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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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5 Dividend Stocks To Own For The Rest Of 2015 And Beyond

The Fed has spoken. It’s March 18 statement was one of the most anticipated in history, as investors had come to fear that rate hikes could start as soon as June. But after the Federal Reserve downgraded its expectations for inflation going forward, Fed watchers concluded that September would be the earliest that hiking would begin, and even then it would proceed at a much slower pace than previously feared.

As a dividend investor, I care about this a lot less than you might think. In my world, debating the precise date of the Fed’s policy shift is no more productive than arguing over how many angels can balance on the head of a pin.

Think about it. Starting at a base of 0%-0.25%, the target Fed funds rate would have to jump by a pretty wide margin before cash and short-term bonds because an even semi-competitive asset class again.

Meanwhile, even in a broadly overpriced U.S. market, we can still find solid deals on dividend paying stocks.  If bought at a reasonable price, a good dividend stock offers both a competitive current yield and a strong probability of dividend growth. Whether the Fed starts hiking rates in June, September or never, a good dividend-paying stock will continue to chug along, paying its dividend every quarter and ideally raising it at least once per year.

Here are five can’t miss dividend stocks to buy, regardless of what the Fed decides to do next:

Kinder Morgan Inc

Oil and gas pipeline operator Kinder Morgan Inc (KMI) is one of my very favorite dividend stocks.

This is a company run by one of the smartest men in the energy industry—Richard Kinder—whose interests also happen to be perfectly aligned with his shareholders.  Richard Kinder receives no salary for his work as Chairman and CEO. His only compensation comes from the dividends he receives as a KMI shareholder, though as the owner of 233 million shares, Mr. Kinder is doing just fine. He dividend income is about $400 million per year. All the same, Mr. Kinder has every incentive to keep the dividend checks coming…and growing.

At current prices, Kinder Morgan sports a dividend yield of 4.4%, and during last year’s reorganization, management wrote that it expected to see dividend growth of at least 10% per year through 2020. Assuming you hold the stock through 2020, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7.0% five years from now. Not too shabby.

Oh, and remember what I said about Mr. Kinder having a lot of skin in the game? Well, he just upped it. On March 15, Kinder bought 100,000 shares for just shy of $4 million. In the past two years, Kinder has purchased 2.3 million shares worth almost $100 million.

General Electric Company

Outside of the global banks, few companies have lost more reputational capital over the past decade than General Electric Company (GE). The 2008 meltdown forced GE to eat some serious humble pie and rebuild itself as a true industrial conglomerate. Before the crisis, its GE Capital unit had grown so large that General Electric had essentially become a high-risk hedge fund that also happened to build stuff. That didn’t end well, as GE had to run to Warren Buffett hat-in-hand for an emergency loan when the credit markets imploded.

GE Capital’s balance sheet has now been shrunk by about half, and by the end of this year General Electric hopes to get no more than 30% of its earnings from financial services.

Investors have mostly yawned at General Electric, considering it too boring in its current form to warrant an investment. But this indifference has created a reasonably good value. GE trades for 16.8 times earnings and yields 3.5% in dividends.

GE slashed its dividend in 2009, but it quickly started raising it again in 2010 and hasn’t stopped since. The annualized dividend growth rate over the past three years was 13.4%. Not too shabby!

In General Electric, we get a moderately priced stock paying a high and growing dividend that has been off most investors’ radars for years. That’s a dividend stock you don’t want to miss.

McDonald’s Corporation

Poor McDonald’s Corporation (MCD). There are few companies outside of perhaps handgun makers and tobacco companies that are less politically correct these days. McDonald’s seems to be the scapegoat for the childhood obesity epidemic at home and a symbol of American imperialism abroad. And among self-respecting, organic-eating yuppies, McDonald’s is just so…déclassé.

As a result, McDonald’s results have been sagging. The company reported absolutely abysmal sales last month, with domestic sales falling 4%.

But the thing is, McDonald’s has been here before.  The chain had gotten stale in the 1990s before retooling itself for a fantastic run in the 2000s. This is a company that has proven itself capable of adapting to the times. (Related: See McDonald’s Is the Microsoft of Burger Joints.)

And I’m willing to buy McDonald’s, when it is out of fashion, because it was also a company that takes its commitment to shareholders very seriously. McDonald’s has raised its dividends for 38 consecutive years and pays a current dividend yield of 3.5%.

McDonald’s dividend growth numbers are almost ridiculous. After growing its dividend at a 23% annual clip over the past 10 years, long-term investors who held for that entire period now enjoy a yield on their original cost of 27.1%.

The rate of dividend growth has slowed in recent years, and I don’t expect to see annualized growth anywhere near those historical levels again. But they show that McDonald’s is committed to its shareholders, and I have no doubt that management will find a way to continue growing the dividend in the years ahead. And frankly, the 3.5% current dividend yield is a lot higher than what you’ll get in most other “income” securities.

Realty Income Corporation

I own shares of Realty Income (O) in a dividend reinvestment plan that I will never sell.

I mean that literally. Barring a buyout that takes the company private or a zombie apocalypse that renders private property worthless, I will own shares of Realty Income until I die. And if I raise my kids right, they will pass the shares on to their own kids someday.

Realty Income is one of my very favorite long-term stocks precisely because it is one of the most predictable. Realty Income doesn’t really “do” anything. It simply buys quality free-standing retail properties that, as a general rule, are already throwing off healthy cash flows and then converts those cash flows into monthly dividends for its shareholders. And as a triple-net landlord, Realty Income doesn’t have to worry about leaky toilets or peeling paint. All maintenance, insurance and taxes are the tenants’ responsibility.

