10 Dividend Stocks You Can't Ignore
05/24/2013 9:11 am EST
Solid gains and high yields can still be found in the dividend equity pool, unlike almost every other corner of the market these days. Here are the ten absolute top picks of MoneyShow's Jim Jubak, also of Jubak's Picks.
Everybody is on the hunt for higher yields. With a three-month Treasury bill yielding 0.03%, way less than the rate of inflation, and a ten-year Treasury yielding just 2.04%, barely more than inflation, who can blame them?
And too many investors seem willing to add lots of risk in their hunt for yield. Ten years is a long time to lock up your money in even something as safe as a Treasury note if interest rates or inflation go up. Buying a corporate junk bond might get you 5% or 6%, but these are the riskiest corporate debt out there. If the economy stumbles, junk bonds will tumble.
If you're looking for higher yield and you don't want to sacrifice safety, I think you're best bet is to look for dividend stocks from solid companies. The payouts from a dividend stock go up over time—unlike the fixed payouts from a bond—giving you protection if interest rates rise.
And if you pick a company with a solid and growing cash flow from its business, you're taking on much less risk than you would with a junk bond. Best of all, if you dig real hard, you can find stocks paying dividends of 3%, 4%, 5%, and even occasionally 6%.
Here are my ten favorite low-risk, high-dividend stocks.
Bank of Nova Scotia (BNS)
This is the third-largest of Canada's six major banks. (Together, the six hold 90% of Canada's bank assets.)
And by far the one with the most exposure to emerging markets in Latin America and Asia, although the bank by has by no means neglected its Canadian market in recent years. In the last year, Bank of Nova Scotia, better known as Scotiabank, bought ING DIRECT Canada to add 2 million Canadian accounts, and acquired a 51% stake in Banco Colpatria in Colombia.
Customer headcount comes to 8 million in Canada and 11.5 million internationally. The mix gives Bank of Nova Scotia exposure to faster growth in emerging markets, as well as the stability of a big deposit base in the highly regulated Canadian market.
The bank has grown dividends by 4.6% a year over the last five years. Standard & Poor's gives Bank of Nova Scotia an A+ credit rating.
General Electric (GE)
With General Electric, you're sacrificing some yield today for the promise of more yield tomorrow.
After cutting its dividend during the financial crisis, thanks to GE Capital's neck-deep exposure to the mortgage crisis, the company has gradually rebuilt its dividend from a quarterly 10 cents a share in 2009 to 19 cents a share in 2013.
And there's more on the way. The company has said it will spend $18 billion in cash on shareholders in 2013, with most of that ($10 billion) going to share buybacks.
Revenue from the company's industrial segment is projected to climb by 5% to 10% this year, with margins climbing an estimated 0.7 percentage points. General Electric plans to gradually shrink GE Capital until it represents about 30% of company earnings.
Standard & Poor's gives General Electric an AA+ rating. General Electric is a member of my Dividend Income portfolio.|pagebreak|
Holly Energy Partners (HEP)
Holly Energy Partners is a master limited partnership spun off by refiner HollyFrontier (HFC) in 2004. Assets include 2,600 miles of pipelines, 12 million barrels of storage, and oil terminals in the West and Southwest.
This is a very low-risk MLP, because almost 100% of its revenue comes from fees with built-in inflation matching (as opposed to contracts with prices based on commodity prices), and because Holly Energy assets are focused near such prime areas of the US midcontinent oil boom as the Permian Basin of Texas.
Distributions climbed 6.7% in the first quarter of 2013 from the first quarter of 2012. The five-year average annual increase in distributions has been 5.31%.
Master limited partnerships are tax-advantaged vehicles best owned outside a retirement account. (Part of the annual distribution is treated as a return of capital, and is not taxed until you sell the units.)
Once upon a time, technology companies didn't pay dividends. Now Intel and others such as Microsoft (MSFT) and Cisco Systems (CSCO) do. (Microsoft's yield is 2.66% and Cisco pays 2.91%.) Call it a clear sign that these erstwhile tech rockets have become mature giants.
But something interesting has developed in the way that Intel plays the dividend game. The company not only pays a higher yield than other technology companies, but it has also been very aggressive in increasing its dividend during periods when the share price has climbed, so that the yield stays above 3%.
Intel's five-year annual rate of dividend growth is a huge 12.82%. That puts it ahead of consumer dividend plays such as Procter & Gamble (PG), which shows a hefty 9.55% annual growth rate in its dividend over the last five years.
I think part of that reason is that the company sees itself going through a tough transition from the PC-centered world its chips dominate to a world dominated by smartphones and tablets. Intel has turned its powerful manufacturing engine to catching up with such new paradigm leaders as ARM Holdings (ARMH) and Qualcomm (QCOM).
The release of Intel's Atom chip using 22-nanometer manufacturing this year (and 14 nanometers in 2014) will help close the gap for Intel on energy efficiency. But this is a long-term battle. Fortunately, Intel is good at those.
