Dividends Value » NNN

3 Dividend Stocks That I Will NEVER Lose Money On *

D4L — Wed, 16 Mar 2011 07:30:20 +0000

Wouldn’t it be nice to buy stocks that only had upside. While we are wishing why don’t we add in predictable earnings, predictable dividends and, of coarse, we don’t want to pay a premium for this investment. Does this sound unrealistic? Possibly, at face value, but there is a way to accomplish this. It won’t happen overnight, but it can be done. Here is how I have been able to do it…

Start With Quality Stocks

Just as ‘better ingredients make a better pizza’, higher quality stocks provide more predictable dividends and an increased chance of becoming one of these Golden Stocks. As with any income investment, I look for stocks that have consistently increased their dividends for many consecutive years and operate in businesses that do well over all parts of the economic cycle.

Add In A Generous Portion Of Time

This is not an overnight process. Most good things are worth waiting for. If you are to establish a long-term relationship with a stock, it better be a quality stock. Time is a powerful force, with it we can overcome poor choices, poor timing and bad decisions. Without it, we immediately are forced to pay for our indiscretions.

Strategic Selection Of Entry And Exit Points

Just typing the above made the hair on the back of my neck stand up — It sounds too much like market timing, for which I have no use for. However, all successful strategies have an element in them that encourages investors to buy low and sell high. Consider how asset allocation works. When one sector experiences a decline, the investor will buy that sector to keep his or her allocation in balance. Later when it rises, the investor may be forced to sell to rebalance their allocation. In much the same way, I tend to smile a lot when the market is crashing-and-burning. It is at these times when truly great stocks are being traded and rock-bottom prices. As we will see, these purchases are more quickly turned into Golden Stocks.

Three Golden Stocks

So what exactly is a Golden Stock? The concept did not originate with me, and others have different names for it, including ‘zero-basis stock.’ I don’t care for that name since, in reality it is nearly impossible to hold a stock with zero basis (at least the way the IRS calculates basis). A Golden Stock is one in which I have fully recovered my entire investment either through dividends or from partial liquidation or a combination of both. In my income portfolio, I am currently holding these 3 Golden Stocks:

3M Company (MMM) | YOC: 4.4% | Yield: 2.3%
This stock was originally purchased in March 2009 when the market was at its low. In October 2010, I sold 50% of my shares. Proceeds from that sale, along with dividends received, account for 101.1% of my original investment.

Emerson Electric Co. (EMR) | YOC: 3.5% | Yield: 2.3%
My EMR holdings were purchased in July 2009 and October 2009. The July purchase was at $31.64 while the October purchase was at $39.59. In February 2011, I sold 55% of my shares. Proceeds from that sale, along with dividends received, account for 100.4% of my original investment.

Integrys Energy Group, Inc. (TEG) | YOC: 7.3% | Yield: 5.4%
TEG is different from the first two stocks in that its quarterly dividend has been frozen at $0.62/share since March 2009. I purchased one block in November 2008 at $43.81 and a second block in February 2009 at $36.83. In March 2011, I sold 67% of my shares. Proceeds from that sale, along with dividends received, account for 102.7% of my original investment.

More Golden Stocks On The Way

In addition to the above, several of my other income holdings are well on their way to becoming Golden Stocks. These include:

The Coca-Cola Company (KO) | YOC: 3.8% | Yield: 2.7%
This stock is in most every dividend growth investors portfolio. I have currently recovered through sales and dividends 21.2% of my initial investment.

Realty Income Corp. (O) | YOC: 6.9% | Yield: 5.0%
This stock is hold-over from my yield chasing days. When I started investing the right way, I held on to a handful of the better high-yield dividend stocks. I have currently recovered through sales and dividends 26.8% of my initial investment.

Consolidated Edison, Inc. (ED) | YOC: 5.5% | Yield: 4.7%
I have held a position in this stock since January 2005. Though its dividend increases have been rather modest, they have been consistent. I have currently recovered through sales and dividends 43.8% of my initial investment.

Commercial Net Lease Realty, Inc. (NNN) | YOC: 7.9% | Yield: 5.9%
This stock is another hold-over from my yield chasing days. In May 2009, I sold 51% of my shares after NNN failed to raise its dividend. However, it later raised its dividend in August 2010 to keep its streak of annual dividend increases alive. I have currently recovered through sales and dividends 68.6% of my initial investment.

Health Care Property Investors Inc. (HCP) | YOC: 6.0% | Yield: 5.0%
Yet another hold-over from my yield chasing days. I have held a position in this stock since March 2005. On paper, I should have sold this stock a long time ago, but it has continued to appreciate and to raise its dividend. It will likely be my next Golden Stock. I have currently recovered through sales and dividends 81.2% of my initial investment.

Conclusion

Needless to say, the statement that I will NEVER lose money on my 3 Golden Stocks is predicated on not purchasing any additional shares, which may or may not be the case. These stocks have already paid for themselves once, and given the right circumstances, I would be willing to let them do it again. Dividend growth stocks are truly stocks that pay you to own them.

Full Disclosure: Long MMM, EMR, TEG, KO, O, ED, NNN, HCP. See a list of all my income holdings here.

