Equities With Dividends Over 10%
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Dividend paying stocks with yields above 10% are unusual. Fortunately, there are many Closed-End Funds (CEFs) trading at a discount to net asset value (NAV) with dividends exceeding 10%.
Below is a table of 30 CEFs with dividend payouts exceeding 10%, which trade at a discount, and have expense ratios below 2.0%…
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mihail @ September 16, 2011
Buy a House!
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By Addison Wiggin
04/06/12 Baltimore, Maryland – A little more than a year ago, a very successful professional investor declared, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”
Since that declaration, house prices have continued drifting lower in most parts of the country. The Case-Shiller index of national home prices is down about 4% year over year. Even so, we’re betting this professional investor was merely early…not wrong. US housing isn’t just cheap; it is the cheapest it has been in more than 40 years. And when one considers the possibility that inflation may rear its head soon, housing looks even cheaper still.
If you think we’re crazy, you’re not alone. The housing market is a complete bust right now. The following chart shows the median home price in terms of per capita disposable income. Based on this calculation, home prices are lower than they have been in 40 years!
And it isn’t just that home prices have fallen a long way. For most home buyers, the price of the home is only one part of the true cost of a home. Mortgage rates matter as much, or more, than the purchase price itself. In other words, buying a house is not just a bet on real estate; it is also a bet against interest rates. For the typical buyer of a home who takes out a 30-year mortgage, an increase in interest rates is just like an increase in the price of a home.
Today, because home prices and interest rates are both at extremely low levels, the cost of buying a home with a 30-year mortgage is at an all-time low. To illustrate this stunning fact, the chart below shows the average monthly mortgage payment on the median-priced home, expressed as a percentage of per capita disposable income.
If you can get a mortgage, you are basically taking a reverse bet on the bond market. You could be a long-term borrower at fixed rates, instead of a long-term lender. Right now, you can borrow for 30 years at around 3.3%. After the mortgage tax deduction, for some people the net effective interest rate is nearer to 2%! That’s going to prove an awesome deal if we see inflation again.
But here’s the factor that clinches the case for investing in residential real estate: the long-term supply and demand for housing. Let’s start with supply.
Consider how long it will take to bring new supply to the market. As investors, we want new supply to come slowly.
The number of housing starts is currently lower than at any time in at least the past 50 years. Moreover, new construction is only about half the long-term average. Again, good news for investors in housing, since this means that new supply is growing very slowly.
Meanwhile, housing demand — based simply on demographic trends — should rise inexorably for years to come. Take the growth in households — driven by population growth — and apply a home ownership rate. Demographically, the US is still a growing country. By 2030, there will be 370 million Americans. Even using the long-term average home ownership rate means we’ll need 1.1-1.2 million new single-family homes per year.
In other words, busted markets don’t last forever. The cure for low prices, as the old saw goes, is low prices. Furthermore, a bet on the housing market is not merely a bet on real estate; it is also a bet that inflation will rise.
The US economy may be idling in neutral for the moment, but inflation is revving its engines. How should you prepare?
“Buy gold” is the time-honored answer, and we don’t quarrel with it. But an alternative answer, especially this time around, might be: “Buy a house.”
That’s the advice offered by a growing — but still small — number of very successful investors. John Paulson is one of them. He is the guy who said about a year ago, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”
He was early…and his hedge fund performed very poorly last year, mostly because he was too early betting big on a rebound in the US economy. Double wrong! But we still think Paulson’s call on housing may be close to the mark.
Despite his dismal performance in 2011, Paulson is the guy who turned one of the greatest trades of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America…still.
His advice today is very different than it was in 2007. “Buy a house,” he says.
And he has put money where his mouth is…He already owns posh digs in Manhattan on 86th Street, plus a Southampton house he nabbed in 2008. In 2010, he snapped up an 8-acre ranch in Aspen for a cool $24.5 million, before buying a Fifth Avenue condo at a 23% discount to the asking price. (This 26th-floor pied-à-terre will be his “guest house.”)
Let’s flash back in time for a second…
Another successful investor gave similar advice in 1971 — the dawn of one of America’s biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:
Smith: The best investment you can make is a house. That one is easy.
Cavett: A house? We were talking about the stock market. Investments…
Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.
Cavett: I already own a house. Now what?
Smith: Buy another one.
How good was that advice?
Houses, as an investment, trounced stocks during the inflationary 1970s. The chart below tells the tale.
In the 1970s, US stocks returned about 5% annually — failing to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s, as inflation heated up:
1972 — $30,000
1973 — $32,900
1974 — $35,800
1975 — $39,000
1976 — $42,200
1977 — $47,900
1978 — $55,500
1979 — $64,200
That was a pretty impressive run-up in home prices. Today, I think we could be on the threshold of another once-in-a-generation buying opportunity in the housing market.
The homebuilding stocks seem to agree. Many of them have doubled during the last five months from their very depressed levels. Although the ISE Homebuilders Index is still down about 80% from its 2006 peak, it has been gaining steady ground relative to the rest of the stock market.
The chart below shows the rolling three-year price performance of the S&P 500 index, minus the rolling three-year price performance of the ISE Index. As you can see, the ISE has been lagging far behind the S&P 500 for most of the last five years. But during the last few months, this index has been closing the gap…and looks like it is about to begin a period of outperformance relative to the rest of the stock market.
So we like select homebuilding stocks, but we don’t love them. Unlike the housing market itself, homebuilding stocks have priced in quite a bit of good news already. Not surprisingly, therefore, the insiders at these companies have been doing a lot more selling of their own shares than buying. (Pulte is one conspicuous exception.)
