We’ve endured three consecutive weeks of losses for the S&P 500 (.INX). Never fun. But if you’re an income investor, ala Charles Dickens, the worst of times is creating the best of times…
Dividend yields now rest close to 15-year highs. Plus, the premiums from writing covered calls (the only safe options strategy) are significantly higher thanks to the extreme market volatility.
As far as I’m concerned, that’s an attractive one-two income-earning punch we shouldn’t ignore.
So how do we play it?
Not with the usual suspects…
Income Investors: GE Is A Dog at Any Price
There’s something about an adolescent stock price on General Electric (GE, Financial) that turns most income investors rabid. Much like they were last summer for Bank of America (BAC). But I continue to get in arguments with friends and colleagues about this.
I don’t care if GE trades below $20 per share, $15 per share, even $10 per share. It’s a terrible stock to own right now.
I know in some circles, such an utterance is blasphemous. Before you conclude the same, at least hear me out…
First things first…
Simple businesses make money.
Investors can understand simple businesses.
And therefore, stocks of simple businesses tend to perform best (consult Warren Buffett’s track record should you disagree).
But - you guessed it - GE doesn’t pass the simple test.
Its business is all over the place. Last quarter, it logged sales in the following segments: water, security, railroads, oil and gas, media and entertainment, lighting, health care, consumer lending, commercial lending, energy, electrical distribution, consumer electronics, aviation and finally (drum roll) appliances.
Try coming up with an elevator pitch for Jeff Immelt for that mess. Jack of all trades, master of none, perhaps?
To be fair, GE does provide exposure to compelling sectors and trends - like energy and infrastructure, water, and green technologies. But it only accounts for a small portion of the revenue pie. And meaningful growth in these segments will always be overshadowed by declines elsewhere.
Case in point, in the fourth quarter, GE’s energy business increased profits by 27%. A homerun by any measure. Too bad the rest of the team struck out - weakness in other segments caused GE’s overall profit to drop 44%.
Bottom line, even after a 60% stock decline in the last year, GE is still a $137 billion behemoth. Moving that earnings needle, and in turn the stock price, requires over a dozen business segments to be firing on all cylinders, simultaneously. That’s not happening. Not now or anytime in the near future.
But How Can We Turn Down a 9% Dividend Yield?
After considering the above, most GE defenders shove their security blanket - the hefty dividend yield - in my face, saying, “At least I get paid 9% to wait for the stock to turnaround.”
True.
But it could take years for the underlying businesses to turnaround. Moreover, as Bank of America proved, no dividend is immune to a cut.
Last summer CEO Ken Lewis said it was safe. Then in October, he ended the streak of 30 years of increases. And he cut it.
The same fate appears likely for Dow Chemical (DOW). Last month CEO Andrew Liveris declared a dividend cut wouldn’t happen on his watch. Fast forward to this week, and he concedes a cut is now possible. Keep in mind, Dow Chemical’s dividend has never been cut since it was first instituted in 1912.
By now, Yogi Berra should come to mind, “It’s like déjà -vu, all over again,” because GE’s Immelt continues to deny the possibility of a dividend cut. He also wants to maintain the company’s coveted AAA rating. Yet, if current conditions persist, and management is desperate for cash, trust me, the dividend will get the ax.
For Income Investors - A Better Alternative Income Investment to GE
It wouldn’t be fair for me to bash GE as an income investment and not offer up a better alternative. So here it is - TEPPCO Partners (TPP, Financial).
It’s one of the oldest publicly traded energy master limited partnerships (MLPs), with over 12,500 miles of pipeline. (For a thorough overview of MLPs, I recommend this MLP primer.) And it currently yields 11%.
Here are the five main reasons I believe the dividend is safe -
Its business is simple. It gets paid to transport fossil fuels, based on total volumes, not the price of the underlying commodity. While the price of crude might be off significantly, I guarantee you worldwide demand, and the volumes to be transported, is not. Such a simple business makes it easy to spot breakdowns, and in turn, recognize when the dividend is truly in jeopardy.