(Photo Credit)

10 Higher Yield Dividend Stocks *

D4L — Wed, 26 Jan 2011 07:30:15 +0000

It’s human nature for new income investors to focus on yield. Many eventually learn that above average yields often carry an above average risk of a dividend cut, loss of invested capital or both. People involved in extreme sports/hobbies, such as base jumping, hang gliding and shark diving, do things to minimize risk and protect themselves. In much the same way those investing in high yield dividend stocks, can do certain things to increase their chance of success…

Evaluate High Yield Stocks Carefully

When a stock carries a high yield, there is an underlying reason. Here are some questions to consider to help you understand the stock:

- Is the high yield a result of a sudden drop in price?
- Is the high yield above the industry average?
- Is the high yield above the stocks average?
- Is the high yield a result of a widespread economic downturn?
- Is the high yield a result of a company specific problem?

Be Honest In Your Evaluation

They say statistics can be used to prove anything. In the same vein, if you are determined to buy a stock, an analysis can be constructed to support the position. Instead of trying to find a reason to buy the stock, look for all the reasons NOT to buy the stock. Then weigh the positives against the negatives. Does the stock still look as appealing?

Start With List of Higher Quality Stocks

If you are looking for high yield, the temptation is to use a stock screen to search for yield and apply it to the entire universe of stocks. As this screen demonstrates, yield is easy to find. Add in growth and sustainability, then the list will dramatically shrink. Currently, I track 198 dividend growth stocks. The list is made up of Dividend Aristocrats, Achievers, Champions and few other dividend stocks for good measure. Below is a list of the stocks from my database yielding more than 5% and with 15 more years of consecutive dividend growth:

Investors Real Estate Trust (IRET)
Yield: 7.7% | Years of Growth: 36
The REIT engages engages in the ownership and operation of income-producing real estate properties in the United States.

CenturyLink, Inc. (CTL)
Yield: 6.9% | Years of Growth: 37
CTL acquired larger telecom peer Embarq in a stock deal in July 2009. Combined, the company provides voice service to 6.7 million customers and Internet service to 2.4 million customers in rural towns as well as larger cities such as Las Vegas.

Universal Health Realty Income Trust (UHT)
Yield: 6.7% | Years of Growth: 24
UHT, a real estate investment trust (REIT), invests in healthcare and human service related facilities.

National Retail Properties, Inc. (NNN)
Yield: 6.1% | Years of Growth: 19
This REIT invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.

AT&T Inc. (T)
Yield: 5.9% | Years of Growth: 27
AT&T Inc. provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.

Buckeye Partners LP (BPL)
Yield: 5.7% | Years of Growth: 15
BLP is one of the largest independent U.S. pipeline common carriers of refined petroleum products, with over 5,400 miles of pipeline.

Mercury General Corp. (MCY)
Yield: 5.6% | Years of Growth: 23
Mercury General Corp. is an insurance holding company, operating primarily in California, writes a full line of automobile coverage for all classifications of risk.

Old Republic International (ORI)
Yield: 5.4% | Years of Growth: 29
The company writes property and liability, mortgage guaranty, title and life, and disability insurance.

Vectren Corporation (VVC)
Yield: 5.2% | Years of Growth: 51
Vectren Corp. delivers gas and/or electricity to more than one million utility customers in Indiana and Ohio, and offers other energy related products and services.

Realty Income Corp. (O)
Yield: 5.1% | Years of Growth: 16
O is a real estate investment trust that owns a diversified portfolio of 2,339 retail properties as of Dec. 31, 2009.

The above yields aren’t nearly as eye-popping as those from the screen. You will notice the above list is heavy in REITs (interest rate risk), telecommunications (technology risk), financials (equity and interest rate risks), along with MLPs and utilities (slow growth). Ultimately, we want to determine if the yield is sustainable. If we go looking for high yield, we will find it, but it may not be what we really want.

Full Disclosure: Long CTL, UHT, NNN, T, O. See a list of all my income holdings here.

(Photo: Gravity X9)

11 Higher-Quality, High-Yield Dividend Stocks *

D4L — Wed, 01 Dec 2010 07:30:44 +0000

A successful dividend growth investor must start young enough to allow time for dividend growth to occur. What happens when a person waits too late in life to start investing and they need immediate income? Many times the person will invest in high-yield, high-risk stocks and lose their savings. If income is needed immediately and you want to mitigate the risk (to a degree), there are some things that can be done, such as…

Start With a High-Quality List of Stocks

If you are looking for a higher-quality dividend growth stock, you have to go where they can be found. For me this is my Stock Ideas page. It consists of:

S&P 500 Dividend Aristocrats: is designed to measure the performance of S&P 500 index constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. These stocks are the best of the best – the blue blood stocks.

Broad Dividend Achievers: is comprised of select US companies with at least ten consecutive years of increasing regular dividends. US companies must be listed on the NYSE, AMEX or NASDAQ. US Companies must have a minimum average daily cash volume of US$500,000 per day for the November and December prior to each Annual Reconstitution Date.

