5 Good Starts When Looking for Income
06/20/2012 9:45 am EST
One sure sign of strength is when companies increase their dividends safely during uncertain times, observes Roger Conrad of Personal Finance.
Over the past 12 months, 14 of the 19 Income Portfolio stocks have raised dividends-the best possible indication that their current yields are sleep-easy safe.
All 19 companies, meanwhile, generated solid first-quarter profits that comfortably covered distributions. Based on upbeat management guidance, as well as conservative financial and operating strategies, they're on track to do so for the rest of 2012 and beyond.
Among the five that did not increase dividends was Canadian Apartment REIT (Toronto: CAR-U). However, CEO Thomas Schwartz stated during the apartment owner's first-quarter conference call that a distribution increase is "top of mind."
Energy Transfer Partners (ETP) has indicated much the same, as it prepares to close its pending merger with Sunoco (SUN) later this year. Vermilion Energy (Toronto: VET) has "targeted a dividend growth model" by 2015, when the Corrib gas field off the Irish coast is producing energy.
Washington REIT (WRE) and Windstream (WIN) are not likely to increase payouts this year. The former is playing it conservative, as it deals with weak occupancy rates in the nation's capital and environs that have driven up its payout ratio to around 90%. The latter is working to integrate recent acquisitions that are part of its transition from the declining traditional phone business to a broadband and enterprise-focused model.
Windstream stock took a big hit in early May, because of unexpected costs from its $1 billion acquisition of PAETEC in the fourth quarter of 2011. However, the company's first-quarter payout ratio based on free cash flow was still just 63.5%.
Adding PAETEC's 37,000 miles of installed fiber-optic cable and seven data centers serving rural and small-city customers repositions it dramatically in high-growth areas of communications, such as cloud computing storage. Windstream is still a buy up to our target of $13.50.
As for Washington REIT, recent portfolio repositioning should cut costs and limit exposure to further local property market weakness. The units are also priced cheaply, right at net asset value.
Unfortunately, there is the possibility of a dividend cut if management sees a need to retain cash early next year. Consequently, we're cutting Wash REIT to a hold. We'll reevaluate on the release of the REIT's second-quarter numbers in late July.