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Make Dividend Achievers a Core Holding in 2013

High dividend stocks were all the rage in 2011 and 2012, as yield-starved investors hunted for income where they could find it.

Yet two of the sectors best known as “high yield” sectors—utilities ($XLU) and telecom ($XTL)—are on track for a sub-par 2012 (the utilities sector is actually negative for the year).  It’s not particularly hard to see why.  For slow-growth sectors, both have become expensive relative to the broader market.

Utilities yield just over 4% as a sector, which is nearly double the yield on the S&P 500 and more than double the yield on the 10-year Treasury.  But in terms of cash payout, you’re not going to be getting significantly more next year than you did this year.  Utilities do grow their dividends over time, but they tend to do so slowly.

Don’t get me wrong; I’d prefer to take a basket of utilities stocks, equity risk and all, over most bonds at current yields.  The uncertainty of the equities markets beats the virtually guaranteed losses that bond investors face, particularly after inflation.

Yet the yield is only part of the story.  Dividends are about more than just current income.  They are about quality.  Which brings me to my recommendation this week: the Vanguard Dividend Appreciation ETF (NYSE: $VIG). 

Fig. 1: VIG vs. SPY

For a “dividend focused” ETF, VIG yields a relatively puny 2%.  But unlike bond coupon payments or slow-growth utilities or telecom stocks, VIG’s cash payout will almost certainly be significantly higher in the years ahead.

You see, in order to be a holding of VIG, a company has to have at least ten consecutive years of rising dividends behind it.  These are growth stocks, not cash cows for widows and orphans.

Yet at the same time, the holdings are generally high enough quality to be held by widows and orphans.  Think about it.  If you’re able to raise your dividend throughout the 2008-2009 meltdown and recession, your company must be bulletproof.

VIG is stuffed full of the highest-quality companies in America; Wal-Mart (NYSE: $WMT), Coca-Cola (NYSE: $KO) and IBM (NYSE:$IBM) are its three largest holdings, to drop a few names.  And interestingly enough, utilities and telecom together make up less than 2% of the portfolio.

VIG is not an ETF that I recommend you trade aggressively.  VIG—and the stocks that comprise it—is the sort of investment that you should use as the foundation of your core portfolio.

As we start a new year, consider ditching any S&P 500 index funds you might own and replacing them with VIG.  And for the developed international allocation of your portfolio, you might consider the PowerShares International Dividend Achievers ETF (NYSE: $PID).  It’s built on the same principles as VIG but covers developed non-U.S. markets.

Disclosures: Sizemore Capital is long VIG, WMT and PID.  This article first appeared on TraderPlanet.

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Disclaimer: 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 nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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After Sandy: Now What?

In the first day of trading after Hurricane Sandy pounded New York, the S&P 500 had its best trading day in seven weeks.

I’m not one to assign a lot of significance to a single day’s trading, but I did find it encouraging.  It suggests that the damage left behind was less severe than the Street feared.  Life is already returning to normal in Manhattan, and power and transport are being restored bit by bit.  The damage tally will not be small, and the disruption will likely take a bite out of 4th quarter GDP.  But the rebuilding efforts should create a nice jolt in economic activity leading into the new year.

Stocks have been stuck in a sideways pattern for the better part of the past two months, as a string of disappointing earnings releases and economic data kept a lid on investor enthusiasm.  But with the bad news now mostly digested—and with the Fed, the ECB and the rest of the world’s major central banks still maintaining the loosest collective monetary policy in history—I expect the animal spirits to return for the last two months of the year.

Sizemore Capital has been pleased with the performance of our Dividend Growth and Sizemore Investment Letter models at Covestor.  Both are beating the S&P 500 for the year without taking significantly more risk.  In a year like 2012, when so much is determined by macro and political risks outside of the control of company managements, an income-focused strategy is the only strategy that makes sense.

Within the Dividend Growth portfolio, we are focusing most heavily on mid-stream oil and gas partnerships and conservative triple-net retail REITS.  In our view, these sectors are attractively priced and throw off healthy amounts of cash.  These are investments we would be happy to hold for the next 1-5 years, come bull or bear market. Given the current pricing of bonds and other mainstream income investments, we expect these investments to outperform by a wide margin with very little risk of principal loss.  In many cases, dividend yields are well in excess of 5%—not a bad income return in a low-yield environment.