We also like housing-related stocks. As Chris Mayer, our colleague over at Capital & Crisis, observes, “Companies such as Lowe’s (LOW) and Home Depot (HD) would benefit from a recovering housing market…as would the makers of flooring, Mohawk Industries (MHK), the makers of kitchen cabinets, Fortune Brands Home & Security (FBHS) and a whole bunch of stuff in between…In a robust housing market, good fortune would also smile on A.O. Smith (AOS), which makes water heaters for homes.”
But again, we don’t love these stocks. Not at their relatively rich valuations. Even so, we’ll be combing through this sector very carefully for promising investment ideas. In the meantime, for those with the means and the inclination, the best buy in the housing sector is an actual house!
This picture is unequivocal. US home prices are very, very cheap today. “Cheap” does not preclude “even cheaper,” of course. Home prices could certainly continue sliding. But even if that were to occur, mortgage rates might begin rising, which would cause the effective price of a home to increase.
Obviously, buying residential real estate at both a housing market low and an inflationary low would be the optimal entry point — in fact, it would be a screaming buy. And that’s exactly what today’s circumstances seem to be offering.
Perhaps that’s why a large number of very successful professional investors are licking their chops over opportunities in the US residential real estate market.
This out-of-favor asset class has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments. He calls them SFHRPs, an acronym for “Single Family Home Rental Property.”
“The best investments we have made are the ones no one else would touch,” Ackman explains.
As housing prices have continued drifting even lower, Paulson and Ackman have picked up a little bit of company. The US housing market is becoming a central focus of several “deep value” investors. Over the past weeks, I’ve bumped into three very successful professional investors who were much more eager to talk about their real estate investments than about their stock market investments.
One gentleman in particular, who has made billions of dollars for his investors by buying deep value stocks, was much more eager to talk about his recent real estate investments than his recent stock market investments. He was talking glowingly — if not giddily — about the opportunities in real estate he was coming across.
“I’m not finding much to buy in the stock market at the moment,” he explained. “But real estate is a different story. I wish I had the capital to act on more of the ideas that are coming across my desk.”
We asked this investor if he was concerned about the risk of real estate prices falling even further.
“Nah,” he said as he waved the question aside, “I assume the housing market will remain soft for a while. But the kinds of deals we’re finding should work out well, even if the housing market keeps sliding for a bit. Besides, there’s one lesson I’ve learned repeatedly as a value investor in the stock market: You can have good news or cheap prices. You can’t have both.”
The US housing market has absolutely no good news…but plenty of cheap prices.
mihail @ April 10, 2012
Is it Risky to Put All My Investments With One Firm?
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By SmartMoney Staff
Question: My wife and I are retired and in our mid-60s, and I want to consolidate all of our investments—my 401(k) and two IRAs—under one roof. Are we putting ourselves at risk if everything is at one firm?
– Chuck Rosa, Shelby Township, Mich.
Answer: We’re all still smarting from the collapse of major financial firms such as Bear Stearns, but experts say for most investors there’s little risk in consolidating accounts at one major brokerage. The Securities Investor Protection Corp., for one, covers investors for up to $500,000 for securities, including a maximum of $250,000 for cash. Plus, assets at brokerage firms or mutual fund companies are held in a custodial account and are not assets of the company, says Frank Boucher, a financial planner in Reston, Va. Translation: If the company goes belly-up, your assets are protected from creditors and regulators. Still, that doesn’t mean you’re safe from bad investments, so experts say it’s crucial to diversify your holdings regardless of how many brokerages are involved.
Question: My wife and I are retired and in our mid-60s, and I want to consolidate all of our investments—my 401(k) and two IRAs—under one roof. Are we putting ourselves at risk if everything is at one firm?Chuck Rosa, Shelby Township, Mich. Answer: We’re all still smarting from the collapse of major financial firms such as Bear Stearns, but experts say for most investors there’s little risk in consolidating accounts at one major brokerage. The Securities Investor Protection Corp., for one, covers investors for up to $500,000 for securities, including a maximum of $250,000 for cash. Plus, assets at brokerage firms or mutual fund companies are held in a custodial account and are not assets of the company, says Frank Boucher, a financial planner in Reston, Va. Translation: If the company goes belly-up, your assets are protected from creditors and regulators. Still, that doesn’t mean you’re safe from bad investments, so experts say it’s crucial to diversify your holdings regardless of how many brokerages are involved.
mihail @ March 26, 2012
How big should your emergency fund be?
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By Michele Lerner • Bankrate.com
Financial experts agree everyone needs an emergency fund, a savings account with readily accessible cash to be prepared for any contingency. The question is: How much should you keep in a rainy-day fund?
With more than 5.5 million Americans unemployed for 27 weeks or longer, according to the Bureau of Labor Statistics, the rule of thumb of three to six months’ worth of expenses may no longer apply.
“A lot of experts now recommend that everyone keep nine months to one year of income in an emergency account in case of job loss,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling in Washington, D.C. “People are often out of work now for as long as nine months, and if they don’t have savings, they live on credit. So when they replace their job, they are behind because now they have debt to repay.”
Cunningham says the important message for all consumers is that “you can’t afford not to save.”
And according to Bankrate’s February Financial Security Index, just more than half, or 54 percent, of Americans said they have more money in emergency savings than in credit card debt. One in 4 Americans has more credit card debt than emergency savings, up a bit from 23 percent last year.