Over the past 10 years, Realty Income has raised its dividend at a 5% annual clip. That’s very solid for a company whose business model is about as exciting as watching an English cricket match on TV. But the consistency goes beyond that. With January’s dividend hike, Realty Income has boosted its monthly dividend 79 times in the past 20 years and in 70 consecutive quarters.

At current prices, Realty Income yields 4.4%. Buy it, instruct your broker to reinvest the dividends, and sock it in a drawer for the next 20 years.

Apple Inc

Next up is Apple Inc (AAPL), a company that you might not normally consider a “dividend stock,” per se, due to its modest dividend yield. At current prices, Apple only yields 1.5%.

But given the rate of dividend growth I expect, I’m ok with that.

After a 17-year hiatus, Apple reinstated its dividend in 2012 at $0.379 per share, quarterly. In less than a year and a half, it has raised it 24% to $0.470. And with a payout ratio of just 25%–and with an earnings stream that just continues to grow—I expect plenty more where that came from.

Let’s look at Apple’s cash position. Apple has a cash hoard of $178 billion. But most of this cash is sitting offshore, outside of the reach of the U.S. taxman. For this reason, investors have treated it as if it doesn’t exist on the assumption it will never be repatriated.

This is a mistake. The optimist in me believes that U.S. corporations will get some sort of tax amnesty within the next few years. But even if they don’t, and you assume that all of Apple’s cash was taxed at the full 35% corporate tax rate—which is a ridiculously conservative assumption—Apple would still have $116 billion in cash. That’s enough to pay off its existing long-term debts three times over. It would also be enough to continue paying dividends at the current rate for the next 10 years.

Apple may not be a high yielder today. But it’s still a no-brainer to own in a portfolio of dividend stocks.

Disclosures: Long KMI, GE, MCD, O, AAPL

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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Dividend Smackdown: Chevron vs AT&T

It’s that time again. We’re putting two iconic dividend payers in the ring for an old-school Dividend Smackdown. This is a faceoff between energy major Chevron Corporation (CVX) and telecom giant AT&T, Inc (T), two stocks that have taken more punches than Rocky Balboa of late. But like Rocky, I expect Chevron to eventually rally and return a few punches of its own. I’m not sure about AT&T, however.

Chevron, like the rest of the oil majors, has taken an absolute beating over the past year. Its share price is down about 23% since late July and has underperformed the S&P 500 by nearly 28%. AT&T hasn’t had the smoothest ride either, for that matter, down about 6% over the same period. But investor sentiment has been particularly sour towards Big Oil following the collapse in the price of crude.

Let’s dig into Chevron. As a value investor, there is a lot I like here. Its price/earnings and price/book ratios are sitting near multi-year lows at 10.2 and 1.3, respectively. This is because Wall Street is a little less than enthusiastic about Chevron’s earning power in a low-crude-price environment, but after the beating the stock price has taken, it would seem that the bad news is mostly priced in.

Chevron’s dividend yield, at 4.1%, also makes it one of the highest yielders in the S&P 500. And Chevron has been a very aggressive dividend raiser over the past decade, growing its dividend at a 10.2% annualized rate. To put that in perspective, had you bought Chevron 10 years ago and held until today, your effective dividend yield today on your original cost would be nearly 11%.


chart (2)

Chevron has raised its dividend for 26 consecutive years running, and I don’t expect it to stop the chain any time soon. Chevron’s dividend payout ratio is a very manageable 42%. Even if Chevron shoots air balls for the next several quarters with new projects, its dividend would seem safe for the foreseeable future even if dividend growth slows for several quarters. Chevron recently suspended its share buyback program, which is a letdown but also a completely reasonable defensive move given its difficult operating environment.

chart (1)

Chevron has had a harder time ratcheting down its capital expenditures than some of its Big Oil peers. Unfortunately for Chevron, several of its big projects—including major liquefied natural gas projects in Angola and Australia and multiple platforms in the Gulf of Mexico—are at stages that require a lot of capital spending that cannot be postponed. That’s going to hurt profitability and may force Chevron to borrow a little more heavily than usual. But with a debt-to-equity ratio of just 18%, Chevron has the ability to borrow pretty heavily without putting its long-term future at risk.

Is Chevron my favorite Oil Major? No, it’s not. I’d prefer ExxonMobil (XOM) domestically, along with the European oil majors. But this Dividend Smackdown isn’t between Chevron and Exxon. It’s between Chevron and AT&T. And AT&T faces some major issues of its own.

Price competition in mobile is brutal, and rival T-Mobile (TMUS) fired a shot across the bow two years ago when it eliminated carrier subsidies for handsets and introduced unlimited, no-contract data plans. AT&T and Verizon (VZ) have had to scramble to compete on price. But with smartphones requiring ever-higher amounts of bandwidth, AT&T’s capital spending has been higher than ever.

Lower margins and higher capital spending are a rough combination, and one that hasn’t gone unnoticed on Wall Street. AT&T’s stock price has drifted sideways for nearly three years, completely missing the monster rally of 2013 and 2014.

AT&T sports a very nice dividend at 5.6%, but its payout ratio has been above 100% in three out of the last four years, and dividend growth has been slowing down dramatically. Over the past year, AT&T barely squeaked out a 2% dividend hike.

I’ll summarize Chevron and AT&T’s respective predicaments like this. Chevron has major unavoidable capital expenditures over the next year or two that will sap profitability, but after that its situation should improve. With AT&T, there is really no light at the end of the tunnel. I don’t see mobile service getting any less competitive on price, and AT&T faces long-term threats to its paid TV and internet service businesses too. Dish Network (DISH) potentially just launched a game changer with its internet-based TV offering, Sling TV, and Google (GOOGL) is rolling out its Google Fiber service in more American cities every year.

The winner of this Dividend Smackdown is Chevron. Leave AT&T to ice its bruises.

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. As of this writing, he was long XOM

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