5 Good Starts When Looking for Income

06/20/2012 9:45 am EST

Focus: DIVIDEND

Roger Conrad

Founder and Chief Editor, Capitalist Times

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.

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