Friday, July 4th, 2008
Growing Dividend
As a spin-off of the successful Duke Energy, Spectra Energy Corp (NYSE:SE) has had a rather successful first 16 months in business and has recently declared an 8.7 percent increase in its quarterly cash dividend
on its common stock, from $0.23 to $0.25 per share. The dividend is payable September 15, 2008, to shareholders of record at the close of business August 15, 2008.
Spectra has what appears to be a very assertive, yet stable, long term growth plan that is focused on organic growth and project development. This includes a very lucrative joint venture with Conaco Phillips and already transports some 12% of the natural gas consumed in the United States.
With these facts in mind, let’s take a look at what the Chief Financial Officer (Soon to be CEO at the end of 2008) of Spectra Energy, Greg Ebel has to say to investors looking to purchase stock in the company:
I think the key reasons are, first and foremost, a home grown stable of expansion projects that give visibility on earnings growth to the better-than-the-pack earnings growth and opportunities they see. Also, solid dividend growth opportunity, sound financial management and overall a relatively safe harbor in what is a somewhat dodgy financial market situation and economic situation we see out there today.
A Closer Look At Spectra Energy
Spectra Energy is one of North America’s premier natural gas infrastructure companies serving three key links in the natural gas value chain: gathering and processing, transmission and storage, and distribution. With very solid transportation contracts into the foreseeable future, there is little concern for profitability and optimism for increasing shareholder value. However, any lagging demand for natural gas would certainly be a concern for the company moving forward.
Spectra Energy owns and operates critically important pipelines and related infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 18,000 miles of transmission pipeline, 265 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets.
Spectra Energy Corp also has a 50 percent ownership in DCP Midstream, the largest natural gas gatherer and processor in the United States.
Why Pipeline Stocks?
It has been said before, but pipeline stocks are like railroads for natural gas. Simply put, the demand for natural gas is up and correlates somewhat with oil prices, but the upside with pipelines is that they do not have the competition from other forms of transportation. In order to move and significant volume of natural gas a pipeline must be used.
Pipelines are traditionally managed very conservatively, as is Spectra Energy, and make their money through cost-of-service contracts and other required services. This means that cash flow is relatively stable and predictable when compared to the market as a whole. This can be referenced by viewing the Beta coefficients of pipeline stocks which show significantly less volatility than the broader markets.
I have stated before, and I will state again that pipelines are great recession proof stocks.
On top of preserving and likely growing capital, investors can collect a healthy (and growing) dividend yield.
Spectra’s current yield is 3.28%.
Spectra also boasts Return on Equity and Return on Investment numbers that are markedly abov ethe industry average at 17.1% and 5.76 % respectively.
For those of you looking to preserve capital during these rough market times and collect a solid dividend, I highly recommend pipeline stocks. Along, with Spectra Energy I suggest looking at Trans Canada Pipeline (TRP).
Full Disclosure: The Author does not own shares of Spectra Energy, but does own some Trans Canada Pipeline.
Posted in Dividend Hikes | 2 Comments »
Thursday, July 3rd, 2008
Progressive Corporation of Auto Insurance fame has changed the landscape of dividend payment to shareholders. And they did so in dramatic fashion. Progressive introduced a new dividend policy for 2007 and I have been waiting to see if any other companies would follow suit. So far, it looks like everyone is watching how this policy is playing out in a bear market to see if investors “jump ship”.
A Variable Dividend
Progressive introduced the idea of a once-per-year variable dividend that will be based solely on the performance of the company. This type of dividend will award shareholders for their belief in the company and appears to actually treat shareholders like owners by offering up a piece of the profits in good years and leaving them high and dry in bad years.
Here is what Progressive CEO Glenn Renwick has to say about the dividend policy that he championed:
“If the business has a good year, the owners should share in the profit, and if the business has a bad year, why should the owners get anything?”
An excellent observation–one that’s so obvious, it makes one wonder why everyone’s not thinking that way.
My contention is that investors, including myself, are fickle. As investors we really have no control over the operations of the company and when our cash flow (dividend) is not paid, the only recourse that a dividend investor has is to sell the stock.
Conversely, when there is a big dividend to be had, I would want as many shares as possible. One may think that this will lead to erratic cycles in the stock price of Progressive as “yield hunters” trade the stock over the course of time.
How The Variable Dividend Works?
Progressive’s board has opted to pay a variable dividend based on the firm’s after-tax underwriting profit. That means the premiums Progressive takes in, less claims paid out and expenses of running the business. Shareholders will get 40 percent of those profits in a great year, 20 percent in an average year, zero in a bad year.
So, what consitutes a Great Year, Average Year, and Bad Year?
It’s not entirely carved in stone , but It helps, of course, that Progressive is solidly profitable and generates far more capital from its operations than it can profitably deploy in its business. But should things turn bad, which has happened to many once fine companies, Progressive won’t be stuck trying to defend an unaffordable cash dividend that shareholders have come to expect. In these volatile days, locking yourself into a significant fixed dividend can be a bad idea.
