More on Dividends

12/08/2006 12:00 am EST


Richard Band

Editor, Profitable Investing

Expert value investor Richard Band is recommending some end-of-the-season portfolio changes to his subscribers. Here he swaps out two companies for a couple more that pay very healthy dividends, adding to your profits in the new year.

"History is lovely, but you want to know where the best buys are now. This month, I'm replacing two of the members of the Machine. KeySpan Energy (KEY NYSE), from the February dividend cycle, is due to be taken over in mid-2007 by Britain's National Grid. Since the deal calls for a cash buyout of $42 per share, the upside in the stock from this point forward is strictly limited.

"If you own KSE, you can hold it until the buyout closes. For new money, though, I think you'll fare better with Masco Corp (MAS NYSE). A leading supplier of building products, MAS, also in the February cycle, has sweetened its dividend 48 years in a row. That's a fantastic record for a company in the cyclical business of making cabinets, faucets, bathtubs, and the like. It's no secret that, after a torrid run during the housing boom, Masco's earnings growth has slowed recently. With the stock boasting a liberal 3.1% dividend yield, however, we can afford to be patient while the homebuilding cycle bottoms out. Come what may, you can count on management to fight tooth and nail to maintain the long skein of dividend hikes. Pay up to $30 for MAS.

"In our other swap, we're deleting electric utility Great Plains Energy (GXP NYSE) from both the main model portfolio and the Incredible Dividend Machine. We'll continue to monitor GXP as a standby Machine selection; if you're interested solely in income, feel free to hang on to it. But the Machine is designed for a combination of income and growth. Accordingly, we're switching to a faster-growing electric company, also in the March cycle, New Jersey's Public Service Enterprise Group (PEG NYSE). Wall Street soured on Peggy last September, when the company's proposed merger with Chicago-based Exelon Corp (EXC NYSE) collapsed. (Jersey regulators had demanded terms the merger parties couldn't accept.) However, the subsequent sell-off in the stock looks like an overreaction to me.

"PEG still operates a valuable electricity distribution franchise in northern New Jersey, besides owning wholesale generating plants with 13.8 billion watts of installed capacity. Earnings should jump smartly in 2007--perhaps as much as 30%, to an all-time record. Meanwhile, the shares are yielding a nifty 3.5%, with plenty of room for increases in the years ahead. Buy PEG at $67 or less. We'll carry it in the main Total Return Portfolio as well."

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