Cunningham recommends starting by saving $100 per month or 10 percent from each paycheck, so you have at least something in a savings account or checking account at the end of the year.
Scott Cramer, president of Cramer & Rauchegger Inc., a financial planning firm in Maitland, Fla., recommends having an emergency fund of three to nine months’ worth of expenses, depending on individual circumstances.
Don’t underestimate
“It’s a common mistake to underestimate your expenses or to just think about fixed expenses such as a mortgage,” Cramer says. “I suggest people look at what they are spending on everything, including gas, food and child care, then estimate how much they will need.”
Cramer says families with kids and one income need the maximum emergency fund, while retirees who face an emergency but have a pension, Social Security and low expenses may need as little as three months’ worth in an accessible fund.
The factors that impact the size of your rainy-day fund include your living expenses, whether you have one or two incomes, and whether you have income from other sources such as investment properties or other income-producing assets.
“If you have two incomes and are good at budgeting, not spending every dollar that comes in, you might be OK with a smaller emergency fund,” Cramer says.
After years of a weak economy, many consumers are worried about job security.
“Most people still feel uncertain about the economy. People who are self-employed may feel they have job security, but they actually need to have more than six months’ of living expenses on hand because they have business expenses in addition to living expenses,” says Larry Rosenthal, president of Financial Planning Services in Manassas, Va.
Where to keep your cash
Cunningham recommends separating your savings into several accounts so you can more easily track your goals. One could be a rainy-day fund for small emergencies such as unexpected car or home repair bills. Others could be vacation funds, down-payment funds, or catastrophe funds for things such as job loss or a major illness.
“I recommend looking for a credit union for these funds, because they are federally insured and therefore safe,” Cunningham says. “In addition, credit unions often offer checking accounts that pay higher interest rates than savings accounts or money market accounts as long as you meet certain criteria such as using a debit card, online banking and direct deposit.”
While earning interest is an extra incentive when saving, most bank accounts are paying interest of 1 percent or less.
“If you need $5,000 per month to live on, that’s $30,000 you’ll need to have for a six-month emergency fund,” Rosenthal says. “That may be too much money to put aside someplace that’s earning as little interest as you do in a savings account.” One option would be to put four months’ savings in a conservative bond fund while keeping two months’ in a liquid savings account or money market account.
Cramer says his big concern with investing money designated for emergencies in the stock market is the possibility of losing it.
“One option for people with equity in their home is to take out a home equity line of credit,” Cramer says. “If you take out a line of credit for $100,000 and then invest $80,000 in the stock market, you can use the home equity line of credit if an emergency hits. Then, when the market is better, liquidate your investment and pay off the loan.”
Another option is laddering certificates of deposit so they mature at different times, which adds a measure of liquidity to the money in those CD accounts. Even if you must liquidate a CD early, Cramer says the penalty is typically three to six months’ of interest earnings.
“It may be worth taking the risk of the penalty you would incur in an emergency if you can earn a better interest rate with a CD,” Cramer says.
Cramer also suggests searching for a money market account or savings account with the highest interest rate. While it may be low, it’s better than losing money in the stock market.
“Everyone needs some amount of liquid cash in case something happens,” Cramer says.
mihail @ March 13, 2012
20 Ways to Make the Most of Capital Gains
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By BILL BISCHOFF
If you’re a stock or mutual-fund investor, then you probably know that investments held for more than a year and sold for a profit are subject to lower tax rates as long-term capital gains. Generally speaking, if you’re in the 25% tax bracket or higher, you will owe no more than 15% of your profits to the Internal Revenue Service.
But what you might not realize is that more than just stock and mutual-fund shares are eligible for favorable capital-gains tax treatment. If you sold, say, your vacation time share or your country-club membership, then you just might be pleasantly surprised to discover you’ll owe no more than 15% on the gain (assuming that you held the asset for more than a year).
Here’s a list of some of the most common types of assets potentially subject to these lower rates:
1. Securities options (as in puts and calls) held as personal investments.
2. Stock of closely-held corporations.
3. Collectibles held as personal investments, like baseball cards, stamps, rare coins, art, etc. In this case, a 28% (not 15%) maximum federal tax rate applies.
4. Personal residences (including vacation homes). In this case, the 15% maximum rate generally applies to gains beyond what you can exclude (not pay tax on) under the $250,000/$500,000 home-sale gain exclusion privilege. However, a 25% maximum rate applies to gains triggered by certain depreciation deductions claimed against your property.
5. Vacation time-share interests.
6. Country-club memberships.
7. Personal autos (that aren’t collectibles). Keep in mind, this means that you’ve sold your car at a profit, which is unlikely.
8. Personal-property items (that aren’t collectibles) in general — such as jewelry, furniture, a lawn mower and so on.
9. Rental real estate owned by an individual, partnership, limited-liability company or S corporation. (The standard 15% maximum rate applies, but gains from depreciating property may be taxed at up to 25%.)
10. Land held as an investment by an individual, partnership, limited-liability company or S corporation.
11. Your ownership interest in a partnership or a limited-liability company. In this case, the 15% maximum rate usually applies, although depending on the assets of the partnership or limited-liability company, part of your gain may be taxed at higher rates of up to 35%.
12. Land used in a business owned by an individual, partnership, limited-liability company or S corporation. This could be the actual land that your small business is located on, or it could be land held by your small business, such as an apple orchard.
13. Options to buy investment land when the option is owned by an individual, partnership, limited-liability company or S corporation. This is the option to buy land at a certain price over a set period of time. It could be, for example, that you’ve purchased the option to buy a plot of land that you think is going to appreciate because of future development in the area.
