Blue Chip Buys for Growth and Income

06/06/2014 10:00 am EST

Focus: STOCKS

Jim Powell

Principal Analyst, Global Changes & Opportunities

Jim Powell, editor of Global Changes & Opportunities, highlights his favorite conservative, blue chip dividend-paying stocks including two energy ideas, a trio of pharmaceutical firms, and a closed-end paying that pays monthly income.

Steven Halpern: Joining us today is international investing expert Jim Powell, editor of Global Changes & Opportunities. How are you doing today, Jim?

Jim Powell: I'm very fine, Steve.

Steven Halpern: Well, thank you for taking the time, today. In your latest research, you suggested conservative blue chip dividend paying stocks are the place for investors to be today. Could you expand on that?

Jim Powell: Yes, I do believe that that is exactly what investors have concluded, judging from the way the prices are behaving, and that's not surprising, really.

Since 1924, dividend stocks have had an average annual return of about 13%. Non-dividend stocks are 10% and the magic of compounding makes that difference really extraordinary over time.

We've also got a problem with interest rates being very low, so dividends look all the sweeter in today's environment, in which treasuries and CDs are paying very little, and, of course, the money market accounts are essentially paying nothing.

Steven Halpern: Now among blue chip stocks, you recently highlighted several that have declared special dividends including two energy funds; Kinder Morgan (KMI) and Diamond Offshore Drilling (DO). Could you tell us a little about these two names?

Jim Powell: Yes. Diamond Offshore Drilling declared a special cash dividend recently of 75 cents a share, and that's versus the regular dividend of only 12.5 cents a share, so that's a significant boost.

All of the companies that are doing these special dividends, and companies that are basically just pushing their dividends, are doing so because investors are looking at their incredible cash hoards, and are saying, “look, if you're not going to be investing this to expand, then you should be sharing this cash with us.” That makes a great deal of sense and many companies are responding accordingly.

Diamond Offshore Drilling is a company selling roughly for 49 a share right now, has an effective yield with a special dividend of 6.6% and that is pretty sweet in today's environment. The company's earnings are basically flat.

There hasn't been as much drilling, especially in a gulf where they had had the drilling ban for quite a while, and they don't expect that their earnings are going to go up a whole lot before about 2015, but from there on out, things look really sweet.

Steven Halpern: Is Kinder Morgan a similar situation?

Jim Powell: Kinder Morgan is a pipeline company and it has been boosting its dividend rate by 8% a year, which is really pretty darn good. They are currently paying 7.3%. Kinder Morgan stands to benefit a great deal from all the gas and oil deposits that are being exploited today.

Most of the oil is being moved by train and is being moved, to some extent, by trucking, because the pipeline infrastructure hasn't existed in the right places where they're finding all this stuff. Very inconvenient, but the pipelines are being expanded.

They're so much cheaper to move by pipeline, that I just seen nothing but growth for all the major pipeline companies, including Kinder Morgan Energy Partners (KMP).

There is also a merger being proposed between Kinder Morgan Energy Partners and Kinder Morgan which has a different stock symbol, which could supercharge returns. I like both of those companies in the energy area.

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Steven Halpern: Now also on your list of blue chip dividend payers, are a number of pharmaceutical companies. In particular, you highlighted GlaxoSmithKline (GSK), Eli Lilly (LLY), and Merck (MRK). What are your overall thoughts on these healthcare companies?

Jim Powell: The pharmaceutical companies, I almost think of them as Rip Van Winkles. They seem to do nothing for many years, and then, all of a sudden, collectively they wake up and they start doing deals, and they start bringing out new drugs and boosting their R&D activities.

Every time they do that, they go into another growth cycle, and I think we're at the cusp of seeing that occur once again.

GlaxoSmithKline earnings are pretty flat. They've got problems with China accusing them of making bribes in order to further their business, but they're buying Novartis vaccine division, and, because that makes more sense for them, and they're selling, or actually trading to Novartis, some of their oncology assets, because that makes more sense for Novartis.

Eli Lilly for example, just to stay with the trading back and forth, bought Novartis' animal health division which makes a great deal of sense for them. Merck is the leader in immunotherapy drugs and its working deals to increase its R&D in that area.

All these companies are saying to themselves, “look, this thing we've been trying hasn't worked very well, but maybe this company can make better use of it,” and vice versa, and so there's just a blizzard of deals going on. As I said, the last time I have seen this happen, I have seen stock prices go through another growth cycle.

Steven Halpern: In terms of these healthcare companies, you see the opportunity for growth as well as for income?

Jim Powell: Yes, I do. The yield on GlaxoSmithKline right now is 4.80%, Eli Lilly 3.3, Merck is last at 3%, but I think that that's going to be balanced by more growth, so you always have a balance between growth and income.

With Kinder Morgan, I see mostly income, but with growth potential as a backup. With the pharmaceutical companies, I see a blend of reasonably good income and better than reasonably good potential for growth.

Steven Halpern: Now, finally, in your latest issue of Global Changes & Opportunities, you discussed an interesting closed-end fund for investors who want it to generate monthly income. Could you share your thoughts on Nuveen Quality Preferred Income Fund II (JPS)?

Jim Powell: Yes. Nuveen, of course, has been around for a long time, and has always been a source of income for investors. You buy one of their closed-end funds like the Nuveen Quality Preferred Income Fund and it is currently paying 7.30%.

Nuveen will arrange for you to either have the income turned into additional shares by reinvestment, or they'll send you a monthly check as you wish, or you can arrange that through your broker, if you purchased it through the broker.

Preferred stock is kind of between the common stock and bonds, in regards to safety. Preferred stock, as the name implies, has a claim on dividends before common stock holders will get it. Their claim is not as strong as bonds. Preferred stock has a very good reputation for having reliable income. It is on a schedule.

Nothing, of course, on Wall Street is guaranteed, but the track record for preferred stock paying as promised is really pretty good. I think the Nuveen Quality Preferred Income Fund really makes a lot of sense for people who are looking for reliable income.

Steven Halpern: We really appreciate you taking the time today. Thank you for joining us.

Jim Powell: My pleasure.

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