Dividends: Something For Nothing

Dividends: Something For Nothing

By Gerald Harris

If you’ve been following the market you know that rising interest rates has become one of the big stories out there. On July 4, 2016, the yield on the 10-year bond was 1.37 percent, the lowest ever. But by February 22, the yield had increased to 2.91 percent, more than double the low. Higher yields are prompting investors to take a fresh look at dividend-paying stocks.

This idea sounds great on paper: Investors buy stock in a company with solid fundamentals, sit back and collect dividends, usually higher than anything a bank offers. This means there are two ways investors can profit: if the price of the shares goes higher, and from the dividend the company pays.

Dividends appeal to investors in many walks of life; young parents want extra income to pay bills of their growing families, middle-aged couples need help paying college tuition and for simchos, and seniors want to supplement their Social Security and pensions, which often don’t cover their needs. If the trend toward higher interest rates continues there will be many new opportunities, and this sector will certainly be getting a lot more attention.

Safety First

Unfortunately, nothing is simple on Wall Street, and this applies to dividend-paying stocks, too. The heightened volatility in the market in the past few weeks means increased risk, because if an investor unexpectedly has to sell shares when the price is down he or she may be forced to take a big loss. Also, just because a company pays a dividend today there is no guarantee that it will continue to do so – because its fortunes may change. General Electric, once a darling on Wall Street, is experiencing a serious financial crunch, and last November it had to cut the dividend; this drove the price of the stock down sharply.

Nevertheless, the perception that companies that pay dividends are safer than those that don’t has support. “In choppy and volatile market conditions, dividend-paying stocks typically perform better than their counterparts,” says John H. Foard III, president and CEO of Foard Wealth Management.

Companies that pay dividends come in a wide variety of styles and flavors, offering investors a large universe of ideas from which they can choose. Some investors opt for companies that have a long history of paying dividends, while others focus their interest on companies that have been raising them in recent years. There are companies that pay dividends in stock, and still others that offer dividend reinvestment plans (DRIPs). These plans allow anyone who owns at least one share to purchase additional stock directly from the company, sometimes for slightly lower than the market price and almost always without having to pay any commissions.

Champs And Aristocrats

Stocks included in the S&P 500 that have increased their dividends for 25 consecutive years are called dividend aristocrats; those that have increased their dividends for 25 consecutive years, regardless of their size, are called dividend champions.

Many of the companies that have achieved these ratings pay dividends with a yield of 2 percent plus, some pay 3 percent plus, and the yields of a few are much higher. While 2 percent and even 3 percent may not seem very much, they are nevertheless noticeably above those offered by most banks. 24/7WallSt.com points out that “even if the Federal Reserve raises the federal funds rate three times this year, we will still be way below what is normal.”

As a generality, companies that anticipate lots of potential growth ahead plow their profits back into the company, while those that have become or are “maturing,” reaching a point where their growth curve has slowed, use much of or even most of their cash flow to pay dividends to shareholders.

Investors interested in dividend-paying stocks will certainly be tempted to purchase those with the highest yields, which could be 10 percent or more. But what looks very appealing at first glance may be deceiving. “High yields are often a signal of financial distress,” says Daniel Kern, chief investment officer at Boston-Based TFC Financial Management.

One reason the yield may be very high is because the stock has sold off, and the stock may have sold off because the company is experiencing serious problems; as a result, the dividend may have to be cut or even be eliminated entirely. And investors who are concerned about these problems become skeptical about the sustainability of the dividend and want out of the stock at any price, pushing up the yield to unusually high levels in the process.

Many investors are fond of studying lists of stocks, and when it comes to dividends there certainly are no shortages of those. Simplysafedividends.com has compiled a list of 34 stocks that pay dividends close to or above 4 percent, have increased their dividends for at least five consecutive years, and meet important criteria that indicate dividend safety. The following are the top five of those, listed in order of increasing ratings. Brief excerpts about those companies follow, and are taken from more detailed information presented by Simply Safe Dividends:

*Main St. Capital is an investment firm that provides long-term debt and equity to lower middle market companies. Main St. has paid dividends for the last seven years and it recently had a yield of 6.3 percent.

*W.P. Carey, one of the oldest REITs (real estate investment trusts) in the world, has a 21-year dividend streak. The recent yield was 6.6 percent.

*Iron Mountain Inc., another REIT, stores and protects all sorts of information, ranging from business documents and electronic files to medical data and more, for more than 230,000 customers. The company has paid a dividend for eight consecutive years and the yield is 7.1 percent.