U.S. Dividend Champions: includes companies that had paid higher dividends for at least 25 consecutive years. The list includes some smaller companies not found on the other lists. This list is maintained by The Drip Investing Resource Center and is available on their website in an Excel spreadsheet.

Look For Sustainability

High-yield isn’t free. There is usually a reason one stock’s yield is higher than another and it is normally tied to risk. With all things being equal, the income investor would always select the higher yield stock, but all things are not equal. It is our job to identify what is driving a stocks yield up and determine if we are willing to accept the additional risk. When making this decision some of the things I consider are free cash flow, debt level, business model, among others.

Higher-Yielding Stocks To Consider

Putting it all together, I have identified 11 stocks that yield at least 5% and have grown their dividends for at least 5 years. They are:

Leggett & Platt, Inc. (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.
- 5.16% Yield
- 36.76% Debt To Total Capital
- 57.89% FCF Payout
- 38 Years of Dividend Growth

Urstadt Biddle Properties (UBA) is a real estate investment trust that acquires, owns and manages commercial real estate properties primarily in the northeastern United States.
- 5.17% Yield
- 30.87% Debt To Total Capital
- 58.27% FCF Payout
- 16 Years of Dividend Growth

Hudson City Bancorp Inc. (HCBK) operates over 100 branches in the New York metropolitan area. It caters to high median household income counties and focuses on jumbo mortgage loan funding, largely through time deposits.
- 5.26% Yield
- 72.57% Debt To Total Capital
- 52.23% FCF Payout
- 10 Years of Dividend Growth

Cincinnati Financial Corp. (CINF) markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.
- 5.31% Yield
- 15.05% Debt To Total Capital
- 46.87% FCF Payout
- 50 Years of Dividend Growth

PP&L Corporation (PPL) is a holding company for PPL Utilities and a utility in the U.K.
- 5.53% Yield
- 37.55% Debt To Total Capital
- 99.92% FCF Payout
- 9 Years of Dividend Growth

National Retail Properties, Inc. (NNN) invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.
- 5.74% Yield
- 1.92% Debt To Total Capital
- 82.18% FCF Payout
- 19 Years of Dividend Growth

Verizon Communications Inc. (VZ) offers wireline, wireless and broadband services primarily in the northeastern United States. It acquired MCI Inc in 2006 and has since sold or spun off non-core assets. Alltel was acquired in early 2009.
- 5.94% Yield
- 38.59% Debt To Total Capital
- 31.49% FCF Payout
- 6 Years of Dividend Growth

AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.
- 6.02% Yield
- 41.67% Debt To Total Capital
- 61.14% FCF Payout
- 27 Years of Dividend Growth

Suburban Propane Partners LP (SPH) markets propane gas and other refined fuels to residential, commercial, industrial, and agricultural customers.
- 6.08% Yield
- 43.49% Debt To Total Capital
- 88.83% FCF Payout
- 11 Years of Dividend Growth

Kinder Morgan Energy Partners LP (KMP) is one of the largest pipeline master limited partnerships (MLPs) in the U.S.
- 6.14% Yield
- 63.92% Debt To Total Capital
- 76.11% FCF Payout
- 14 Years of Dividend Growth

CenturyLink, Inc. (CTL) acquired larger telecom peer Embarq in a stock deal in July 2009. Combined, the company provides voice service to 6.7 million customers and Internet service to 2.4 million customers in rural towns as well as larger cities such as Las Vegas.
- 6.74% Yield
- 44.56% Debt To Total Capital
- 75.39% FCF Payout
- 37 Years of Dividend Growth

As note earlier, yield comes with a cost. Each of the above stocks carries some level of additional risk higher than the average Aristocrat, Achiever or Champion. Ideally, we will start building our income portfolios years before we need the income, but if that is not possible, diversifying and focusing on higher quality stocks should help reduce our overall portfolio risk.

Full Disclosure: Long LEG, NNN, CTL, T, CINF. See a list of all my income holdings here.

(Photo Credit)

13 Stocks Growing Their Cash Dividends *

D4L — Fri, 16 Jul 2010 07:30:46 +0000

Dividend growth investing in its classic form focuses on identifying solid companies with a long record of growing their dividends each year; and an expectation that they will continue to do so into the future. The focus is not solely on yield but a combination of yield and dividend growth. Often it is the lower yield, higher growth, security that will provide the best return over time.

Here are several stocks living up to shareholders’ expectations by raising their cash dividends:

Fastenal Company (FAST) distributes fasteners and other industrial and construction supplies through 2,400 stores throughout the U.S. and in a few foreign countries. July 12th the company increased its semi-annual dividend to $0.42/share. The dividend is payable September 3, 2010 to shareholders of record at the close of business on August 20, 2010. FAST is a Dividend Achiever and has raised its dividend for 17 consecutive years. The yield based on the new payout is 1.62%.

Genesis Energy (GEL) is a limited partnership that operates crude oil common carrier pipelines, is an independent gatherer and marketer of crude oil and operates a wholesale CO2 business. July 13th the partnership raised its quarterly distribution 8.7% over Q2/2009 to $0.375/unit. The distribution will be paid on August 13, 2010, to Common Unitholders of record at the close of business on August 3, 2010. The ex-distribution date is July 30, 2010. The yield based on the new payout is 7.39%.

