bad hike given the weakness in the retail sector this year. But it’s one of the skimpier dividend hikes Target has made in a long time. This time last year, Target hiked its dividend by 20.6%. And over the past ten years, Target has managed annual dividend growth of 20.2% per year.

What’s impressive about Target’s dividend growth is its consistency. Those 20% annual gains are not the result of large increases years ago that skew the averages today. Over the past three and five-year periods, Target has generated dividend growth of 20.0% and 23.4%, respectively.

Target’s dividend yield today, at current share prices, is 2.8%. That might not sound particularly high, but remember, the 10-year Treasury still only yields a measly 2.3%.

Let’s now take a look at how that dividend growth affects investor returns. One of my favorite metrics is “yield on cost.” This is effective dividend yield you receive on your original purchase price (Current annual dividend per share / purchase price). If you had bought Target three years ago and held until today, your yield on cost would be 4.5%, about in line with the current yields on many REITs. If you had bought Target five years ago and held until today, you’d be enjoying a yield on cost of 7.4%, which is more than most junk bonds pay today. And if you had bought Target ten years ago and held until today, you’d be looking at a yield on cost of 16.5%… a yield you’d be lucky to find in a distressed mortgage REIT these days.

I know, I know. “Past performance is no guarantee of future results,” and we have no way of knowing if Target’s next ten years will be as generous to shareholders as the previous ten. But given Target’s track record here, I’m giving the company the benefit of the doubt.

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And in case you needed an additional sweetener, dividends are not the only way that Target shares its largess with shareholders.  In the same announcement, Target announced it was expanding its $5 billion share repurchase program to $10 billion. Since 2004, Target has reduced its shares outstanding by more than 37%.

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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