Two Dividend Plays in High Demand

06/02/2011 10:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

With investors seeking steady income as an alternative to the commodity rollercoaster, Waste Management and a preferred-shares ETF are on the rise, writes Jack Adamo of Insiders Plus.

As predicted, the American investor is turning toward income stocks.

Coming off the 2008 market bottom, the most speculative investments reigned—gutted banks, small caps, decimated housing stocks, etc. Then the huge pumping up of Ben Bernanke’s Bountiful Bubble of Monetary Blessings went rushing into commodities.

Now that the air is leaking out of them, investors are adopting a more prudent attitude. How about companies that pay their shareholders? What a novel idea!

After a slow start, Waste Management (WM) is doing nicely for us—it’s up a shade under 5% this year, and looks technically stronger every day. It has several initiatives that are catching investors’ attention. To name a few:

  • It is growing its waste-to-energy capabilities
  • Its consumer-oriented “Bagster” pickup service is gaining traction
  • It is in on the ground floor of water cleanup in the Marcellus Shale area, and could expand that service to other parts of the country suffering water contamination from hydro-fracking natural gas

[The 3.5% dividend yield doesn’t hurt either—Editor.]

I was surprised to learn Waste Management produces more non-fossil based energy than all US solar power combined. Granted, waste conversion isn’t quite as clean as solar, but it’s much cheaper than solar, and probably cleaner than most fossil fuels, especially when you take into account the energy needed to extract competing energy sources.

I also read that Bill Gates’ charity foundation holds Waste Management. Considering his friendship with Warren Buffett and his ability to pay for good help, I think we can presume Gates has smart guys running his money.

Waste Management has a good long-term record for growing shareholder value. Let’s give them a chance to help us some more. Buy the stock up to $41. [Shares traded below $39 Tuesday—Editor.]

Preferred ETF Paying Dividends
One group getting a lot of attention is preferred stocks.

In general, I’m not a fan of preferreds, because in an inflationary environment most don’t have any protection. Their dividends lose value during inflation because they don’t grow with prices.

Convertible preferreds, like Bunge Cumulative Convertible Perpetual Preference Shares (BGEPF) are an exception, as are those with escalating payouts like our Seaspan Series C 9.50% Cumulative Preferred (SSW-C).

But with the need for income so strong right now, investors are rushing into any kind of preferred stock. The iShares S&P US Preferred Stock Index ETF (PFF) is on a roll, and I think it will stay on it for a while.

The shares yield about 6% at their current price. If the current mood sticks, I can see the shares rising as much as 50% over the next few years, assuming inflation doesn’t become too glaring.

Of course, it’s already much worse than our government’s numbers suggest—anyone who buys anything knows that—but most Americans don’t eat food, drive cars, take mass transit, or heat their the “core” inflation numbers the Fed uses make perfect sense.

In the short run, however, the important thing is perception. Investors tend to listen to Uncle Sam’s ramblings, even though the man on Main Street dismisses them. Inflation will have to get high—and very obvious—before interest in preferred stocks wanes.

We have time until that happens. If it turns around, so will we.

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