Could This Dividend Policy Work For Other Companies?
If other companies could stomach what seems to be the inevitable swings in stock price, then this policy may work for them because they would pay out what dividend they could afford and no more.
While this would produce stronger companies in that sense, investors who are seeking regular income (who, as our population ages are more and more), may steer clear from companies offering an unpredictable payout. This lack of investor confidence could ultimately result in a lack of capitalization that would ultimately harm the operations of the organization.
Because the strength of a company and the performance of management is ultimately gaged on the price of the company’s stock, this dividend policy seems risky for those managers, investors and companies that are more conservative.
I guess we will have to wait a couple of years to see how this policy plays out for Progressive. While it seems very good in theory, it certainly bucks the trend of traditional dividend theory.
Posted in Investment News | 2 Comments »
Wednesday, June 4th, 2008
We have all heard people harp on having a financial plan and investing for the future, but what does that mean? What happens when you develop your asset allocation, purchase your Dividend Growth Stocks and Dividend ETF’s and have saved for an emergency fund with a high interest online account like ING Direct?
We have also heard all of the “talking heads” on television talk about diversification. They are more than likely talking about diversifying within the stock market. Diversifying between stocks, sectors, and industries as well as between fixed income investments like bonds and equity investments like stocks. This is usually good advice, but what about other types of investments? Where do they fit in the picture and how can they help you to further grow and protect your wealth?
What Happens Next?
At Blueprint for Financial Prosperity, they ask what is next in your financial plan after you have successfully accomplished the following:
- Paid down all your debt until all you owe on is your mortgage.
- Maintain six months of expenses for your emergency fund in a high yield money market account.
- Fully fund your and/or your spouses 401k, 403b, 457, etc.
- Maximize your and/or your spouses Roth or Traditional IRA up to the allowable limit.
- Invest some money each month in a 529 plan (and possibly even a Coverdell “Education†IRA) for each of your children’s future educations.
- Set aside some additional money each month and at bonus time into a taxable brokerage account for such goals as that long-awaited trip to the Orient, the sunny vacation property on the water, or even retirement.
- All your investments are properly diversified by asset type according to your goals, time frame, and risk level.
The article goes on to mention investments in tangible assets such as gold coins or a stash of gasoline, although the latter is difficult to manage.
Diversify Away From The Stock Market!
I would suggest that diversification away from the stock market take into account a variety of tangible assets such as precious metals, raw land (vacation property is preferred), Real Estate, and valuable collectibles or antiques.
You should be aware that these tangible assets typically have narrow markets and can be very illiquid. However, they can be very valuable in times when the stock markets are out of favor and should comprise a small piece of one’s overall investment portfolio.
It is essential that you do your due diligence with every form of investment. Purchasing these tangible assets can be tricky if you are not well versed in the particular niche market. That said, thorough research could yield tremendous value so get out there and test the waters!
I have little in the way of antiques and coins, but I have had some success with Real Estate and I do own some semi-valuable sporting collectibles.
I am a strong believer in diversifying away from the stock market and I prefer rental Real Estate because I am adamant that cash flow is the engine that drives wealth. Real Estate is the only avenue where the average person can utilize the power of a mortgage as financial leverage to compound their wealth.
Posted in Investment News | 6 Comments »
Tuesday, June 3rd, 2008
Time and time again I hear the same thing from friends and family about investing the way that I do. Most of them ask me why I invest in “boring” dividend paying stocks when all of the money to be made is in the high growth stocks.
To be completely honest, they are right…sort of.
Some people do find the less volatile dividend paying stocks boring, I find them exhilarating! As you may have noticed, I’m a huge fan of cash flow. Cash flow is the ticket to play the game of life and dividend growth stocks will eventually allow me to play the game on my own terms!
Yes, it is a long road and the process can be uneventful at times. And no, I’m not going to get rich overnight. However, I also won’t go broke overnight and I am compounding my future cash flow with every dividend payment that is reinvested.
Yes, there is money to be made in growth stocks. There are actually a lot of people making a lot of money in high growth stocks. However, that just isn’t my style and I’m not ashamed to admit it.
I like to have cash flow back to me so that I can make the decision whether or not to re-invest it into the company. I also like the fact that I don’t have to watch the market every day to see if my “high-growth” stock has tanked and left me with nothing!
I have nothing against traders and I actually learn a lot of useful techniques from very good stock traders. However, I have recognized that over the past 14 years an investment in the S&P 500 would have you receiving all of your original investment back just in dividends.
So I guess one could say that dividend stocks are boring, but I’ll give you one more thought to ponder before I get off of my dividend paying soap box!
Take a boring old dividend paying stock — or at least one that seems that way — paying 5% in dividends yearly and racking up a conservative 5% in capital appreciation. Begin with $1,000 and reinvest those dividends. After 30 boring years, you’ll possess a staggering $18,700! (Let’s multiply that number by 10X for a more realistic example)
$187,000 How boring is that?
Posted in Investment News | 5 Comments »
