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Energy still the key for income investors
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Oil companies rolling in cash are boosting payouts
My search for stocks that had the kind of growing cash flow that would lead to dividend increases -- from already high yields, mind you -- resulted in a portfolio heavily concentrated in the energy sector. Stands to reason, no? Higher oil prices have resulted in a flood of cash at these companies, often more than they can reinvest in their own businesses, and that has resulted in rising dividend payouts.
Here's the final portfolio as completed on Dec. 6, 2005. I've listed purchase prices, date of purchase, current prices as of April 21 and total returns from the time of purchase. (You can follow the securities in the portfolio in our expert picks database.)
| Jubaks dividend stocks for income investors | | Security | Date purchased | Purchase price | Price on 4/21/06 | Total return as of 4/21/06 | | Kinder Morgan Energy Partners (KMP, news, msgs) | 10/14/2005 | $51.03 | $47.80 | -4.8% | | Magellan Midstream Partners (MMP, news, msgs) | 10/14/2005 | $32.62 | $33.34 | 5.5% | | Natural Resource Partners (NRP, news, msgs) | 10/14/2005 | $58.33 | $55.25 | -2.7% | | Northern Border Partners (NBP, news, msgs) | 10/14/2005 | $45.70 | $49.06 | 10.1% | | Penn Virginia Resources (PVR, news, msgs) | 10/14/2005 | $26.99 | $29.60 | 15.4% | | Rayonier (RYN, news, msgs) | 12/6/2005 | $40.69 | $44.63 | 10.8% | | Lehman Brothers Preferred Shares (LEH-G, news, msgs) | 12/6/2005 | $25.21 | $25.50 | 3.1% | | Southern California Edison Preferred (SCEDN, news, msgs) | 12/6/2005 | $101.58 | $99.50 | -0.7% | | 6-month CD | 12/6/2005 | | | 1.5% | | 12-month CD | 12/6/2005 | | | 1.5% |
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A few of these picks worked exactly the way I intended. Both Magellan Midstream Partners (MMP, news, msgs) and Penn Virginia Resources (PVR, news, msgs) increased dividends from the last quarter of 2005 to the first quarter of 2006. Magellan Midstream Partners paid out 74 cents a share on Oct. 28 and 76 cents a share on Jan. 30, 2006. At Penn Virginia, the dividend went from 65 cents (before a two-for-one split on March 30, 2006) to 70 cents. So at Penn Virginia, the dividend yield on my original purchase price climbed to 5.2% from the 4.9% that the stock yielded when I originally purchased it. That's exactly the kind of dividend move I was looking for to give me protection when interest rates as a whole were climbing.
Not every pick worked out nearly as well, and a few were definite disappointments. Kinder Morgan Energy Partners (KMP, news, msgs), which has a history of raising dividends -- they're up 11.1% annually over the last five years -- did manage to raise its dividend but just by a penny from one quarterly payout to the next. That certainly wasn't enough to keep the stock from dropping in price by 6.3%, resulting in a negative total return of 4.8% for the period.
Energy is still the foundation of my portfolio
I'm not going to make any big changes in my fixed-income portfolio for 2006. I think sticking with high-dividend energy stocks that show a likelihood of increasing dividends still makes good sense. I can't think of a sector with better cash flow than energy -- and, at least when I'm looking for dividend increases, I'm happy to see the difficulties that the companies in the energy sector are having in investing their cash. (See my April 14 column, "Oil patch is drowning in cash," for the details.)
But I am going to replace one of the stocks in this portfolio, Kinder Morgan Energy Partners, with one that stands a better chance of keeping dividends moving up at the brisk pace I'd like to see with long-term interest rates likely to climb in 2006. (Since I've got a loss on Kinder Morgan Energy, holding these shares for less than a year isn't a tax issue.)
My replacement is Penn West Energy Trust (PWTFF, news, msgs), a Canadian exploration and production company that recently -- June 2005 -- converted to a royalty trust. The company is the largest energy trust, by production, in North America, and CIBC World Markets projects 2006 cash flow per unit of $6.36. As an energy trust, most of that gets passed through to unit holders -- CIBC estimates 2006 distribution of $4.05 a unit. On a recent price of $39.14, that distribution comes to a yield of 10.3%.
