by Richard Band | August 31, 2012 8:52 am
I’ve got to level with you. The panicky flight to safety in recent months has shriveled yields on many dividend-paying stocks. But overpriced merchandise isn’t safe! Be extremely selective. Buy top-quality franchises when they get temporarily knocked down by emotional selling. A good example of late is my first Top Dividend pick: McDonald’s (NYSE:MCD).
At a current yield of 3.2%, this powerful brand pays you almost double a 10-year Treasury note — and Mickey D’s has boosted its dividend 87% in the past five years alone! Which investment do you suppose will treat you better in the decade ahead?
What to do now: Buy MCD at $91 or less. From today’s level, I’m projecting a total return (dividends plus price gain) of 15%-20% in the next 12 months, and a double within the next six years.
Compared to the world economy — especially Europe — the U.S. seems like an island of stability. Small wonder most investors these days are turning inward, limiting their stock purchases to companies headquartered within our own borders. I certainly understand the force of the “buy American” argument. To be honest with you, most of the capital I myself have deployed in the stock market this year has gone to domestic names.
A bargain is a bargain, though. While I’m not ready to jump with both feet into international markets, I have to admit that some of the values I’m spotting are extraordinary. When a company’s stock is throwing off a dividend yield well above the yield on the same issuer’s bonds, and far above the dividend yield of comparable U.S. businesses, even a hardened skeptic will sit up and take notice.
So my second pick for the month is a conservative monthly dividend payer. Calgary-based Pembina Pipeline Corp.(NYSE:PBA) transports oil and gas through a 7,500-kilometer network of pipelines that crisscrosses the Canadian provinces of Alberta and British Columbia. PBA also provides a suite of related services to energy producers, from natural gas gathering and processing to storage, loading, shipping and marketing of various hydrocarbons.
In the United States, most of these functions are typically performed by master limited partnerships (MLPs). Pembina, however, is organized as a corporation and pays ordinary, taxable dividends. While PBA’s dividends (unlike MLP distributions) don’t give you the benefit of tax deferral, there are certain compensating advantages: No cumbersome paperwork at tax time (you receive a simple Form 1099 to report your dividends), and you can hold as many Pembina shares as you want in a retirement account without triggering Uncle Sam’s weird UBTI tax. Even better, the Canadian government waives the usual 15% withholding tax on dividends paid to U.S. residents if you hold PBA shares in a retirement account.
Here’s the value proposition. At the current share price, Pembina yields just under 6%. Meanwhile, the embedded interest rate on all the company’s debt is only 4.7%. In a normal world, the equity of a stable, predictable business yields less than its debt. What we’re seeing today — with PBA and hundreds of large, successful companies, especially overseas — is abnormally high dividend yields, driven by fear of economic collapse.
I’m wary of the macro picture, too. In Pembina’s case, though, I’m convinced that the company’s solid balance sheet and entrenched market position — PBA transports about half of Alberta’s conventional oil output — far outweigh the risks. It’s a stock you can retire on.
What to do now: Buy PBA on a dip to $27 or less.
My Profitable Investing subscribers sometimes ask why I recommend so many different stocks. The answer is simple: The more widely you diversify, the less you’ll be hurt when an isolated investment blows up.
Exchange-traded funds give you immediate diversification in a single package — a great way to cut both your risk and your paperwork burden at the same time. With the income from a dividend-focused ETF, you can build an added element of safety into your portfolio, making it more comfortable for you to venture into the high-stakes international markets.
For more-aggressive investors, consider the SPDR S&P International Dividend ETF(NYSE:DWX). This fund corrals the 100 highest-yielding foreign stocks that meet a series of liquidity, capitalization and profitability criteria. Companies with a market value of $1 billion or less are excluded. DWX currently yields an eye-popping 12%. Of course, the ultra-high-yield also reflects elevated risk. Spain and Italy together account for more than 20% of the fund’s assets, and emerging markets another 17%.
Yes, there are scary things happening overseas, but at a yield of up to 12%, though, you’re being compensated handsomely to sail those waters. I also think you’ll be well rewarded over the long run. Over the next five years, I project that DWX will log a total return of approximately 70%-80%.
What to do now: Buy DWX at $46.50 or less.
Wall Street’s extra-innings bull has enabled many fundamentally weak stocks to cheat the hangman — but not for much longer. Here are 13 companies, all with market values over $1 billion, that are facing serious operating and financial challenges. If you own any of these unlucky 13, sell now, while the selling is good.
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