Standard & Poor's gives Intel an A+ credit rating. Intel is a member of my Dividend Income portfolio.
Kinder Morgan Energy Partners (KMP)
This master limited partnership is in expansion mode, thanks to the acquisition of El Paso by Kinder Morgan (KMI), the owner of Kinder Morgan Energy Partners. This has resulted in a pipeline of asset dropdowns that are headed to KMP over the next few years.
Kinder Morgan Energy Partners spent $1.8 billion on growth in 2012, and its capital budget for acquiring natural gas pipelines in 2013 runs to $2.9 billion. This puts KMP in the sweet spot in a financial market awash with cheap money: Raise cheap capital, buy assets, increase distributions—and repeat.
Kinder Morgan's average annual rate of growth for distributions has been 7.1% over the last five years. (Again, MLPs are tax-advantaged vehicles best owned outside a retirement account.)
Standard & Poor's gives Kinder Morgan Energy Partners a BBB credit rating. Kinder Morgan Energy Partners is a member of my Dividend Income portfolio.
Master limited partnership ONEOK has stumbled recently—which is why you can get a 5.36% yield on this normally very stable dividend payer.
The culprit was a shrinking spread in natural gas liquids, as a result of soaring supply of these liquids due to the boom in midcontinent US energy production. (ONEOK gets more of its revenue from transportation, where prices are linked to commodity prices, than does a competitor such as Targa Resources Partners (NGLS). See next page.)
I think you'll have to be patient with ONEOK, since the squeeze in spreads for natural gas liquids is likely to continue through much of 2013. That will lead to a temporary slowdown in the growth of distributions...but I think you can count on a gradual pickup from the 6.3% annual average growth rate of the last five years.
Morningstar gives ONEOK a BBB credit rating. ONEOK is a member of my Dividend Income portfolio.|pagebreak|
This is by far the riskiest stock or master limited partnership on the list. By leveraging each rig it completes to finance construction of the next rig, SeaDrill has grown from 11 rigs in 2005 to 50 at the end of 2011, with another 18 under construction.
Not only has SeaDrill become the owner of the second largest deep sea drilling fleet in the world, next to Transocean (RIG), but it has also become the owner of one of the newest and most advanced fleets in the industry. That lets SeaDrill collect the highest day rates for its fleet.
By pledging its existing rigs to raise debt to finance new rigs, SeaDrill has severely reduced its flexibility in any industry downturn. Because it needs the revenue from its rigs, SeaDrill wouldn't be able to stack them in a downturn, and would have to keep them in operation by cutting prices. That, in turn, could make any downturn worse.
At the moment there's no downturn in demand for deep sea drilling rigs in sight, but this leverage is certainly something to keep in mind.
Morningstar gives SeaDrill a B credit rating. SeaDrill is a member of my Dividend Income portfolio.
Targa Resources Partners (NGLS)
Targa is in the right place at the right time to take advantage of the midcontinent boom in the US production of natural gas liquids, a key feedstock for the chemical industry. This master limited partnership has just made its first acquisition in the Bakken, adding an oil pipeline to its natural gas liquids focus.
The US energy boom has put the squeeze on the price of natural gas liquids (see ONEOK on previous page), but fortunately for Targa and its investors, the company gets a relatively high 46% of its revenue from fee-based services, where prices don't depend on commodity spreads. (Targa projects that it will expand its fee-based business to 55% of revenue by the end of 2013, and to 65% by the end of 2014).
Distributions have grown at an average annual rate of 12.5% over the last five years. Morningstar gives Targa a B+ credit rating. Targa Resources Partners is a member of my Dividend Income portfolio.
Westpac Banking (WBK)
Westpac is one of just four banks that control the Australia/New Zealand banking market.
In the first half of 2013, return on equity grew to 16.1%, and revenue rose by 5% from the first half of 2012. Net interest margins rose 1 basis point, a good performance in the current low interest rate environment, and impaired assets as a percentage of total non-securitized loans fell to 0.83% from 0.94%.
The Australian economy has slowed lately leading to interest rate cuts from the Reserve Bank of Australia. That could put pressure on net interest margins, and on bad loan ratios.
The bank has grown dividends at an average annual rate of 8.2% over the last five years. Westpac Banking is a member of my Dividend Income portfolio.
Johnson Controls (JCI)
I've left this one for last, because it is a classic old-time dividend growth pick. The yield isn't all that high, but the company has paid a dividend every year since 1887.
In 2009 it froze the dividend, breaking a 33-year record of increasing the dividend each year. Because of that freeze, these shares don't show up in most dividend growth screens, which look at the last five years...but the company's 7.9% average annual rate of dividend growth since 2009 is what you'd expect from a company with a very long-term commitment to dividend growth.
The company has three main businesses-auto interiors, building energy efficiency, and auto batteries, which give it—usually—a very stable cash flow. Standard & Poor's gives Johnson Controls a BBB+ credit rating. Johnson Controls is a member of my Jubak's Picks portfolio.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Johnson Controls, SeaDrill, and Westpac Banking as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund's portfolio here.