Whats to like about Penn West Energy
There are lots of Canadian energy trusts with high yields to choose from, so why Penn West Energy Trust? - First, I like its role as a relative newcomer to the energy trust sector. The company's stock still trades only on the Toronto Stock Exchange and in the U.S. in the over-the-counter Pink Sheets market. As the stock gets better known -- the company is working toward listing on a U.S. stock exchange -- valuations will climb.
- Second, the company's recent conversion to an energy trust, and its very recent combination with Petrofund Energy Trust (PTF, news, msgs), will gradually lead to lower capital spending and increased cash flow that will push Penn West Energy Trust closer to the valuation of an energy trust such as Enerplus Resources Fund (ERF, news, msgs). As a result of its combination with Petrofund Energy Trust, Penn West Energy Trust will spin off a new exploration company called Exploreco.
- And third, the company's resource base includes two unconventional projects: An oil-sands heavy oil project just ramping up production in 2006 and a plan to inject carbon-dioxide into the oil field at Pembina, west of Edmonton, Alberta. The latter investment could result in enough oil production that, from 2010 to 2020, could replace the company's annual production declines.
If you're tracking this portfolio at home, give this new buy of Penn West the same equal weighting as the rest of the portfolio. And please pay attention to taxes. Master limited partnerships, such as Kinder Morgan Energy Partners and Magellan Midstream Partners, are governed by complex tax rules that make where you buy them -- in a tax-sheltered account such as an IRA or a regular taxable account -- extremely important. Canadian Energy Trusts are as complex but in different ways. Have your accountant take a look at how owning one of these will affect your withholding and what the appropriate tax treatment of distributions is.
Look for the next tweak in my fixed-income portfolio sometime in June 2006 when the first of my CDs, the six-month CD purchased for the portfolio in December 2005, matures. By the time I've got that capital in hand and need to invest it, I'd expect the fixed-income picture to be a lot clearer -- for better or worse -- than it is now.
In the meantime, just remember that at current yields, fixed-income investors aren't getting paid enough to take much risk.
So don't.
New developments on past columns
3 new global hot spots for investors
In Peru's presidential election, it looks like former president Alan Garcia is going to come in second -- and that's likely to send global commodity markets higher as traders take their anxiety up a notch. Under the nation's election laws, if no candidate receives a majority in the first round of voting, a run-off pits the No. 1 and No.2 vote getters. Ollanta Humala, who has promised to raise taxes on global mining companies operating in Peru and/or seize 49% ownership stakes for Peru in the projects now run by the foreign mining companies, is the clear winner in Round 1, with 31% of the vote. But two candidates, former president Garcia and ex-Congresswoman Lourdes Flores, have been separated by less than 1%. International investors and mining company CEOs have, for the most part, been hoping for Flores to finish ahead of Garcia. Most election handicappers believe that Humala would beat Garcia but lose to Flores. But on April 24, with 98% of the vote counted, Garcia was leading Flores 24.3% to 23.6%, and it now looks like Garcia will face Humala in the run-off election.
Meanwhile, the international mining industry twists nervously in the wind. Peru is the world's fourth-largest copper producer, the fifth-largest gold producer, the third-largest zinc producer and the second-largest silver producer. Stay tuned.
And as if the commodity markets needed more bad news, Venezuela's President Hugo Chavez, who has already seized two major oil fields from foreign-owned oil companies Total (TOT, news, msgs) and ENI (E, news, msgs) without compensation, has now targeted the country's huge heavy-oil reserves in the Orinoco River Basin. The plan before the Venezuelan Congress, which is controlled by Chavez's party, would raise royalties paid by foreign oil companies in the basin to 30% from the current 17% and taxes to 50% from the current 34%. Global oil companies with Orinoco projects include ConocoPhillips (COP, news, msgs), Chevron (CVX, news, msgs), BP (BP, news, msgs) and ExxonMobil (XOM, news, msgs).
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Rayonier. He does not own short positions in any stock mentioned in this column.
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