14. The right to receive money for release of a restrictive covenant in a land deed when the deed is owned by an individual, partnership, limited-liability company or S corporation.
15. The right to a condemnation award when the right is owned by an individual, partnership, limited-liability company or S corporation. This would apply if, say, your property were condemned by the city so that it could take over the land and build a civic building.
16. The right of a tenant to receive a lease-cancellation payment when the tenant is an individual, partnership, limited-liability company or S corporation. This would apply if you were renting property and your landlord cancelled your lease.
17. Contract rights owned by an individual, partnership, limited-liability company or S corporation. For example, you might own a license giving you the right to use a software program. If you can sell that license to someone else for a gain, it will be taxed at no more than 15%.
18. Most other intangible business assets (such as intellectual property, trade secrets, goodwill and so on) owned by an individual, partnership, limited-liability company or S corporation. In these cases, the 15% maximum rate generally applies. However, if the business intangible was amortized, gains attributable to the amortization deductions are taxed at your regular rate (up to 35%).
19. A stock-exchange membership owned by an individual, partnership, limited-liability company or S corporation. Obviously, there aren’t too many of these, but this does apply to regional exchanges as well.
20. Depreciable or amortizable assets used in business — provided the asset is owned by an individual, partnership, limited-liability company or S corporation. Gains attributable to depreciation or amortization deductions are generally taxed at your regular rate (up to 35%). The 15% maximum rate generally applies to the balance of the gain.
mihail @ March 8, 2012
Global X Permanent ETF: Equal Allocation To Precious Metals, Stocks, Long-Term Treasuries, Short-Term Treasuries
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Global X announced today the launch of the Permanent ETF (PERM), a new fund that will offer one stop exposure to a number of core asset classes. The new ETF will be linked to the Solactive Permanent Index, a benchmark that includes three major asset classes: stocks, Treasuries, and precious metals. Each of those broad categories includes multiple layers; the equity component includes both domestic and international stocks, while the Treasuries allocation is split evenly between long-term and short-term securities. The precious metals allocation includes both gold and silver.
At each rebalance, the underlying index will allocate 25% to each of stocks, short-term Treasuries, long-term Treasuries, and precious metals. The rough breakdown by asset class for PERM will be as follows:
AssetWeight - Physical Gold – 20%, Physical Silver – 5%, Long-Term Treasuries – 25%, Short-Term Treasuries – 25%, Large Cap U.S. Stocks – 9%, Small Cap U.S. Stocks – 3%, International Stocks – 3%, Natural Resources Equities – 5%, Real Estate Stocks – 5%.
PERM’s portfolio will consist of both exchange-traded products and individual holdings. Gold and silver are represented in the underlying index by ETPs offered by ETF Securities, while the bond allocation consists of individual Treasuries. In total, the underlying index has about 87 individual components.
Basics Of Permanent Investing
The concept of the “permanent” asset allocation strategy was highlighted in a 1998 book titled Fail-Safe Investing that was authored by Harry Browne. The strategy is based on the idea that the economy is always in one of four states: prosperity, inflation, recession, depression. Regardless of the environment, one component of the portfolio should be expected to deliver strong results–hopefully sufficient to offset any underperformance in the remaining allocations.
The Permanent Portfolio has been in existence in a mutual fund wrapper for nearly 30 years; PRPFX debuted in late 1982. Since then, that fund has accumulated almost $17 billion in assets according to Morningstar–which perhaps makes it surprising that PERM is the first exchange-traded product to implement this technique. The permanent mutual fund has delivered annual returns of about 5.9% annually (after taxes on distributions and sale of portfolio shares) since its launch. Over the last ten years the mutual fund has gained about 9.6% annually, compared to a gain of less than 3% per annum for the S&P 500.
Mutual Fund vs. ETF
It should be noted that the 30-year old mutual fund and the new ETF from Global X are not identical; PRPFX uses gold coins and gold bullion, while PERM uses physically-backed gold and silver ETFs to achieve its precious metals exposure. Moreover, the aforementioned mutual fund includes positions about 10% in Swiss Franc assets and a higher allocation (15%) to natural resource stocks.
PERM’s expense ratio of just 0.48% is quite a bit lower than the 0.78% charged by PRPFX. In addition, the new ETF features no minimum initial purchase ($1,000 for the mutual fund) and comes with the tax efficiency and intraday liquidity of the exchange-traded structure.
Like all Global X ETFs, PERM will be available for commission free trading on the E*TRADE and Interactive Brokers platforms.
mihail @ February 9, 2012
10 Cheap Stocks With Dependable Earnings
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Cheap stocks are suddenly abundant. The S&P Composite 1500 index of large, midsize and small U.S. companies has lost 12% in three months. More than 300 of its members now have price-to-earnings ratios in single digits, suggesting a discount of more than one-quarter to historical levels.
That alone doesn’t make these stocks bargains. If earnings in coming quarters prove much lower than expected, today’s P/E ratios will have misled. The task for investors is to figure out which companies are both modestly priced relative to forecasts and likely to meet or exceed those forecasts.
One tool professional investors use to predict that is past earnings volatility. Companies with relatively smooth earnings histories — a low standard deviation of quarterly earnings, in statistical parlance — are more likely than others to deliver the same in coming quarters.