Enterprise Products (EPD) is an integrated provider of natural gas and natural gas liquids services, including processing, fractionation, storage, transportation, and terminalling. July 13th the partnership increases its quarterly distribution 5.5% to $0.575/unit. The quarterly distribution will be paid on Thursday, August 5, 2010, to unitholders of record as of the close of business on Friday, July 30, 2010. The ex-distribution date is July 28, 2010. EPD is a Dividend Achiever and has raised its dividend for 12 consecutive years. The yield based on the new payout is 6.21%.

Duncan Energy Partners (DEP) transports, markets, and stores natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals in the U.S. July 13th the partnership raised its quarterly distribution 3.4% to $0.45/unit. The distribution will be paid Friday, August 6, 2010, to unitholders of record at the close of business on Friday, July 30, 2010. The ex-distribution date is July 28, 2010. The yield based on the new payout is 6.31%.

Cummins (CMI) i a leading manufacturer of truck engines also makes stand-by power equipment and industrial filters. July 13th the company increased its quarterly dividend 50% to $0.2625/share. The dividend is payable on Sept. 1 to shareholders of record on August 23. The ex-dividend date is August 21. The yield based on the new payout is 1.42%.

Healthcare Services Group (HCSG) provides housekeeping, laundry, linen, facility maintenance and food services to hospitals and other health care facilities. July 13th the company increases its quarterly dividend 4.5% to $0.23/share. The dividend is payable on August 6, 2010 to shareholders of record at the close of business July 23, 2010. The ex-dividend date is July 21, 2010. The yield based on the new payout is 4.96%.

National Semi (NSM) is a leading manufacturer of a broad line of semiconductors, including analog, digital and mixed-signal integrated circuits. July 14th the company raised its quarterly dividend 25% to $0.10/share. The dividend will be paid on Oct. 12, 2010 to shareholders of record at the close of business on Sept. 20, 2010. The ex-dividend date is September 16, 2010. The yield based on the new payout is 2.79%.

Walgreen (WAG) is the largest U.S. retail drug chain and operates more than 7,500 drug stores throughout the U.S. and Puerto Rico. July 14th the company increased its quarterly dividend 27% to $0.175/share. The dividend is payable Sept. 11, 2010, to shareholders of record Aug. 19, 2010. The ex-dividend date is August 15, 2010. WAG is a Dividend Aristocrat and has raised its dividend for 35 consecutive years. The yield based on the new payout is 2.38%.

ONEOK Partners (OKS) is a leading transporter of natural gas and natural gas liquids (NGLs) in the Mid-Continent area to market centers in the U.S. July 14th the partnership raised its quarterly distribution to $1.12/unit. The distribution is payable August 13, 2010, to unitholders of record as of July 30, 2010. The ex-distribution date is July 28, 2010. The yield based on the new payout is 6.55%.

National Retail Properties (NNN) invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants. July 15th the REIT raised its quarterly dividend 1.3% to $0.38/share. The dividend is payable August 16, 2010 to common shareholders of record on July 30, 2010. The ex-dividend date is July 28, 2010. NNN is a Dividend Achiever and has raised its dividend for 19 consecutive years. The yield based on the new payout is 6.67%.

PPG Industries (PPG) is a leading manufacturer of coatings and resins, flat and fiber glass, and industrial and specialty chemicals. July 15th the company increased its quarterly dividend 1.9% to $0.55/share. The dividend is payable September 10, 2010, to shareholders of record August 10, 2010. The ex-dividend date is August 6, 2010. PPG is a Dividend Achiever and has raised its dividend for 37 consecutive years. The yield based on the new payout is 3.40%.

ONEOK (OKE) is an integrated natural gas company also has an energy marketing and trading business. July 15th the company raised its quarterly dividend 5% to $0.46/share. The dividend is payable August 13, 2010, to shareholders of record at the close of business July 30, 2010. The ex-dividend date is July 28, 2010. The yield based on the new payout is 4.00%.

Omega Healthcare (OHI) invests in and provides financing to the long-term care industry. Its portfolio includes health care facilities in 27 states. July 15th the REIT increased its quarterly dividend 12.5% to $0.36/share.The dividend is to be paid August 16, 2010 to common stockholders of record on July 30, 2010. The ex-dividend date is July 28, 2010. The yield based on the new payout is 6.90%.

Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised their dividends; it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long NNN. See a list of all my income holdings here.

(Photo Credit)

The Secret To Finding The Best Dividend Stocks *

D4L — Wed, 12 May 2010 07:30:42 +0000

Is a stock with a 3% yield and a 9% dividend growth rate better than one with a 7% yield and a 1.5% dividend growth rate? Last week we looked at yield-on-cost (YOC) and how it can be used to track the progress of a growing dividend of an individual stock. However, it is not a good metric for comparing multiple dividend stocks with each another. For this I devised a metric I call NPV MMA Differential.

