I have outlined why fundamentals look best at market highs, and worst at market lows. Just like we n...
Top Gurus Share 5 Income Picks
10/19/2011 10:22 am EST
A quorum of top investment gurus are ready to give their latest picks for squeezing income out of these volatile markets, writes Chloe Lutts of Cabot Wealth Advisory.
We recently conducted a short survey of our subscribers. Several common concerns were market volatility and economic uncertainty, but long term, there was one overarching concern among serious investors.
Today, I want to address a third common refrain. As a subscriber from Texas put it: "Maximize dividend income while preserving capital."
Two other respondents complained about the low interest rates on fixed-income investments.
Howard B. wrote that he would like help "finding the highest possible yield with investment-grade or high credit quality. I am looking for a combination of appreciation and current cash flow yields."
Charles M. is "trying to find safe, dependable, interest-bearing securities."
And a subscriber from Massachusetts simply wrote, "INCOME."
As more and more Americans approach retirement age, and lose other regular income streams, I expect to see this concern more frequently. Fortunately, unlike market volatility and economic uncertainty, making your portfolio generate regular income is entirely within your control.
There are a lot of fixed-income investments for investors to choose from: bonds and preferred stocks offer investors varying levels of security on corporate debt. And for all but the most conservative investors (those who really can’t afford to risk any capital, ever), dividend-paying stocks are a great way to generate income right now.
John Buckingham, editor of The Prudent Speculator, brilliantly explained the advantages of dividend payers:
"Clearly, equity investors must steel their nerves for heightened levels of volatility, especially as the European sovereign debt crisis remains front and center, growth in stronger economies like China and Germany has slowed, and recent economic statistics in the US have been far from robust, but relative to Treasuries, dividend yields are as attractive as they’ve been in 50 years.
"Aside from several months at the height of the 2008-2009 Global Financial Crisis, the last time the yield on the S&P 500 was above the yield on the ten-year Treasury was 1958. And the big plunge in both interest rates and equity prices on October 3 moved the forward yield on the S&P closer to the 2.8% yield on the 30-year Treasury!
"What’s more, corporations have actually been boosting their payouts, as more than half (258) of the S&P 500 members have either raised or initiated a dividend this year."
"It is nice to see the renewed interest in income, as we can’t forget that dividends and their reinvestment have long been a substantial contributor to the total return on equities. Data from Morningstar going back to 1927 show that through the end of last year, the income component of total return amounted to 41% for Large-Cap Stocks, 35% for Mid-Cap Stocks, and 31% for Low-Cap Stocks.
"More importantly, our own analytical work going back 20 years and numbers we’ve crunched from Eugene T. Fama and Kenneth R. French dating to 1927 find that dividend payers have actually outperformed non-dividend payers over the long term, and they have done so with lower volatility! Not quite the Holy Grail, but higher returns with lower risk is obviously a winning combination."
Hard to argue with that. So, assuming that our subscribers aren’t the only investors looking to generate more income from their portfolios, I’ve chosen five great dividend-paying stocks to tell you about today.|pagebreak|
The most conservative, for investors whose priority is capital preservation, is an electric utility recommended by Dennis Slothower in the October issue of Stealth Stocks. But even though this utility is a defensive play, you’re not giving up any yield in exchange for safety—the current quarterly dividend of 25 cents yields a generous 5% per year.
"If you must be long a stock, as we transition from the early contraction phase to a middle contraction phase, I recommend utilities, which tend to be a defensive sector in a contraction. I recommend Duke Energy Corporation (DUK), which is an electric utility company paying a solid 5% dividend.
"The stock hit a new 52-week high in a solid uptrend. Look for a pullback to the $19 range or perhaps lower to buy this company. Projection: According to my numbers, DUK should be selling in the $40 range. It is currently trading around $20; so DUK has large upside potential.
"Place a sell stop at 25% below your entry price. As the stock rises, continue to raise your stop so that you are trailing the Friday close by 25%."
For investors who are willing to take on slightly more risk in exchange for the chance to see their principal grow, there’s this aerospace giant, recommended by Steve Christ in The Wealth Advisory on October 7. He thoroughly covered the growth catalysts providing a nice tailwind for Boeing Co. (BA), yield 2.6%:
"Not only is Boeing a great company, but it’s a global leader in a space that America still dominates. When it comes to designing and manufacturing aircraft, Boeing is a company with few peers—especially when it comes to commercial aircraft.
"[Boeing’s new] Dreamliner is the first plane ever to have its entire fuselage made of carbon composites, rather than aluminum sheets that are held together with some 50,000 fasteners. Along with its new engines, these design features help to give the plane a dramatic boost in speed and efficiency, allowing it to use considerably less fuel.
"Clean and green, the Dreamliner burns 20% less fuel than a comparable aircraft—a huge plus in a world where airlines are often rocked by fuel price increases. What’s more, Boeing projects the plane’s revolutionary design can remain in service for 50 years, adding roughly 20 more years to the life cycle of each plane…
"To date, the Dreamliner is actually Boeing’s best-selling airplane of all time, with 820 planes already on backorder representing $145 billion in future sales…From this point forward, Boeing has ambitious plans to ramp up production into 2013 to crank out ten Dreamliners a month, up from the current two.
