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Two Dividend-Paying Energy Winners

10/19/2010 1:00 pm EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham, chief investment officer of Al Frank Management and editor of The Prudent Speculator, likes dividend-paying stocks a lot, especially those of two energy companies.

No doubt, the recent rally and the tremendous advance off the March 2009 lows discount a large part of the relatively modest economic and profit recovery we’ve seen.

We’ll also concede that [earnings] estimates for the Standard & Poor’s 500 of $82.82 [per share] for 2010 and $94.10 for 2011 may be a bit aggressive.

[But] looking at stock market history and extending the analysis to the broad-based S&P 500, it has been nearly 50 years since stocks were as attractively valued versus Treasuries based on a relative yield basis. True, the de facto equity benchmark yields “only” 2% today, so it has a way to go before it catches the 2.5% yield on the ten-year [Treasury].

But aside from [the first quarter of] 2009, when Treasuries actually yielded less than the S&P, data from Yale Professor Robert Shiller shows that it was December 1962 when last we saw such a small, 50-basis- point spread. We know that the S&P has enjoyed handsome returns since the end of 2008, and this was also the case for 1963, 1964 and 1965. Data from Morningstar show a total return on the S&P 500 in those three years of 22.8%, 16.5% and 12.5%, respectively.

Looking at returns going back to 1927, as compiled by Professors Eugene Fama and Kenneth French, dividend-paying stocks have turned in vastly superior performance. Still, while we think that the unusually uncertain environment argues for continuing to steer our portfolios toward generally less-volatile large-cap and dividend-paying stocks, reasonable equity valuations, cautious investor sentiment, an accommodative Federal Reserve, and microscopic interest rates compel yours truly to again add [recommended] names to both portfolios this month.

Not only one of the largest integrated oil companies in the US, Marathon Oil (NYSE: MRO) also has international oil and gas exploration and production expertise. The company’s integrated model provides solid cash flow diversification, which helps mitigate the effects of economically weak periods.

Seeing increased exposure to high-growth regions, a focus on larger E&P projects, and an “embedded call” on oil from its Alberta oil sands operations, we think Marathon is in a strong position to benefit as world economies continue to recover and energy demand increases. (The shares closed below $36 Monday—Editor.)

A lackluster global economy has kept spot tanker rates under pressure. Despite this, international crude oil and petroleum product transportation services company Tsakos Energy Navigation (NYSE: TNP) has managed 17 years of continuous profitability.

The company also has a generous policy of distributing 25%-50% of earnings as dividends. With operating costs for its fleets on the decline, capital expenditures more than covered by cash available, and a double-hull-only fleet that is young relative to competitors, Tsakos should benefit from ongoing consolidation opportunities and an improvement in the worldwide economy. (The stock closed below $13 Monday—Editor.)

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