Calculating A Dividend Stock’s NPV MMA Differential

The basis of this calculation is a hypothetical $1,000 investment in a stock and a Money Market Account (MMA) earning earning a 20 year average rate (I use a 20 year Treasury as a proxy). The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at the calculated dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. The dividend growth rate used is calculated as the minimum dividend growth rate of the 1, 3, 5, 7, 10 year dividend growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.

Interpreting The NPV MMA Differential

The calculation takes into account the time value of money, thus if it takes too long for the stock’s dividend yield to exceed the MMA rate, then the calculation will return a negative value. This means you are financially better off to put your money in the MMA. If the dividend stock is a better investment then the NPV MMA Diff. calculated will be positive. Like dividend yield, it is desirable to have a higher NPV MMA Diff. But also like a dividend yield, if it is too high, you need to start asking why? The NPV MMA Diff. can be used to compare two or more investments.

Comparing Various Dividend Stocks NPV MMA Differential

Like all calculations, the value of the output is directly tied to the quality of the input (garbage in, garbage out). For the sake of the illustration let us consider the calculated inputs are correct and sustainable.

Which of these would you rather purchase:

- Vector Group Ltd. (VGR) with a 9.99% yield and a 3.61% dividend growth rate
- Chevron Corp. (CVX) with a 3.68% yield and a 5.95% dividend growth rate
- McDonald’s Corporation (MCD) with a 3.23% yield and a 15.00% dividend growth rate

Based on the NPV MMA Diff. they would be ranked like this:

1. McDonald’s Corporation (MCD) | NPV MMA Diff: 8,429
2. Vector Group Ltd. (VGR) | NPV MMA Diff: 6,640
3. Chevron Corp. (CVX) | NPV MMA Diff: 780

As you can see neither yield nor dividend growth is the sole determinant of value. Below are several other companies in ascending order of their NPV MMA Diff:

General Dynamics (GD)
NPV MMA Diff: (339) | Yield: 2.16% | Growth: 2.01%

3M Company (MMM)
NPV MMA Diff: (260) | Yield: 2.47% | Growth: 2.00%

Clorox Company (CLX)
NPV MMA Diff: 171 | Yield: 3.12% | Growth: 4.35%

Consolidated Edison (ED)
NPV MMA Diff: 537 | Yield: 5.37% | Growth: 0.85%

Lowe’s (LOW) | Analysis
NPV MMA Diff: 748 | Yield: 1.38% | Growth: 15.00%

The Coca-Cola Company (KO) | Analysis
NPV MMA Diff: 890 | Yield: 3.34% | Growth: 7.32%

National Retail Properties, Inc. (NNN)
NPV MMA Diff: 972 | Yield: 6.91% | Growth: 0.00%

Johnson & Johnson (JNJ) | Analysis
NPV MMA Diff: 1,245 | Yield: 3.33% | Growth: 8.42%

Raven Industries (RAVN) | Analysis
NPV MMA Diff: 1,855 | Yield: 1.87% | Growth: 15.00%

TC PipeLines, LP (TCLP)
NPV MMA Diff: 2,255 | Yield: 8.01% | Growth: 1.74%

And if you believe all the underlying inputs (which I don’t), the top stock on the list is:

Courier Corporation (CRRC)
NPV MMA Diff: 54,801 | Yield: 5.56% | Growth: 15.00%

As with any projection based on historical information, the analyst must determine the sustainability of the inputs going forward. Put another way, past performance is no indication of future results. I have always heard the luckiest people in the world are those who work the hardest. In the same vein, the secret to finding the best dividend stocks often involves rolling up our sleeves and doing our homework.

Full Disclosure: Long CVX, MCD, MMM, CLX, ED, KO, NNN, JNJ. See a list of all my income holdings here.

(Photo Credit)

Increasing Dividend Yield Part II: REITs *

D4L — Wed, 10 Mar 2010 11:30:04 +0000

This is the second installment in a multi-part series that looks at various options used by income investors to boost their yield while waiting for dividend growth to lift their portfolio’s overall yield-on-cost. Last week we looked at Utilities. This week we are looking at Real Estate Investment Trusts (REITs).

Below is some background information on REITs from REIT.com:

Congress created REITs in the U.S. in 1960 as a way to make investment in large-scale, income-producing real estate accessible to all investors in the same way they typically invest otherwise – through the purchase and sale of liquid securities. U.S. REITs have seen their equity market capitalization soar from $90 billion to roughly $200 billion in just the past 10 years.

In order for a company to qualify as a REIT in the U.S., it must comply with certain ground rules specified in the Internal Revenue Code. These include: investing at least 75 percent of total assets in real estate; deriving at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and distributing annually at least 90 percent of taxable income to shareholders in the form of dividends.

The 90% distribution requirement and no corporate taxes are the reasons REITs yields are often above average. However, it is important to note that because REITs pay no income tax, they are not eligible for the special treatment as a “qualified dividends”, which are normally taxed at 15%. When comparing REIT yields to investments with qualified dividends, you must always look at them on an after-tax basis.

