2010’s Top Dividend Plays
Back in late 2008 I was invited to participate in a stock picking competition, where the goal was to pick the best stocks for 2009. The picks that I selected were Kinder Morgan (O), Realty Income (O), Con Edison (ED) and Philip Morris International (PM).
The reason for the selection of these stocks is that each of them paid an above average yield and was trading at attractive valuations. Another reason was that the dividend was well covered from cash flows for all stocks. The most important reason was that two of them, Kinder Morgan (KMP) and Con Edison (ED) were natural monopolies, which had a toll booth type business model with stable cash flows. Philip Morris International’s (PM) business model is characterized by having a globally recognizable brand product, which is addictive and for which consumers are willing to pay higher prices each year. Realty Income (O) also has a rather stable revenue source, since it typically provides long-term leases to its tenants. I do like the companies enough, that I also have a position in them. Including a company on a stock list without having a position there, shows what the real opinion of the author on the stock really is.
The time has come to reveal how the stocks fared in 2009, and also pick the best stocks for 2010. As a long term dividend investor my holding period is forever. Thus I would select the same picks mentioned above as my top picks for 2010. I would explain the reasons behind each selection below:
Realty Income (O) has consistently increased dividends several times per year since it was listed on the NYSE in 1994. This dividend achiever owns 2348 retail properties, which are under long term leases (15-20 years) with tenants from a variety of industries and geographic location. Tenants are typically responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.83/share in 2008. Realty Income distributed $1.66 /share in 2008. FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. The company doesn’t have any debt maturing until 2013 and also has an unused credit facility worth $355 million. Realty Income currently yields 6.50% .Check my analysis of the stock.
Kinder Morgan (KMP) operates a toll-road-like network of diversified and primarily fee-based assets generated a tremendous amount of stable cash flow. This dividend achiever is largely immune to fluctuations in commodity prices and has enough in distributable cash flows per unit to cover distributions, which are expected to increase to $4.40/unit in 2010 up from $4.20 in 2009. Future growth in one of the largest MLPs in the US will be fueled by projects such as the Midcontinent Express Pipeline, Rockies Express-East and Kinder Morgan Louisiana Pipeline. Distributable cash flow includes each period’s earnings before all non-cash depreciation, depletion and amortization expenses, including amortization of excess cost of equity investments, to be an important measure of our success in maximizing returns to our partners. Kinder Morgan’s partnership agreement requires it to distribute 100% of net cash (cash receipts minus cash disbursements less changes in reserves) to unitholders on a quarterly basis. Check my analysis of the partnership.
Consolidated Edison (ED) is a regulated utility which provides electric service to 3.3 million customers and gas service to 1.1 million clients in New York city and Westchester County. The company is a natural monopoly in its geographic area, and thus is able to generate strong and steady revenue streams and enjoy a healthy balance sheet. Do not let the high payout ratio of 70% scare you from the stock – this utility has been able to maintain this high payout of 70% on average over the past decade, while still affording to grow the distributions by about 1% each year. This dividend aristocrat has been able to increase dividends in each of the past 34 years. Check my analysis of the stock.
Philip Morris International (PM) was spun out of cigarette maker Altria Group (MO) in 2008, in order to separate potential US legal liabilities from the international tobacco operations. The company is the largest cigarette manufacturer in the world, with a 15.6% market share worldwide. The company’s strategy includes organic growth and growth through acquisitions. Philip Morris International (PM) is in the middle of expanding its sales to China, which represents about one-third of the global tobacco market. The company has announced its intent to repurchase up to $13 billion of its shares over the next two years. In addition to that it has raised distributions twice since it became a separate public company in 2008. Check my analysis of the stock.
The four stocks generated a total return of 26.48% in 2009. The picks from the other bloggers participating in the contest, as well as their performance could be found below:
Intelligent Speculator: 81.55%
Where does all my money go: 56.14%
The Financial blogger: 44.62%
Four Pillars: 35.26%
Dividend Growth Investor: 26.48%
Million Dollar Journey: 20.27%
My Traders Journal: 0.18%
Zach Stocks: -8.80%
It is important to understand that while these four stocks have the necessary characteristics to grow their distributions over time, they are simply chosen for illustrative purposes only. A real portfolio should include at least 30 different companies from a variety of sectors, sizes and continents. For a list of the best dividend companies for the long run, check here.
Full disclosure: Long KMR, O, PM, MO and ED
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