The revenue stream is highly reliable. We’re addicted to oil. And no matter how green the world gets, we’ll still consume plenty of it. That means the registers will keep ringing for TEPPCO, and there will always be cash in the till to pay out dividends.
Management believes in conservative growth. Overdosing on debt to fund expansion is a recipe for disaster. If borrowing costs increase (like now), more cash needs to be set aside to make interest payments. If they jump too high, too fast, something has to give. And most times, it’s the dividend. Thankfully, TEPPCO believes in conservatism. For the past five years, it’s financed 75% of its growth through asset sales and equity contributions. In other words, interest payments won’t threaten the dividend one bit.
Insiders keep buying. Insiders know best and Dan Duncan, the CEO of the general partner that controls TEPPCO, plunked down $7 million last September, at much higher prices. If the dividend was in jeopardy, he certainly wouldn’t be buying.
Credit is not a concern. In these distressed markets, we can’t overlook this factor. If a business relies heavily on credit, and is having trouble getting it, look out. No worries for TEPPCO, though. It’s sitting on $600 million in liquidity, enough to fund almost all of its proposed capital expenditures for 2009.
Truth be told, I recommended TEPPCO to subscribers a month ago when it traded around $18. Now we’re up 48%. And we haven’t even received our first dividend payment, yet.
Even after such an impressive move, though, I estimate at least another 36% upside remains.
Here’s why…
The company sports strong fundamentals: earnings, distributions and its operations are all growing.
It owns prime assets. Namely, the only pipeline transporting liquefied petroleum gases from the Texas Gulf Coast to the Northeast and the sixth-largest U.S. inland barge operations.
Both make it a prime acquisition candidate.
And history dictates MLPs should only average a 7.83% yield, based on the Alerian MLP Index. To bring its yield back inline with the historical mean, TEPPCO’s stock needs to rally another 36%.
Add it all up and it’s a no brainer. If you want high and reliable income, with the potential for capital appreciation, too, forget GE and buy TEPPCO. Or at the very least, ensure any high dividend-paying stocks you’re considering boast the five qualities above.
Good investing,
Louis Basenese, Advisory Panelist,
Investment U
www.investmentu.com
Dividend yields now rest close to 15-year highs. Plus, the premiums from writing covered calls (the only safe options strategy) are significantly higher thanks to the extreme market volatility.
As far as I’m concerned, that’s an attractive one-two income-earning punch we shouldn’t ignore.
So how do we play it?
Not with the usual suspects…
Income Investors: GE Is A Dog at Any Price
There’s something about an adolescent stock price on General Electric (GE, Financial) that turns most income investors rabid. Much like they were last summer for Bank of America (BAC). But I continue to get in arguments with friends and colleagues about this.
I don’t care if GE trades below $20 per share, $15 per share, even $10 per share. It’s a terrible stock to own right now.
I know in some circles, such an utterance is blasphemous. Before you conclude the same, at least hear me out…
First things first…
Simple businesses make money.
Investors can understand simple businesses.
And therefore, stocks of simple businesses tend to perform best (consult Warren Buffett’s track record should you disagree).
But - you guessed it - GE doesn’t pass the simple test.
Its business is all over the place. Last quarter, it logged sales in the following segments: water, security, railroads, oil and gas, media and entertainment, lighting, health care, consumer lending, commercial lending, energy, electrical distribution, consumer electronics, aviation and finally (drum roll) appliances.
Try coming up with an elevator pitch for Jeff Immelt for that mess. Jack of all trades, master of none, perhaps?
To be fair, GE does provide exposure to compelling sectors and trends - like energy and infrastructure, water, and green technologies. But it only accounts for a small portion of the revenue pie. And meaningful growth in these segments will always be overshadowed by declines elsewhere.
Case in point, in the fourth quarter, GE’s energy business increased profits by 27%. A homerun by any measure. Too bad the rest of the team struck out - weakness in other segments caused GE’s overall profit to drop 44%.
Bottom line, even after a 60% stock decline in the last year, GE is still a $137 billion behemoth. Moving that earnings needle, and in turn the stock price, requires over a dozen business segments to be firing on all cylinders, simultaneously. That’s not happening. Not now or anytime in the near future.