Consider an example where a taxpayer with a federal marginal tax rate of 30% owns AT&T (T) with a yield of 6.56% and Universal Health Realty Income Trust (UHT) with a yield of 6.82%. On an after-tax basis T, which qualifies for the 15% tax rate, will yield 5.58%, while UHT will only yield 4.78%.

Like utilities, most REITs rely on new capital either in the form of debt or equity to fund investments, pay debt and pay dividends, albeit to a lesser extent. Consider the following:

Universal Health Realty Income Trust (UHT) – Yield: 6.82%
Shares Outstanding: 2000 9m; 2008 11m
Long-Term Debt: 1999 $75.2m; 2008 $32.7m
Years of Negative Free Cash Flow: 0 of 10

National Retail Properties, Inc. (NNN) – Yield: 6.76%
Shares Outstanding: 2000 30m; 2009 79m
Long-Term Debt: 1999 $101.7m; 2009 $0m ($961.1m in short-term)
Years of Negative Free Cash Flow: 5 of 10

HCP, Inc. (HCP) – Yield: 6.12%
Shares Outstanding: 2000 102m; 2009 274m
Long-Term Debt: 2000 $1,158.9m; 2009 $5,456.1m
Years of Negative Free Cash Flow: 5 of 10

Realty Income Corporation (O) – Yield: 6.00%
Shares Outstanding: 2000 53m; 2009 103m
Total Debt: 2000 $404m; 2009 $1,354.6m
Years of Negative Free Cash Flow: 7 of 10

Essex Property Trust (ESS) – Yield: 4.56%
Shares Outstanding: 2000 18m; 2009 29m
Long-Term Debt: 2000 $595.5m; 2009 $0.0m ($1,847.4m short-term)
Years of Negative Free Cash Flow: 6 of 10

Corporate Office Properties Trust, Inc. (OFC) – Yield: 4.07%
Shares Outstanding: 2000 25m; 2009 56m
Long-Term Debt: 2000 $193.7m; 2009 $0.0m ($2,053.8m short-term)
Years of Negative Free Cash Flow: 9 of 10

Federal Realty Investment Trust (FRT) – Yield: 3.67%
Shares Outstanding: 2000 39m; 2009 59m
Long-Term Debt: 2000 $485.3m; 2009 $1,731.6m
Years of Negative Free Cash Flow: 2 of 10

Each of the above companies are growing their debt and/or shares outstanding, while not always generating sufficient cash to fund their operating expenses, including normal capital replacements (except for UHT). For a company to consistently raise its dividend, it must generate cash flows sufficient to meet operating obligations and to service outstanding debt. Since a REIT is legally required to pay out 90% of its earnings, it is less likely to eliminate its dividend, but it could drastically cut the dividend in the face of persistent weak earnings (like any company).

Similar to the utilities mentioned last week, I purchased some of the above companies many years ago, but I won’t be rushing to add to increase my positions.

Full Disclosure: Long T, NNN, HCP, O. See a list of all my income holdings here.

(Photo Credit)

Five High-Yield Positive Return Investments *

D4L — Wed, 10 Feb 2010 11:30:59 +0000

Readers of this space know that the primary focus of my income portfolio is to create ever-increasing income by investing in dividend growth securities. This means that often I will choose a lower yielding security with better dividend growth prospects over a higher yielding security. However, as one that values diversity, I also invest in some high yield securities. Here are some of the better performers, along with my life-to-date return:

National Retail Properties, Inc. (NNN) is a real estate investment trust (REIT) that invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.
Purchased: September 2005 | Life-To-Date Return: 5.04% | Yield: 7.58%

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in United States.
Purchased: May 2006 | Life-To-Date Return: 5.75% | Yield: 6.53%

Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) operates as a diversified and closed-end management investment company. The fund invests primarily in common and preferred stocks of the United States and foreign issuers.
Purchased: July 2008 | Life-To-Date Return: 7.97% | Yield: 7.80%

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company, through its subsidiaries and joint ventures, invests in health care-related properties and provides mortgage financing on health care facilities.
Purchased: March 2005 | Life-To-Date Return: 10.92% | Yield: 6.56%

CenturyLink Inc. (CTL) provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin.
Purchased: November 2008 | Life-To-Date Return: 32.50% | Yield: 8.28%

High-yield securities often carry a higher risk factor. Before adding any security to your portfolio you should understand its effect on your overall portfolio’s risk and allocation.

Full Disclosure: Long CTL, ETO, HCP, NNN, O. See a list of all my income holdings here.

