This year has been rough for income-focused investments. After a strong start to 2015, bonds, REITs, utilities, dividend stocks — virtually everything that gets a high percentage of its total return from income — have been smacked around by fear of a pending rate hike by the Fed. Some of my favorite dividend stocks are down 20% or more.
Of course, we’ve seen this movie before.
In the second half of 2013, income-focused investments got hammered in the “taper tantrum.” Fear that the Federal Reserve would eventually wind down its bond-buying scheme sent dividend stocks tumbling.
But then a funny thing happened. Once the tapering actually started months later, bond yields fell and dividend stocks enjoyed a massive recovery. It seems that Mr. Market threw a tantrum over nothing.
And I think we might see a similar situation unfold in the second half of 2015.
In 2013, anticipation of tapering proved to be worse than the tapering itself. And two years later, I expect that anticipation of a rate hike will prove to be far worse than the rate hike itself. In any event, Fed Chairwoman Janet Yellen has made it abundantly clear that she intends to go slowly after “liftoff,” and I expect that this time next year the Fed funds right will be, at most, 0.5% higher than in its today. That hardly justifies a 20% collapse in the prices of high-dividend-paying stocks.
Today, we’re going to look at five dividend stocks that have lost their luster in the first half of 2015 … but that I expect to shine brightly in the second.
Dividend Stocks to Watch: Enterprise Products Partners, LP (EPD)
Dividend Yield: 4.9%
YTD Performance: -15%
I’ll start with the workhorse of the MLP sector, Enterprise Products Partners, LP (EPD), one of the largest, most-diversified and best-managed MLPs in the midstream pipeline sector.
Enterprise Product’s largest competitor, pipeline juggernaut Kinder Morgan Inc (KMI), recently rolled its MLP assets under its corporate umbrella, and Williams Companies (WMB) is in the process of doing the same. Among the true MLPs remaining, Enterprise is generally considered to be the blue chip of the bunch.
You certainly wouldn’t know that by looking at EPD’s stock price. Enterprise is down 20% from its 52-week highs and was recently down more than 25%.
So … why have investors turned on Enterprise?
Mostly it’s a case of guilt by association. Virtually all stocks even tangentially related to oil and gas prices have been dumped due to fear over falling oil prices. Enterprise has very little direct exposure to commodity prices, as more than 85% of its revenues are fee-based. Of course, lower prices affect demand for domestic drilling, which in turn affect demand for Enterprise’s pipelines.
So, Enterprise may be looking at slightly slower growth going forward. Yet the distribution (MLPs have “distributions,” not “dividends”) would appear to be more than safe with a coverage ratio of 1.4x.
Let’s take another look at that distribution. Enterprise has raised its payout for 44 consecutive quarters, and its current yield is roughly 5%.
At current prices, EPD would seem like a no-brainer to own.
Dividend Stocks to Watch: Exxon Mobil (XOM)
Dividend Yield: 3.5%
YTD Performance: -10.6%
Yet investors are wary of anything related to energy these days, and shares of Exxon Mobil have most definitely lost their luster of late. XOM is down about 21% from its all-time high set last summer.
It’s easy to understand why investors have become wary of Exxon. The drop in the price of crude has taken a wrecking ball to the earnings of all oil majors, and XOM is no exception. Yet for dividend investors, this could be a fantastic opportunity to pick up shares of one of the world’s true payout-raising champions.
Think back to the 1980s and 1990s. Yes, Dallas was on TV and J. R. Ewing seemed to be living the high life. Yet the reality on the ground was a lot different. Crude oil prices collapsed during that two-decade stretch, eventually dropping below $10 per barrel.
Yet throughout a two-decade bear market in energy prices, Exxon Mobil was able to raise its dividend every single year. The company currently has a 33-year streak of raising its dividend and yields a not-too-shabby 3.6%.
Dividend Stocks to Watch: Teekay Corporation (TK)
Dividend Yield: 5.2%
YTD Performance: -17%
A 75% dividend jump is always going to get my attention. And that’s exactly what we saw with marine oil transporter Teekay Corp (TK).
Teekay is an interesting story. With its recent divestment of much of its operating assets, Teekay is transforming itself into a “pure play” general partner, serving in a management role for multiple related companies and collecting healthy distributions for its efforts. Teekay Corporation is the general partner for Teekay LNG Partners (TGP), Teekay Offshore Partners (TOO) and Teekay Tankers (TNK).
Teekay Corporation announced its nearly 75% dividend hike in conjunction with the transfer of its largest North Sea storage assets to Teekay Offshore. Management expects continued dividend growth of 15%-20% over the next three years based on its current pipeline of business.
With all of this good news, you might expect Teekay’s stock to be performing a little better. However, the stock is down 36% from its highs last year.
It’s hard to find too many stocks with a yield this high (5.2% currently) that also expect dividend growth of 15%-20%. I’d recommend snapping up this one before Wall Street realizes what it’s missing.
Dividend Stocks to Watch: Intel (INTC)
Dividend Yield: 3.2%
YTD Performance: -18%
Semiconductor king Intel (INTC) is another dividend stock that’s really fallen out of favor of late. The stock is down more than 20% from its old December high and has struggled to find a bottom.
So what’s the story here?
If you happen to be reading this article on your phone, the problem, alas, is you. Intel has thus far had a hard time getting traction in the mobile market. The bulk of Intel’s business still comes from PCs, and PC demand continues to be tepid. Last quarter, PC sales fell by an estimated 10% year-over-year.
But there is room for hope.
PC sales are particularly weak this year for two reasons. To start, last year’s comps were inflated due to a surge of upgrades that came with the retirement of Windows XP. And compounding this was the second issue: the planned release of Windows 10 later this summer. Unless it is an absolute emergency, few PC users want to buy a new PC now, with Windows 8.1, when they can simply wait a few months and get the same computer with Windows 10 preloaded.
Meanwhile, despite sluggish PC sales, strong server sales have helped to push Intel’s revenues to all-time highs. And after a long break, Intel started raising its dividend again earlier this year. At current prices, Intel yields 3.1%. It’s also been reducing its shares outstanding by a good 2% per year over the past three years.
Intel may never again be the growth dynamo it was in the 1990s. But it’s still a solid company with high and rising dividend.
Dividend Stocks to Watch: McDonald’s (MCD)
Dividend Yield: 3.4%
YTD Performance: +6%
And finally we get to the burger joint that everyone — from labor activists to health enthusiasts — loves to hate: McDonald’s (MCD).
McDonald’s share price hasn’t fared particularly bad in 2015 (it’s up 6% so far), but it definitely has lost its luster. The stock price has barely budged since 2011, trading sideways for years.
You can say what you want about McDonald’s food. I know that whenever I eat a Big Mac, I usually go in secret and always lose a little respect for myself afterwards. But as a dividend payer, McDonald’s is in a class of its own.
McDonald’s has raised its dividend every year since 1977, and over the past decade its dividend growth has been off the charts. McDonald’s has hiked its dividend at a 19.5% clip over the past 10 years.
Do I expect to see that kind of torrid growth today?
No, I don’t, or at least not until sales start to pick up again. But growth in the ballpark of the recent 9% seemed pretty reasonable. At current prices, McDonald’s yields 3.5%.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long EPD, INTC and MCD. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.