But this tool is of limited use now, because the past five years have produced chaotic results for much of the market, and traditionally stable industries now face challenges. Food makers must deal with crop inflation, soap and toothpaste firms are battling a shift in shopper preference to discount brands and even some utilities are seeing a drop in electricity usage. Some companies in these industries will report stable earnings over the next year, but perhaps not all of them.
So here are two ways to tell which firms are reliable. The first is to look for a recent dividend increase. That puts more cash in shareholder pockets, but just as important, it signals that managers are confident about future results. After all, no company wants to raise its dividend only to find the new payments unaffordable in the coming year.
The second is another statistical clue: a tight clustering of the earnings estimates issued by different analysts. Three decades of research, including recent studies by Anna Scherbina, now at U. C. Davis, show two important things about estimate dispersion. First, tightly grouped estimates are more likely than scattered ones to precede an upside earnings surprise. Second, stocks with clustered earnings estimates tend to outperform those without.
One theory on why this is so has to do with the earnings guidance that companies provide to analysts. Firms with good news to report tend to be more forthcoming with details than firms that are struggling, the thinking goes.
The 10 stocks below have modest P-E ratios and healthy dividend yields. They’ve also raised payments over the past year and have earnings estimates that show relatively close agreement among analysts.
| Company | Ticker | Industry | Dividend Yield (%) |
Forward P/E* |
EPS Consensus, Next Quarter |
High/Low EPS Estimate, Next Quarter |
| Abbott Laboratories | ABT | Drugs | 3.8 | 11 | 1.44 | 1.49 / 1.39 |
| Altria Group | MO | Tobacco | 6.4 | 13 | 0.5 | 0.52 / 0.48 |
| Analog Devices | ADI | Semiconductors | 3.1 | 12 | 0.62 | 0.66 / 0.58 |
| Campbell Soup | CPB | Food | 3.8 | 13 | 0.66 | 0.71 / 0.62 |
| Darden Restaurants | DRI | Restaurants | 3.9 | 12 | 0.55 | 0.64 / 0.52 |
| General Dynamics | GD | Aerospace & Defense | 3.4 | 8 | 2 | 2.09 / 1.88 |
| Johnson & Johnson | JNJ | Drugs | 3.7 | 12 | 1.13 | 1.21 / 1.02 |
| Mattel | MAT | Toys | 3.5 | 12 | 1.02 | 1.10 / 0.94 |
| Microsoft | MSFT | Software | 3.2 | 9 | 0.84 | 0.88 / 0.77 |
| Raytheon | RTN | Aerospace & Defense | 4.4 | 8 | 1.39 | 1.48 / 1.34 |
mihail @ January 27, 2012
Europe Downgraded: Opportunties From High Yield French Blue Chips
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By Charles Sizemore
Standard & Poor’s dropped a bomb on Europe on Monday, downgrading the European Financial Stability Facility (EFSF). Also known as the “bailout fund,” the EFSF was put in place to make emergency loans to Europe’s troubled sovereign borrowers.
The downgrade, though newsworthy, came as little surprise. After Standard & Poor’s downgraded France and Austria late last week, it was all but inevitable. If the guarantors of the bailout fund are no longer rated AAA, it’s hard to see how the fund itself could be. Germany is now the only major European country to be rated AAA by all major bond ratings agencies, and given that the burden for saving the entire Eurozone now rests on Germany’s shoulders, it’s debatable whether even mighty Deutschland deserves such a rating.
For investors, what does all of this mean?
Frankly, not all that much. The markets were mildly roiled by the downgrade of France, but the downgrade of the EFSF barely made a ripple. To investors battle-scarred by a volatile year of sovereign debt crisis, a ratings downgrade isn’t as scary as it used to be.
It seems like an eternity ago, but it was just this past August when Standard & Poor’s downgraded the United States. It set off a firestorm of volatility, but once the dust settled investors realized that very little had changed. The sun still rose in the east the next morning, and the bond markets continued to function as if nothing had happened. Contrary to investment orthodoxy, yields actually fell after the U.S. downgrade.
In the case of Europe, the reaction was muted. France had a successful bond auction on Monday, and Europe’s leaders met the announcement with a collective shrug.
This is not to say that all is well in the world. It’s more a case of resigned acceptance. As Matthew Broderick succinctly put it in The Freshman, “There’s a kind of freedom in being completely screwed because you know things can’t get any worse.”
This is more or less the market expectation for Europe today. The market has stopped reacting to bad news because more than enough bad news is already factored into prices. Ratings agencies have a well-deserved reputation for closing the barn door after the horse has already bolted. Standard & Poor’s told bond investors what they already knew—that debt-laden Europe is suffering from a crisis of confidence.
If you believe, as I do, that market confidence in Europe has reached its low point (or, at the very least, that it is close to doing so), then it makes sense to start accumulating shares of high-quality European blue-chip multinationals. I’ve been wildly bullish on the prospects for German stocks in recent months (see “Buy Germany While It’s Down“) but France has its share of attractive companies as well. Investors may want to consider picking up shares of French oil major Total S.A. (TOT) on any weakness. Total trades for just 7 times earnings and yields and impressive 5 percent in dividends.
Investors seeking yield may be particularly interested in French telecom giant France Telecom S.A. (FTE). France Telecom trades for 10 times earnings and yields over 9 percent in dividends. In addition to its dominant position in France, France Telecom also has great exposure to Africa and other fast-growing emerging markets.