(Photo Credit)

3 Styles Of Sucessful Dividend Investing *

D4L — Wed, 09 Dec 2009 10:30:48 +0000

There are certainly many ways to categorize the different styles of investing in dividend stocks, including yield, risk, growth, etc. An investment strategy based on any of these could be successful, if implemented within the framework well-crafted plan. Over the years, I have found that most dividend investing styles fall into one of the three major categories listed below:

High Yield/Low Growth

I would classify dividend stocks with a yield over 5% and dividend growth less than 2% in this group. This is probably the most popular group, particularly among those new to income investing. It is human nature to want it now and lots of it, and high yield stocks appear to deliver that desire. However, there is often a reason the stock’s yield is so high and many times the investor learns the hard way the yield is not always sustainable. Examples of stocks in the high yield/low growth group include:

National Retail Properties, Inc. (NNN) – Yield: 7.12 – Dividend Growth: 1.4%
Integrys Energy Group, Inc. (TEG) – Yield: 6.63 – Dividend Growth: 1.5%
Realty Income Corporation (O) – Yield: 6.61 – Dividend Growth: 2.1%
CenturyTel Inc. (CTL) – Yield: 5.97 – Dividend Growth: 0.0%

Low Yield/High Growth

I would classify dividend stocks with a yield less than 2.5% and dividend growth greater than 7.5% in this group. Low yield and high growth dividend stocks are the other extreme of high yield and low growth stocks. Their long-term risk is associated with growing the yield-on-cost over time. If the dividend growth rate is cut, the investor’s future earnings and yield will also be cut. Stocks in this group would include:

Aflac Incorporated (AFL) – Yield: 2.44 – Dividend Growth: 16.7% [Analysis]
United Technologies Corp. (UTX) – Yield: 2.25 – Dividend Growth: 15.0% [Analysis]
Eaton Vance Corp. (EV) – Yield: 2.05 – Dividend Growth: 15.0%
Colgate-Palmolive Company (CL) – Yield: 2.02 – Dividend Growth: 10.3%
Wal-Mart Stores, Inc. (WMT) – Yield: 2.01 – Dividend Growth: 11.3% [Analysis]
Canadian National Railway Company (CNI) – Yield: 1.63 – Dividend Growth: 15.0%
Lowe’s Companies, Inc. (LOW) – Yield: 1.53 – Dividend Growth: 15.0% [Analysis]

Moderate Yield/Moderate Growth

I would classify dividend stocks with a yield between 2.5% to 5% and a dividend growth rate between 2% to 7.5% in this group. This is a good compromise between the above too extremes. It is an approach focusing on a moderate yield and dividend growth rate. Keeping these two metrics at a reasonable level will help reduce the likelihood of either being cut. Companies in this group are your traditional dividend growth stocks, as seen from the list below:

Chubb Corp. (CB) – Yield: 2.88 – Dividend Growth: 6.1% [Analysis]
The Procter & Gamble Company (PG) – Yield: 2.81 – Dividend Growth: 7.3% [Analysis]
Johnson & Johnson (JNJ) – Yield: 3.00 – Dividend Growth: 7.5% [Analysis]
Automatic Data Processing Inc. (ADP) – Yield: 3.09 – Dividend Growth: 5.5% [Analysis]
Emerson Electric Co. (EMR) – Yield: 3.13 – Dividend Growth: 6.4% [Analysis]
Chevron Corporation (CVX) – Yield: 3.41 – Dividend Growth: 5.1%
SYSCO Corporation (SYY) – Yield: 3.39 – Dividend Growth: 4.3% [Analysis]

In my personal investing strategy, I incorporate measured participation in each of the above groups. My primary focus is on the Moderate Yield/Moderate Growth stocks, believing that over time this group carriers the highest probability of success. The remaining two groups offer the potential for above average returns – as long as they continue to perform at the estimated level, which is often difficult to do over time.

Full Disclosure: Long NNN, TEG, O, CTL, AFL, UTX, WMT, CNI, CB, PG, JNJ, ADP, EMR, CVX, SYY. See a list of all my income holdings here.

(Photo Credit)

High Yield, High Risk Dividend Stocks *

D4L — Wed, 23 Sep 2009 10:30:06 +0000

It is not unusual after I publish a list of stocks to get a comment or two asking why those stocks and not these stocks. Often the real thrust of the question is why buy those low yield stocks when you can buy these high yield stocks. The answer involves risk and its management.

When I started investing in dividend stocks for income, I did as most new income investors – I chased yield. To make things worse, I had success early on. At one time I had a portfolio consisting of Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs) and high yield, high risk stocks. The portfolio’s yield was consistently in the low to mid-teens. I remember once being disappointed in buying a stock that only yielded 8%.

As I continued to read and learn about investing in dividend stocks, it became apparent that I was doing it the wrong way. I started to unwind my high-yield strategy and move into more traditional dividend stocks. However, the high-yield strategy was still experiencing some success so I did not move as fast as I should and ultimately suffered some unnecessary losses.

My portfolio still carries some remnants of my high yield investing days with stocks such as:

Integrys Energy Group Inc. (TEG) – Yield: 7.62% – Div. Growth: 1.5%
National Retail Properties (NNN) – Yield: 6.75% – Div. Growth: 1.4%
Realty Income Corp. (O) – Yield: 6.33% – Div. Growth: 2.1%
Health Care Property Investors, Inc. (HCP) – Yield: 6.12% – Div. Growth: 1.1%

None of the above stocks are currently on my buy list, mainly due to their underlying fundamentals. I suspect over time they will work their way out of my portfolio.