But How Can We Turn Down a 9% Dividend Yield?
After considering the above, most GE defenders shove their security blanket - the hefty dividend yield - in my face, saying, “At least I get paid 9% to wait for the stock to turnaround.”
True.
But it could take years for the underlying businesses to turnaround. Moreover, as Bank of America proved, no dividend is immune to a cut.
Last summer CEO Ken Lewis said it was safe. Then in October, he ended the streak of 30 years of increases. And he cut it.
The same fate appears likely for Dow Chemical (DOW). Last month CEO Andrew Liveris declared a dividend cut wouldn’t happen on his watch. Fast forward to this week, and he concedes a cut is now possible. Keep in mind, Dow Chemical’s dividend has never been cut since it was first instituted in 1912.
By now, Yogi Berra should come to mind, “It’s like déjà -vu, all over again,” because GE’s Immelt continues to deny the possibility of a dividend cut. He also wants to maintain the company’s coveted AAA rating. Yet, if current conditions persist, and management is desperate for cash, trust me, the dividend will get the ax.
For Income Investors - A Better Alternative Income Investment to GE
It wouldn’t be fair for me to bash GE as an income investment and not offer up a better alternative. So here it is - TEPPCO Partners (TPP, Financial).
It’s one of the oldest publicly traded energy master limited partnerships (MLPs), with over 12,500 miles of pipeline. (For a thorough overview of MLPs, I recommend this MLP primer.) And it currently yields 11%.
Here are the five main reasons I believe the dividend is safe -
Its business is simple. It gets paid to transport fossil fuels, based on total volumes, not the price of the underlying commodity. While the price of crude might be off significantly, I guarantee you worldwide demand, and the volumes to be transported, is not. Such a simple business makes it easy to spot breakdowns, and in turn, recognize when the dividend is truly in jeopardy.
The revenue stream is highly reliable. We’re addicted to oil. And no matter how green the world gets, we’ll still consume plenty of it. That means the registers will keep ringing for TEPPCO, and there will always be cash in the till to pay out dividends.
Management believes in conservative growth. Overdosing on debt to fund expansion is a recipe for disaster. If borrowing costs increase (like now), more cash needs to be set aside to make interest payments. If they jump too high, too fast, something has to give. And most times, it’s the dividend. Thankfully, TEPPCO believes in conservatism. For the past five years, it’s financed 75% of its growth through asset sales and equity contributions. In other words, interest payments won’t threaten the dividend one bit.
Insiders keep buying. Insiders know best and Dan Duncan, the CEO of the general partner that controls TEPPCO, plunked down $7 million last September, at much higher prices. If the dividend was in jeopardy, he certainly wouldn’t be buying.
Credit is not a concern. In these distressed markets, we can’t overlook this factor. If a business relies heavily on credit, and is having trouble getting it, look out. No worries for TEPPCO, though. It’s sitting on $600 million in liquidity, enough to fund almost all of its proposed capital expenditures for 2009.
Truth be told, I recommended TEPPCO to subscribers a month ago when it traded around $18. Now we’re up 48%. And we haven’t even received our first dividend payment, yet.
Even after such an impressive move, though, I estimate at least another 36% upside remains.
Here’s why…
The company sports strong fundamentals: earnings, distributions and its operations are all growing.
It owns prime assets. Namely, the only pipeline transporting liquefied petroleum gases from the Texas Gulf Coast to the Northeast and the sixth-largest U.S. inland barge operations.
Both make it a prime acquisition candidate.
And history dictates MLPs should only average a 7.83% yield, based on the Alerian MLP Index. To bring its yield back inline with the historical mean, TEPPCO’s stock needs to rally another 36%.
Add it all up and it’s a no brainer. If you want high and reliable income, with the potential for capital appreciation, too, forget GE and buy TEPPCO. Or at the very least, ensure any high dividend-paying stocks you’re considering boast the five qualities above.
Good investing,
Louis Basenese, Advisory Panelist,
Investment U
www.investmentu.com