If you prefer a one-stop-shop for French stocks, the iShares MSCI France ETF (EWQ) would be a good bet. In addition to Total and France Telecom, EWQ counts luxury powerhouse Moet Hennessey Louis Vuitton and pharmaceutical giant Sanofi among its largest holdings.
mihail @ January 18, 2012
42 Dividend Contenders For Above-Average Total Return
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With interest rates hovering near all-time lows, investors needing income are faced with very limited choices. The traditional high yield available from bonds and other fixed income vehicles are no longer available to meet the needs of retirees needing income to live off. Moreover, it is almost a certainty that today’s low yields are not adequate enough to fight inflation. Consequently, there is a growing investor interest in dividend-paying common stocks, especially those that have a long record of increasing their dividend every year. This has led many lay, and even many professional investors, to assume that dividend-paying common stocks are becoming overvalued. In addition to being too general to be relevant, these assumptions do not stand up to closer scrutiny.
Our research indicates this to be a fallacy, because in truth we have discovered numerous dividend-paying enterprises that are trading at historically low valuations. But even more importantly, in addition to being historically low, we have identified numerous blue-chip companies that are trading below their intrinsic values based on fundamentals, primarily earnings and cash flows. Today’s growing interest has yet to compensate for the enormous aversion to equities that most investors have after being traumatized by the great recession of 2008 and the precipitous drop in stock prices that accompanied it.
On the other hand, not all dividend-paying common stocks are the same. Therefore, we believe that potential investors need to be very discerning regarding the type and quality of the dividend paying stocks they are willing to invest in. This is especially true for those investors seeking to either augment or replace their fixed income investments with common stocks. Since the major attractions and benefits of fixed income in addition to yield, are safety and low risk, it only makes logical sense that a dividend-paying strategy being considered to replace or supplant it should focus heavily on the same issues.
Dividend paying common stocks come in many different flavors and range from very aggressive to very conservative. When considering alternatives to fixed income because of today’s low yields, we would argue that the emphasis should be on the most conservative dividend paying common stocks possible. In this vein, the reliability and predictability of a given dividend payment should rank high in importance. With that said, a logical place to begin looking is at companies that have long histories of paying dividends, and even better, a long history of increasing them each year. Although there is no guarantee that this will continue, a long track record certainly instills confidence.
One of the best sources available for identifying companies with long histories of dividend excellence is with David Fish’s CCC lists of Dividend Champions, Contenders and Challengers. The Champions list is comprised of companies that have increased their dividend every year for at least 25 consecutive years, the Contenders list is comprised of companies that have raised their dividends for 10 to 24 years, and finally, the Challengers list is comprised of companies that have increased their dividends every year for between five to nine consecutive years.
It’s important to point out here that in theory at least, the Champions list is a more conservative group than the Contenders list which in turn is more conservative than the Challengers list. As a general statement, we believe this is true, but like most statements that are too general, the devil is in the details. Consequently, even though the Champions list is in theory the most conservative, we believe that there are names on the Contenders list that are even better quality, and therefore, more conservative than some of the names on the Champions list, and vice versa. Our last article dealt with the Dividend Champions that we believe are on sale. This is important because low prices and valuations are great attributes that mitigate risk in their own right. This article will look at 42 Dividend Contenders that we believe are reasonably priced, too in some cases, significantly undervalued.
42 Dividend Contenders on Sale
This list of Dividend Contenders, like the list of Dividend Champions before, is offered as a prescreened resource made available prior to engaging in a more comprehensive analysis. However, there is a difference between these lists and the traditional lists that are sorted by mere numbers or statistics. Currently, there are only 102 Dividend Champions and only 146 Dividend Contenders. Therefore, we were able to quickly and easily evaluate each company on the lists by running a F.A.S.T. Graphs™ on each company that provides essential fundamentals at a glance. Therefore, we feel that this screen is more comprehensive than one based simply on statistical analysis.
Instead of bothering you with a long iteration using words and numbers to articulate what we screened for, we let a few pictures tell a few thousand words instead. The premium version of F.A.S.T. Graphs™ has David Fish’s lists pre-loaded, with his permission of course. Therefore, it was a simple matter of scrolling through each company to determine whether or not it met our criteria of fair value, and whether or not it possessed the quality characteristics of predictability, reliability and consistency that we could be comfortable with. With our first run through, we took price out of the equation so as to only reveal the essential fundamentals of earnings and dividends on each company at a glance. Then we ran through the exercise again, only this time we added monthly closing stock prices to the graphs.
Remembering that we are coveting consistency and predictability with compiling our list of Dividend Contenders on sale, let’s review two graphs showing earnings (orange line with white triangles) and dividends (blue shaded area paid out of but stacked on top of earnings) exclusive of stock price.
Two Contenders Rejected because of a Lack of Consistency
Alterra Capital Holdings Ltd. (ALTE)
Our first example, Alterra Capital Holdings Ltd. (ALTE) is a Bermuda-based holding company created by the merger between Max Capital Group and Harbour Point Limited in May of 2010. Max was a holding company formed in 1999 that went public in May of 2001 and paid a dividend that increased every year since (see DIV listed at the bottom of the graph). Although this 11-year record of increasing dividends qualifies it as a Dividend Contender, it was excluded due to the enormous cyclicality and unpredictability of its earnings (see red box at bottom). Simply stated, we didn’t feel it was conservative enough to be considered as a potential fixed income replacement.
RenaissanceRe Holdings Ltd. (RNR)
Our second example, RenaissanceRe Holdings Ltd. (RNR) is a property catastrophic reinsurance company that has increased its dividend every year for 19 consecutive years (see DIV at bottom of the graph). Once again, the severe cyclicality and unpredictability of their earnings growth caused them to be excluded from our conservative list, even though their record of dividend increases has been long. This decision was made instantly by simply reviewing their earnings record (orange line).