The focus of my income portfolio is now on blue chip dividend stocks with a long record of growing their dividends. Examples of companies I now follow include:

Johnson & Johnson (JNJ) – Yield: 3.18% – Div. Growth: 7.5% – Analysis
The Coca-Cola Company (KO) – Yield: 3.05% – Div. Growth: 7.9% – Analysis
Abbott Laboratories (ABT) – Yield: 3.48% – Div. Growth: 8.4% – Analysis
Emerson Electric Co. (EMR) – Yield: 3.21% – Div. Growth: 6.4% – Analysis

You will notice the yields on each of these stocks are much lower than those in the first group, but they provide a much stronger dividend growth rate. Over time their yield on cost will grow much faster than the first group, thus have a good chance of producing more income.

That is not to say I have completely walked away from high yield investments. Like salt and pepper, I use them to add a little flavor to my income portfolio, but in limited and controlled portions. Here are some high yield securities that I hold that have performed well for me:

Alpine Total Dynamic Dividend Fund (AOD) – Yield: 15.74%
Eaton Vance Tax Advantaged Global Dividend Fund (ETO) – Yield: 7.33%
CenturyLink Inc. (CTL) – Yield: 8.86%

AOD and ETO are ETF’s that pay a steady monthly dividend, but each has cut the dividend over the last 12 months. CTL’s dividend has been flat at $0.70/share for 5 straight quarters. If you invest in such securities, you should understand the inherent risk and limit your exposure. I likely will always have a place in my income portfolio for riskier securities, but as I grow older the place will grow smaller.

Full Disclosure: Long ABT, AOD, CTL, EMR, ETO, HCP, JNJ, KO, NNN, O, TEG. See a list of all my income holdings here.

(Photo: Gravity X9)

Are REITs and Utilities Good Dividend Investments? *

D4L — Wed, 29 Jul 2009 10:30:29 +0000

Dividend stocks. When you hear those two words what do you think of? Many people think of widows and orphans, along with their stereotypical investment in utility stocks. While others may think of maximizing income by finding the highest yielding stocks available like Real Estate Investment Trusts (REITs). But are utilities and REITs really good dividend investments?

I have been using my new evaluation model now for about a month now. So far, I have been quite pleased with the results. It is helping me to efficiently review a lot of dividend stocks and identify those with strong financials, that are likely to continue increasing their dividends and that are fairly priced. As I was developing and testing the new model I noticed it had a distinct dislike of Real Estate Investment Trusts (REITs) and utilities.

This got me to looking at these classes of stocks and asking the fundamental question, ‘Are they really quality dividend investments?’ Sure both are known to have above average yields, but as any knowledgeable dividend investor will tell you, current yield is just one small part of what makes up a great dividend stock.

I currently own three utilities and three REITs. In addition to those, I follow three other utilities and three other REITs. Let’s take a look at some of them and determine if they are good dividend investments:

REITs
Health Care Property Investors Inc. (HCP) – 0 Stars
Debt to Total Capital: 52%
Free Cash Flow Payout: 131%

Realty Income Corp (O) – 0 Stars
Debt to Total Capital: 47%
Free Cash Flow Payout: -65%

Federal Realty Investment Trust (FRT) – 2 Stars
Debt to Total Capital: 51%
Free Cash Flow Payout: 101%

Kimco Realty Corporation (KIM) – 2 Stars
Debt to Total Capital: 55%
Free Cash Flow Payout: -1753%

National Retail Properties, Inc. (NNN) – 4 Stars
Debt to Total Capital: 39%
Free Cash Flow Payout: -144%

Utilities
SJW Corp. (SJW) – 0 Stars
Debt to Total Capital: 49%
Free Cash Flow Payout: -94%

Progress Energy, Inc. (PGN) – 1 Stars
Debt to Total Capital: 56%
Free Cash Flow Payout: -36%

Atmos Energy Corporation (ATO) – 1 Stars
Debt to Total Capital: 54%
Free Cash Flow Payout: 1045%

Black Hills Corp. (BKH) – 2 Stars
Debt to Total Capital: 48%
Free Cash Flow Payout: -105%

Integrys Energy Group, Inc. (TEG) – 3 Stars
Debt to Total Capital: 18%
Free Cash Flow Payout: -47%

Consolidated Edison, Inc. (ED) – 3 Stars
Debt to Total Capital: 52%
Free Cash Flow Payout: -40%

For a company to consistently raise its dividends, it must generate strong free cash flows sufficient enough to meet other obligations, such as debt, before paying a dividend. I look for a maximum of 45% Debt to Total Capital and a maximum of 60% Free Cash Flow Payout with the last 10 years positive.

With the exception of NNN and TEG, each of the above companies failed the Debt to Total Capital and Free Cash Flow Payout tests. NNN and TEG passed the Debt to Total Capital test while failing the Free Cash Flow Payout test. All the above companies had multiple years of negative FCF over the last 10 years thus their dividends are supported via non-operating cash such as debt issuances and property sales. Ironically, NNN was the only 4 Star stock and it just recently froze its dividend.

Most REITs and utilities may provide your income portfolio with an additional boost in yield, but may end up costing you more in the long run. I will continue to look at REITs and utilities, but they must measure up like any other stock.

Full Disclosure: Long HCP, O, NNN, PGN, TEG, ED. See a list of all my income holdings here.