The Sizemore Investment Letter portfolio is slightly more speculative and is not limited to a pure income focus (strong dividend growth is one of many investment criteria covered).  In this portfolio, we see the greatest opportunities in European blue chips with substantial operations in emerging markets.  As the European Union slowly congeals into a more “American” style federal system, we see investor risk appetites for European stocks returning.  And in the meantime, we get access to high emerging-market growth rates and a steady stream of dividends.

You can view our Covestor profile here.

Disclaimer: 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 nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Three Dividend Stocks Owned by the Smart Money

As I wrote back in August, it can be helpful at times to look over the shoulders of successful investors to see what their highest-conviction investments are.  And during times like these, when the economy is looking wobbly and the potential for a Eurozone meltdown is hanging over our heads like the sword of Damocles, that extra insight is all the more valuable.

Today, I’m going to take a look at one high-conviction dividend stock each from three investors whose skills I respect and whose track records have withstood the passing of a crisis or two.

The usual caveats apply; I’m basing this analysis on SEC filings that are reported on a time lag and may already be out of date by the time they become publicly available.  For these reasons, I will stick with large positions that the investor has held for a long period of time or new positions that I consider unlikely to have been sold so quickly.

Stock

Ticker

Guru

Dividend

International Business Machines

IBM

Warren Buffett

1.6%

Johnson & Johnson

JNJ

Prem Watsa

3.5%

Six Flags Entertainment Corp

SIX

Kyle Bass

4.1%

Let’s start  with the granddaddy of modern value investors, Berkshire Hathaway’s ($BRK-A) Warren Buffett.

Mr. Buffett made quite a splash last year when he bet big on technology powerhouse International Business Machines (NYSE:$IBM).  It was his first major purchase in the tech sphere, and it quickly became one of Berkshire’s largest holdings.    Buffett added to his position last quarter, and IBM now accounts for nearly 18% of Berkshire’s portfolio.

The appeal of IBM is straightforward; Buffett was attracted by the stability of the company’s cash flows and its business model as a high-end service provider whose customers are locked in to long-term contracts.

But its qualifications as a “dividend stock” might be a little more controversial.  At current prices, IBM yields only 1.6%.  Still, this is roughly in line with the current yield on the 10-Year Treasury Note, and—importantly—IBM’s dividend rises every year.  IBM’s dividend rose 13% this year and 15% the year before.

Of course, this is nothing new.  IBM is a proud member of the Dividend Achievers index, an exclusive fraternity of stocks that have boosted their dividends for a minimum of ten consecutive years.

So while the current yield of 1.6% is a little uninspiring, it’s safe to assume investors buying IBM today will be enjoying cash payouts far higher in a couple years’ time than they would have had they opted to invest in bonds.

Next on the list is the “Warren Buffett of Canada,” Fairfax Financial Holdings (FRFHR) Chairman Prem Watsa.

Like Buffett, whom Watsa admires, Watsa built his financial empire around a solid insurance business, which provided him with a growing float to invest.  And like Buffett, Watsa is known for being a patient investor who often holds his best positions for 5-10 years or even longer.

Watsa’s track record speaks for itself.  According to research site GuruForus, Watsa has grown Fairfax’s book value by an astonishing 212% over the past ten years.  This compares to total returns of just 34.9% for the S&P 500.  Impressively, he actually made money in 2008.  Fairfax saw its book value rise 21% in the midst of the worst financial crisis in 100 years.

Diversified health and pharmaceutical company Johnson & Johnson (NYSE: $JNJ) is Watsa’s largest holding by far, and accounts for more than 21% of his listed portfolio.

Johnson & Johnson is an obvious choice for a conservative dividend stock, and it is a current holding on the Sizemore Investment Letter’s Drip and Forget Portfolio.

It also happens to be one of the highest-yielding major American blue chips, with a 3.5% dividend at current prices.  And like IBM, Johnson & Johnson has a long history of raising that dividend.  J&J is a member of the Dividend Achievers Index.

Given the low repute of ratings agencies this matters less than it used to, but Johnson & Johnson is one of only four American companies to have its bonds rated AAA.  Yes, Johnson & Johnson is actually considered to be less risky than the U.S. government, and its stock pays more in yield.  This is one you can buy and lock in a proverbial drawer.