In addition to highly cyclical names like the two examples above, we also excluded MLPs and REITs, as we consider these typically high-yield vehicles too risky to be considered as fixed income substitutes. However, there are many who would disagree with that position on these asset classes.
Two Quintessential Examples of What We Were Looking For
Stryker Corp. (SYK)
Stryker Corp. (SYK) has raised their dividend for 19 consecutive years in conjunction with an impeccable record of consistently increasing their earnings at the above-average rate of 18.4%. With very little debt on the balance sheet, this company represents the quintessential example of the type of predictable high-quality business we were seeking.
International Business Machines Corp. (IBM)
Affectionately known as Big Blue, IBM is arguably one of the bluest of all blue-chip technology stocks. The record of consistently increasing earnings at the above-average rate of 11% per annum since 1998 coincides with increasing their dividend for 16 consecutive years. Once again, IBM represents the classic earnings pattern and fundamental qualities that we were seeking.
Bringing It All Together
Some Contenders Are Fairly Valued
With our United Technologies Corp. (UTX) example below we put it all together by adding monthly closing stock prices (black line) to the earnings and dividend graphs. In order to make our list of Dividend Contenders on sale, the company’s stock price had to sit at or below its intrinsic value (the orange line) as United Technologies Corp.’s price clearly does.
In addition to just pure dividend income, this article is further focused on total return. Since, under normal circumstances, there is more risk owning equities than owning fixed income, it is important that our candidates offered the opportunity for an attractive total return to compensate for the risk. One of the most overlooked elements of risk is valuation (overvaluation). Even though United Technologies (UTX) is currently moderately undervalued based on our calculation of intrinsic value (the orange line), it nevertheless generated a very attractive long-term total return for shareholders because valuation was sound at the beginning of 1998, and therefore, valuation risk was reasonable.
Some Contenders Are Extremely Undervalued
Teva Pharmaceutical Industries (TEVA)
Teva Pharmaceutical Industries (TEVA), a leading global generic and branded pharmaceutical company headquartered in Israel represents a compelling valuation at today’s levels, in our opinion. Teva has grown earnings very consistently at a compounded rate exceeding 23% per annum, which we believe warrants a much higher PE ratio than the meager P/E of 9 that the market is valuing its shares at today.
With the consensus five-year earnings estimates ranging from the low of 9.6% from 20 analysts reporting to Capital IQ to as high as 17.5% by 17 analysts reporting to Zacks, we believe the minimum P/E of 15 to as much as a P/E of 20 is warranted for this high-quality pharmaceutical with only 16% debt on its balance sheet. Consequently, we see a high probability for outsized future returns based on low valuation and long-term growth potential.
Harris Corp. (HRS)
Harris Corp. (HRS) is a leading international communications and information technology company. Note that although earnings were a little inconsistent from 1998 into 2003, since that time they have consistently advanced. Harris Corp. can currently be bought at what we believe to be a ludicrous price earnings ratio of only 7.4. We believe a more appropriate price earnings ratio for this dividend contender that has raised its dividend every year for 10 consecutive years, and now offers a starting yield of 3%, should be awarded at least a 15 PE. This implies an intrinsic value that is more than double from where the company’s price currently rests. This is why Harris Corp. (HRS) sits at number two on the list for the highest five-year estimated total return.
Close Calls – Quality Rejected Because of Modest Overvaluation
There were several names that were rejected due to modest overvaluation. A few examples include T.J. Maxx (TJX), Ross Stores (ROST), Federal Express (FDX), Nike (NKE), T. Rowe Price (TROW), Casey’s Gen. Stores (CASY) and others. The following earnings and price correlated graph on Church & Dwight Inc. (CHD) represents overvaluation because stock price is higher than the orange earnings justified valuation line. We believe that each of these names listed in this paragraph are strong potential candidates if their stock prices came back into sound valuation levels. For example, we would consider Church & Dwight (CHD) a buy in the mid-$30 price range.
Obvious Overvaluation Rejected
The following two examples, Royal Gold Inc. (RGLD) and Fastenal (FAST) represent extreme and obvious overvaluation (orange line represents fair value). Although both of these names appear to be excellent businesses, the valuation risk of investing in these dividend contenders is heightened by an earnings yield that makes no economic sense; therefore, they were easily and summarily deleted from the master list because of extreme overvaluation.
42 Contenders That Made the Cut
After rejecting Dividend Contenders that revealed themselves as either being too risky, too inconsistent or too expensive, we ended up with the following 42 companies that have increased their dividend every year for a minimum of 10 to 24 consecutive years. Consequently, we offer them as a fertile source of potential candidates for both investors seeking an above-average and growing dividend yield, as well as investors looking for above-average total return at reasonable levels of risk.
In other words, we believe this list offers opportunities for further exploration for all dividend income oriented investors. Dividend yields range from as low as .8% to as high as 5.2%, with almost everything in between. Also, keep in mind that each of these selections has been screened for fair value or preferably undervaluation, and each has increased their dividend every year for at least 10 consecutive years.
A few words on the column headings are offered for clarification purposes. First, we compare each company’s current PE ratio to its historical normal 15-year P/E ratio. However, note that the five-year estimated total return is not based on each respective company returning to its normal PE ratio. Instead, the five-year estimated annual total return is a calculation based on the consensus estimated EPS growth (five-year) and then applying an appropriate P/E ratio to that growth. Historical EPS growth plus expected EPS growth are also side-by-side in order to provide a perspective of whether EPS growth will be higher or lower in the future than it was in the past. Market cap, the company’s level of debt and the sector it operates in round off the table, with our candidates listed in order of highest estimated total return to lowest.