"At current prices, that means Boeing hopes to add nearly $24 billion to its top line over the next two years if it can meet those goals. That gives today’s investors the chance to buy Boeing at a discount, since the ongoing delays knocked 15% off Boeing’s 2011 earnings, helping to keep its share price down.
"The upside is that the sales growth added to Boeing’s earnings by Dreamliner sales won’t begin to hit until next year. CEO Jim McNerney recently said the plane will actually be profitable from the first day, since the input costs per plane are not generating a loss on each delivery.
"According to analyst consensus, this translates to an increase in earnings per share by 23.6% and 18.7% (respectively) over the next two years. That adds up to $5.24 a share in 2012 and $6.21 a share in 2013.
"At 13.5 times earnings, that gives Boeing a reasonable price target of $84.24 a share. And at today’s prices, that leaves 35% upside from here. That doesn’t include the dividend, which at 2.7% is well above the market average, and has grown by an average of 6.5% annually over the past 20 years."
Harry Domash, editor of Dividend Detective, profiled another stock with growth potential, but a higher dividend yield:
"The Canadian economy, thanks to abundant natural resources, remains much stronger than the US economy…Consequently, we’re adding another Canadian bank, Canadian Imperial Bank of Commerce (CM), yield 4.7%, to the Dividend Detective Large Bank portfolio.
"Unlike existing portfolio member Bank of Nova Scotia (BNS), which has operations in 50 countries, CIBC focuses mostly on the Canadian market. CIBC has two major operating units. Retail markets, which accounts for around 75% of profits, offers the usual banking services. Its wholesale banking unit, CIBC World Markets, offers merchant and investment banking and capital market services to corporate, institutional, and government clients.
"In 2011, CIBC acquired a 41% stake in US-based asset management firm American Century Investments. CIBC just raised its quarterly dividend."
J. Royden Ward, editor of Cabot Benjamin Graham Value Letter, profiled an even higher-yielding stock from the same sector. This isn’t a growth stock, but Roy does think it’s undervalued, so it’s a great choice for investors who want high yield, appreciation potential and relatively low risk:
"First Niagara Financial Group (FNFG), yield 6.5%, shares sell at 9.6 times its latest 12-month EPS (earnings per share), which is a bargain despite the upcoming 22% dilution (see below). The dividend yield of [almost] 7% is huge. FNFG’s stock price will likely reach our Minimum Sell Price of 15.20 within one to two years…
"Based in Buffalo, New York, FNFG provides financial services through its wholly owned savings bank subsidiary, First Niagara Bank. The company currently operates branches in 346 communities providing financial services to individuals and small and mid-size businesses…
"FNFG’s loan portfolio is weighted heavily toward low- risk commercial loans, which make up 67% of total loans. Several acquisitions within the past few years have provided rapid growth.
"Outlook: First Niagara’s strong balance sheet has enabled management to acquire smaller banks at advantageous prices, including NewAlliance Bankshares with 88 branches in New York and New England. The company’s next step will be to acquire 195 bank branches in Upstate New York and Connecticut from HSBC Bank USA for $1 billion.
"First Niagara will sell $800 million in common stock, which will dilute investor ownership by 22%. Shareholders have overreacted, though, by sending FNFG shares down 30% to their lowest price in ten years. It is not expected that the 7% dividend will be cut. Maximum Buy Price: 9.63."
Finally, for those who just want yield, yield, yield, look no further than our neighbor to the North, Canada. Capstone Infrastructure Corp. (Toronto: CSE) is riskier, but it pays a 6-cent dividend every month, for an annual yield over 10%. Roger Conrad, editor of Canadian Edge, wrote:
"Capstone Infrastructure Corp. currently yields more than 10%, based largely on the perception that its distribution is at risk. Easing investors’ fears is an obvious catalyst for a fast return trip to a price of at least $8 for the stock, a range it held up until mid-summer.
"Such a roundtrip became a lot more likely this week, as management announced it would use the remaining dormant cash on its books to buy a 70% stake in Bristol Water from Suez Environment…As a result of the deal, management has raised its cash flow projection for 2011 to C$75 million from a prior forecast of C$60 million. The 2012 estimate is now C$140 million, up from C$80 million.
"Capstone management has long maintained its high payout ratio of recent quarters is only temporary, caused in part by the large amount of cash still on its books from the sale of its 42% stake in Leisureworld. Management has taken its time investing the money, which has resulted in a large portion of assets earning only meager returns…
"With the Leisureworld proceeds now deployed, the most important item on the agenda is still the re-contracting of the Cardinal natural-gas power plant…Should Cardinal get a new contract that’s perceived as favorable to Capstone, we may not have to wait long for a return move to $8, and eventually well beyond."
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