Our final guru today is hedge fund manager and fellow Dallas resident Kyle Bass, principal of Hayman Advisors.  Though he does trade equities, Bass is a macro investor better known for making large bets in the credit and currency markets; he made his investors a small fortune betting against subprime mortgage securities in the run-up to the 2008 meltdown.

Bass’s equity portfolio is completely dominated by Six Flags Entertainment Corp (NYSE:$SIX), the owner and operator of theme parks.  Six Flags makes up nearly 40% of his equity holdings.

With a current yield of 4.1%, Six Flags certainly qualifies as a dividend stock.  But readers should consider this stock a riskier bet than IBM or Johnson & Johnson.  Theme parks are sensitive to the state of the economy, and the stock trades at a nosebleed valuation of 32 times expected 2013 earnings.  There is a lot of optimism built into the price at current levels.

All of this said, Bass has certainly done well by owning Six Flags—it’s up more than 100% over the past year—and he clearly has a high level of conviction in the stock if he’s make it nearly 40% of his equity portfolio.

Disclosures: Sizemore Capital is long JNJ.

Disclaimer: 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 nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Russian Dividend Stocks: Not An Investment For Widows and Orphans

In case you had any concerns about the safety of Russian stocks, you can now set those fears aside. By Kremlin decree, Russian stocks will now start paying higher dividends.

As the Financial Times reported this week, “One of the reasons why Russian companies trade at a discount to their global peers is their historically low levels of dividend payments. In a bid to raise market valuations ahead of a series of privatizations, the Kremlin has been calling on state companies to share a larger proportion of their profits with investors.”

What a spectacular showing of shareholder-friendly management from the former bastion of international communism. If he wasn’t displayed in a glass coffin in Red Square for all to see, I might assume that Comrade Lenin was spinning in his grave.  Yay, capitalism.

Of course, another reason why Russian companies “trade at a discount to their global peers” is that they are located in Russia.

This is a country that still imprisons capitalists when they no longer toe the Kremlin line.  Mikhail Khodorkovsky, the former Chairman and CEO of oil giant Yukos and once Russia’s wealthiest man, has been rotting in prison since 2005 and is unlikely to see his freedom so long as Vladimir Putin rules the country.  But hey, maybe his wife and kids will appreciate the higher dividend payouts promised to Russian shareholders.

I have written for years about the virtues of dividend investing, and I firmly believe that the regular payment of a cash dividend encourages both honestly and managerial discipline.  It’s a lot harder to cook the books or waste shareholder money by chasing empire-building acquisitions when you are committed to writing a check to investors every quarter.  Furthermore, it guarantees that investors realize a return even during a flat market.

But does any of this apply when we are talking about a country that is effectively ruled by thugs and Mafiosi?

Make no mistake; I’m glad to see Russia encouraging its companies to pay a dividend.  All else equal, this is a step in the right direction.  But would I consider buying Russian dividend stocks for my conservative, income-focused investors?  If I did, I would hope that someone would lock me in a mental institution or, at the very least, strip me of my trading responsibilities.

And this is not to pick on Russia; I have been a buyer of Middle Eastern and African stocks in recent weeks via the iShares MSCI Turkey ETF (NYSE:$TUR) and the MarketVectors Africa ETF (NYSE:$AFK).  But I consider both to be highly-speculative positions that would only be appropriate for the most aggressive portion of a client’s portfolio.  And while I don’t complain about receiving a dividend on either, the dividend is not a major factor in my decision to invest in these regions.

(This ties into a broader theme that I’ve covered recently and that bears revisiting: Investors should NEVER chase yield.) 

In the case of Russian stocks, the payment of a dividend does not mitigate the risks posed by the absence of the rule of law in the country.  Given the risks, investors should only trade Russian stocks with a mind towards short-term price appreciation.

Investors looking for both high current income and emerging market growth should look instead to what I like to call “emerging markets lite.”  Look for established American and European firms with large and growing businesses in the emerging world.

Two I particularly like are Anglo-Dutch consumer products company Unilever (NYSE:$UL) and Dutch megabrewer Heineken (pink:$HINKY).

Disclosures: Sizemore Capital is long AFK, TUR, UL and HINKY.

Disclaimer: 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 nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Naughty or Nice Part 2: 5 Delightfully Sinful Dividend Stocks

This is Part 2 of a two-part series on “Naughty and Nice”  dividend stocks.