Conclusions
There are several reasons why we are offering these articles on dividend-paying growth and income stocks, first and foremost is to illustrate that there are numerous extremely high-quality dividend paying stocks that are available for purchase today at very attractive levels. The opportunity to invest in extremely high-quality stocks at historically low valuations that offer both a growing dividend and capital appreciation is rare. Unfortunately, many investors remain traumatized and are currently eschewing quality dividend-paying common stocks in favor of fixed income, at precisely the time when they should be looking at quality equities with a strong dividend record. Don’t forget, each of the companies on this list raised their dividend right through the great recession.
Even though we have always embraced fixed income as a viable asset class that can, during normal economic times, appropriately be capable of meeting certain goals and objectives of many investors inclined towards safety and the highest yield possible, we are currently, and we believe temporarily, altering our stance. We believe that today’s artificially induced and extremely low interest rate levels represent uncommon dangers with owning fixed income instruments. Therefore, we believe that carefully chosen extremely high-quality dividend paying common stocks represent a viable alternative for safety conscious investors under today’s economic conditions. Yes, there may be more risk, but a potentially higher total rate of return and increasing dividend income stream compensate for this greater risk, in our opinion.
Finally, this article in particular is offered to illustrate that there are vast differences in the types and quality of various classes of dividend paying common stocks. We feel that there’s been way too much generalization with too little focus on the specifics that encompass the many differences and attributes that various kinds of dividend paying stocks possess. There are quality dividend paying stocks, there are risky dividend paying stocks and there are very expensive dividend paying stocks and in some cases there are very inexpensive dividend paying stocks, etc. To us, to investing is about making these distinctions one at a time, while avoiding the natural but erroneous temptation to over-generalize. In this vein, this article only scratches the surface of what could be discussed and evaluated regarding the desirability of investing in dividend paying stocks.
Disclosure: Long SYK, TEVA, UTX, AVP, CVX, MDP and UTX at the time of writing.
mihail @ January 12, 2012
2012 Dogs of the Dow
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“Dogs of the Dow” or “High Yield 10″ is a popular investment strategy that recommends buying the Dow stocks with the 10 highest dividend yields at the beginning of the year.
The basic strategy suggests putting an equal amount of money into each of the 10 stocks; although there have been variations that include proportionate investments in the Dogs weighted by share price.
Other permutations suggest dropping the lowest price / highest yielding Dog out of concern that the there may be a reason why the yield is so high.
In 2011, the Dogs of the Dow strategy worked. The 10 companies that made it to the list at the beginning of 2010 are up about 17 percent, adjusting for dividends, compared with a 1.7 percent loss for the non-dog stocks and a 5 percent increase for all 30 Dow components.
Ahead of 2012, here is a look at the highest yielding stocks in the Dow.
Procter & Gamble and General Electric, a minority stakeholder of NBC Universal / CNBC, are the new additions to the 2012′s dogs, replacing McDonald’s and Chevron.
mihail @ December 31, 2011
The Key Number For 2012: Oil Price
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There’s always a key number on which the market is based. Sometimes it’s an interest rate, as in Europe today. Sometimes it’s another number, like America’s unemployment rate. In the past it’s been housing starts; it’s been inflation; it’s been GDP. For 2012, the key number is the oil price.
It’s the oil price because decoupling growth from oil prices is the key to real prosperity. Throughout the last several years, growth and oil have grown closer together. It’s at the point where now a jump in the Dow Jones industrial average is nearly always matched by a rise in the price of West Texas Intermediate, and vice versa.
Most of what has been happening in the U.S. economy, below the surface, is aimed at this decoupling.
Before you jump on me for another rant against big oil, let me state first that what U.S. oil and gas companies are doing is part of the equation, at least in the near term. Fracking has already decoupled natural gas prices from growth. For the last two years, we’ve had real growth in the economy but falling natural gas prices. Oil can be the same.
Drillers have now had several years to accommodate themselves to spot prices of near $100/barrel. This has given them time to invest enough capital to produce large supplies, profitably, at that price. And once a well goes into production, the nominal cost of producing an additional barrel is usually quite low.
But the more important work is taking place on the demand side. The technologies of efficiency are growing, and have a ready market. Every barrel saved in industrial production, every KwH a commercial building owner can save, every gallon of gas a consumer doesn’t use while remaining productive at work, that’s money in the pocket. It’s an investment that pays for itself, whether you’re replacing bulbs with LEDs in your Christmas lights, buying a higher-mileage car, or insulating a building.
Renewable energy is what will maintain the gains. Yes, it’s small now, in the general mix. But it’s increasing, thanks in part to today’s prices, and in part to advancing technology. Even if solar installation doesn’t grow in 2012 from 2011, the supply of solar energy in the market will grow dramatically, because the base is low. The same is true for wind energy, for chemicals and other feed stocks produced from biomass, and for geothermal energy.
Over time it’s this harvest of the abundance all around us that will not only keep oil prices reasonable, but cause them to roll over in time. For 2012 let’s focus on WTI, the spot price for oil in our own country, less in relation to European “Brent” prices than in absolute terms. Keeping that price down as economic growth accelerates, as employment grows, is the key to nearly all other market prices for 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
mihail @ December 22, 2011