*Spectra Energy Partners is an oil and gas infrastructure master limited partnership that transports natural gas, crude oil, and liquids through more than 15,000 miles of interstate pipeline systems in the U.S and Canada. It also owns 170 billion cubic feet of natural gas storage and 5.6 million barrels of crude oil storage capacity. Spectra has paid a dividend for 11 straight years and is yielding 7.2 percent.

*Omega Healthcare Investors is a real estate investment trust that provides financing and capital to skilled nursing facilities (SNFs) and assisted living facilities (ALFs) in the U.S. and U.K. The company’s real estate portfolio consists of approximately 1,000 operating facilities located in over 40 states and run by 77 third-party operators. Omega has paid a dividend for the past 16 years and its yield is 10.1 percent.

24/7wallst.com is another website that has compiled intriguing lists of high-yielding ideas “that look able to maintain their payouts and that Merrill Lynch rates ‘Buy.’” 24/7 says that the following three ideas all look like good plays for aggressive income accounts.

CenturyLink Inc. is the nation’s third-largest telephone company and the largest rural exchange provider, serving residential, business, and wholesale customers. It has 11 million access lines and 5.9 million high-speed Internet connections across 37 states. Century’s dividend has a yield of 11.41 percent dividend. The stock was recently trading at just under $19/share and Merrill has set a target price of $27.

Energy Transfer Partners owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas, among other business lines. Energy Transfer’s unitholders receive a very hefty 12.18 percent distribution. Merrill Lynch has a $23 price target for the shares (they were recently trading at $18.55), while a consensus of analysts has a target price of $24.14.

Golar LNG Partners has liquefied natural gas (LNG) shipping and storage interests. The company owns and operates floating storage regasification units (FSRUs) and LNG carriers under long-term charters in Brazil, the United Arab Emirates, Indonesia, and Kuwait. It also leases its fleets. Golar is very highly rated on Wall Street. Moreover, it gives shareholders a distribution that recently was above 11 percent. Merrill’s target price for Golar is $25; it was recently trading in the $21 3/4 range.

NASDAQ.com has come up with a list of 14 companies that have not only paid dividends but have also increased them for at least 50 years. Only a select group of companies have been able to achieve this feat, despite some severe downturns in the economy, greatly increased competition from abroad, periods of high inflation, automation, and many other challenges. The select 14 are: 3M, Cincinnati Financial, Coca-Cola, Colgate-Palmolive, Dover Corp., Emerson Electric, Federal Realty Investment Trust, Genuine Parts, Hormel, Illinois Tool Works, Johnson & Johnson, Lowe’s, Proctor & Gamble, Stanley Black & Decker. The companies in this group represent many different industries and their yields range from approximately 1.5 percent to 3.2 percent.

And among other lists are some of the companies that have DRIPs (dividend reinvestment plans). As noted above, these plans allow existing shareholders who own one or more shares to purchase additional shares directly from the company. Some, but not all, offer these additional shares at minimal or no cost to the shareholder. Even fewer, but some, sell their shares at small discounts to their market prices. Companies with DRIPs range in size from very small and mid-cap companies to giant multinationals.

Seeking Alpha has a list of four no-fee DRIPs that also offer 5 percent discounts when purchasing shares through their DRIPs. Topping their list is Aqua America, one of the largest U.S.-based publicly traded water and wastewater utilities. Aqua provides water and wastewater services through contracts with municipalities and other government parties. It also provides water supply services to drilling firms.

According to a statement released in late December, Aqua said, “As we move into 2018, we remain highly confident in our ability to deliver long-term value for our stakeholders while operating a sustainable and growing business focused on world-class service.” The recent yield was 2.37 percent. Of interest to investors is that the stock price has increased steadily over many years.

The information above does not aim to be a comprehensive guide to the subject of dividend-paying stocks; in fact, it barely scratches the surface. It simply attempts to call readers’ attention to the fact that even in this still relatively low-interest environment, there are some companies that pay a very hefty dividend that are considered safe investments and whose stocks, in the past, have also appreciated dramatically. However, choosing the right ones is not as simple as it seems. Investors interested in these stocks should ask their financial experts which, if any, dividend-paying stocks may be best suited to their needs and tolerance of risk.

Gerald Harris does not own any of the stocks mentioned above. The foregoing material is intended for informational purposes only and is not a recommendation of any of the companies mentioned, nor is it an endorsement of a strategy for purchasing dividend-paying stocks.

Sources: fool.com;

Gerald Harris is a financial and feature writer. Gerald can be reached at geraldhrs@yahoo.com