In the last article, I gave you five socially-responsible stock picks that you could feel good about owning.  Now, we’re going to go a very different direction.  In this article, I’m going to give you five delightfully naughty dividend-paying stocks to consider.

I’ll start with a confession: I love sin stocks, and I always have.  Because they are politically incorrect, companies in the tobacco, alcohol and defense industries tend to trade at lower valuations and higher dividend yields than the broader market.  In effect they are perpetual value stocks, and investors with no qualms about investing in stocks with social stigmas attached to them benefit from this pricing.

For a longer explanation on the virtues of being bad, see “The Price of Sin.”

As I’ve written before, “Not All Sin Stocks are Created Equal,” and not all vice investments are strong dividend payers.  But the following five stocks all pay current yields well in excess of the market average.

I’ll start with a sin stock standard, American tobacco giant Altria ($MO).  As the poster boy for Big Tobacco, Altria is probably the most hated company in history. If Altria were a movie character, it would be Darth Vader.

It also happens to be the most profitable investment in history, according to Jeremy Siegel’s The Future for Investors.  Dr. Siegel’s calculation assumed the reinvestment of dividends, of course.   And when you buy shares of Altria, you should accept that you are buying the stock specifically for its dividend because the company’s business is in long-term terminal decline.  Cigarette smokers will continue to light up, but their ranks are not growing and cannot be expected to.

At current prices, Altria yields 4.70%.  This is a little lower than I would normally like to see for a tobacco stock, but it still makes Altria one of the highest-yielding stocks in the S&P 500.

Some of the best values in the vice sphere are in the “merchant of death” category, and the next stock is one that I covered in “Five Smart Money Dividend Stocks” as a stock owned by Magic Formula guru Joel Greenblatt: defense and aerospace firm Northrop Grumman Corporation ($NOC).

Northrop Grumman makes the sort of toys you might expect to see in a James Bond movie. Its aerospace division sells hardware and systems to government agencies for use in various mission areas, including intelligence, surveillance and reconnaissance, battle management, strike operations, electronic warfare, missile defense; earth observation and space exploration.

Northrop Grumman trades for just 9 times expected 2013 earnings and yields an impressive 3.3% in dividends.

Next on the list is one of Northrop Grumman’s competitors, Raytheon Company ($RTN). Raytheon offers integrated defense systems, including integrated air and missile defense, naval combat systems, and intelligence systems.

Raytheon is priced comparably to Northrop Grumman, trading for just 9 times earnings and yields 3.6%.

The entire defense sector is attractively priced at this time, and Northrop Grumman and Raytheon are two excellent dividend stocks.

Moving down the list of all things naughty, we come to booze.  And the single best play in the world of spirits is British-based Diageo PLC ($DEO), the largest and most diversified seller of premium alcoholic beverages in the world.

Diageo’s brands include Johnnie Walker scotch, Smirnoff vodka, Baileys Irish Cream liqueur, Crown Royal Canadian whiskey, Captain Morgan rum, Jose Cuervo tequila and many, many others.  The company has been a long-time favorite of the Sizemore Investment Letter for its exposure to emerging markets; Diageo already gets 40% of its revenues from emerging markets, and this number grows every year (see “Diageo: the Ultimate 12 to 18 Year Play”).

Diageo is a current constituent of the Mergent International Dividend Achievers Index, meaning the stock has a long history of raising its dividend, and currently yields a respectable 2.0%.

Another stock in the alcohol sphere I like is Dutch mega-brewer Heineken NV ($HINKY).

The global beer market is dominated by the Big 4—Anheuser Busch InBev ($BUD), Heineken, SABMiller ($SMBRY) and Carlsberg—though beer sales have been stagnant in the company’s core American and European markets.  Sales are booming in emerging markets, however, and the Big 4 continue to gobble up small local brands with reckless abandon.

Heineken is unique among Western multinationals in that it is not only a great indirect play on rising incomes in the developing world, but it is a great play on the development of Africa in particular.  Heineken already gets roughly a quarter of its revenues from Africa, and this percentage will only rise over time as the African middle class grows and develops.

Heineken pays a decent dividend of 2.1%.

So there we have it.  Investors looking to build an income portfolio have their choice of both naughty and nice dividend-paying stocks.  I recommend they take their pick of both.

Disclosures: Sizemore Capital is long MO, DEO and HINKY. This article first appeared on InvestorPlace.

Disclaimer: 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 nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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