What Are You Buying?
As we end the month of November, and move into the full swing of the holiday season, I thought now would be a great time to ask you readers what equities are on your shopping list. I look forward to receiving a healthy chunk of fresh capital from my day job early next month. I plan on continuing to scan the market for attractively priced entry points to quality dividend growth stocks for the long-term.
For now, I do have a few stocks that are pretty high on my shopping list. If Santa has a “naughty or nice” list, the following stocks are definitely “nice” for my portfolio.
As I take a look at my portfolio, and as it grows to larger portions month after month, I have to keep proper allocation in mind and make sure I’m not over-allocating to any one company. For instance, I find Intel Corporation (INTC) very attractively priced right now at the $20/share level. However, I already have a fairly large allocation to this one particular company, and if unfavorable conditions were to force them to cut their dividend this could cause outsized disruptions to my dividend income. So, I’m not sure I want to add to that position right now even though it’s trading for more than 10% below my cost basis. When my portfolio was smaller, allocation didn’t matter as much. Also, technology stocks in particular frighten me a bit due to the ever-changing nature of their industry. However, INTC is on my list for a potential purchase since it’s significantly undervalued by almost any measure.
I’m listing below some attractively priced dividend growth stocks that I believe offer the long-term investor an opportunity for intelligent allocation of capital. If market conditions change rapidly over the next couple weeks, then this shopping list could change accordingly.
Per Morningstar:
McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units.
MCD is not as attractively priced as it was just two weeks ago, but when you’re investing for multiples of decades, a price change of 3-4% doesn’t really matter that much. MCD started off the year at over $100 per share, so recent prices of $85-86 per share offers investors a great opportunity to invest in a global restaurant with huge growth opportunities ahead. The current entry yield of 3.56% is fantastic, the balance sheet is strong, and the 10-year growth rate of the dividend at 27.4% is phenomenal even if it’s halved over the next decade. The P/E ratio is currently at 16.29 and I believe the fair value of MCD shares is over $100, so there is a margin of safety here. With a payout ratio of 58%, the dividend also has a margin of safety with room to grow.
Kinder Morgan Inc. (KMI)
Per Morningstar:
Kinder Morgan Inc. owns the general partner, incentive distribution rights, and an approximate 11% interest in the limited partner units outstanding of Kinder Morgan Energy Partners. It also owns a 20% stake in NGPL, a major interstate natural gas pipeline.
KMI is, in my opinion, a long-term winner as it’s incentive distribution rights ensures an ever-growing stream of cash from Kinder Morgan Energy Partners (KMP) and the energy infrastructure it provides. The entry yield at 4.21% is well above average, and the projected dividend growth rate of 12.5% is well above inflation. I anticipate steady long-term growth from this name as it’s insulated from commodity price swings and as our country ramps up usage of natural gas. I already have a fairly large allocation to KMI, so I have to be careful here not to get too excited. It’s hard not to get excited about an opportunity like this, however.
General Mills, Inc. (GIS)
Per Morningstar:
With operations that began more than 150 years ago, General Mills is now a leading global manufacturer and marketer of branded consumer foods, such as ready-to-eat breakfast cereals, refrigerated dough and other baking items, snack foods, ice cream, and yogurt. Its portfolio of well-known brands includes Cheerios, Betty Crocker, Pillsbury, Haagen-Dazs, and Yoplait. International sales account for about 20% of the firm’s consolidated revenue.
GIS operates a high quality global branded consumer foods company, and that’s pretty enticing. I like fairly defensive holdings as we head into a time of uncertainty surrounding the outcome of fiscal compromises in Washington. This is about as defensive as it gets with a beta (measure of volatility) of 0.16 (closer to 0, less volatility). With an entry yield of 3.24%, a P/E ratio of 15.91 and a pretty solid balance sheet, this is a long-term investment that is priced right. I hope for a little weakness in the market over the next couple weeks, and would love to buy GIS closer to $38-39 per share, which is just under what it’s trading for right now. This is a company that I do not own an equity stake in yet, so I would love to initiate a position and further diversify my portfolio here. The payout ratio of 51% provides fuel for future dividend growth, and the 10-year DGR is only 7.8%, but is accelerating.
Wells Fargo & Co. (WFC)
Per Morningstar:
Wells Fargo is one of the four largest banks in the United States, with $1.3 trillion in assets at the end of 2011. The company is split into three segments for reporting purposes: community banking, wholesale banking, and wealth, brokerage, and retirement. The company is a major player in the residential mortgage market, servicing $1.8 trillion in loans.
WFC might be a surprising pick. A lot of dividend growth investors are not big fans of banks, especially national U.S. banks, since many banks reduced, eliminated or failed to increase dividends during the Great Recession. WFC is just now getting back to growing the dividend, raising it by over 83% earlier this year. If recent actions are any indication of future changes, WFC is anxious to get back to rewarding shareholders. WFC is a fairly conservative pick among the big banks, as it doesn’t have a large showing in the investment banking field. It mostly makes it mark in mortgages, and real estate coming back to life here in the U.S. bodes well for WFC. Also, it doesn’t hurt that one of my personal idols, Warren Buffett, is a huge fan of WFC as the Berkshire Hathaway investment portfolio has an almost 20% weighting to WFC. The stock currently yields 2.65% and with a low payout ratio of 27.5%, I expect a significant raise next summer.
This is my short list. Again, ever-changing market conditions may provide other opportunities and I’ll take them as I’m provided. I’m also looking at names like GPC, BDX, UNS, AVA, SBSI, GD, UTX, BBL and CAT.
So, what are you buying?
Full Disclosure: Long MCD, INTC, KMI, UNS, AVA, SBSI, GD
Thanks for reading.
Photo Credit: Free Digitial Photos
I have owned General Mills for over 2 years now. I am not disappointed with the returns. It is a solid company. I would love to add more to my positions on some dip.
I bought MCD few weeks ago around $85. MCD is now one of my biggest holdings. Not sure if I want to add more to my position.
WFC and KMI also look very interesting!
Great list. I like every one of the companies you listed.
I’ll probably look to add some more MCD, KMI, VOD, and CVX if it dips below $100. SO might be a possibility as well if it drops below $42.
The market has picked up quite a bit in the last two weeks, so the bargains aren’t as apparent. It might be worth waiting a bit longer. Hopefully some more panic sets in as we approach the deadline.
Happy hunting!
Anonymous,
Good on you for being a long-term GIS shareholder. I love to hear from people who are part-owners of companies for the long haul. 2 years is the start of a beautiful relationship!
MCD is also one of my bigger holdings, so I don’t want to get too crazy. Even for a global juggernaut that I’m optimistic about. If I was to buy more MCD shares in December, it would be my last purchase for a while.
Hope the holidays bring you joy and opportunity!
Best wishes.
FI Fighter,
Thanks for stopping by.
I like your list as well. MCD, KMI, VOD and CVX are all large, core holdings for me right now. I find all of them great companies on solid footing. Of them, VOD probably has the biggest headwinds, but it gives you the largest yield to wait it out.
I agree with you. The bargains aren’t as obvious or readily available. MCD, INTC and KMI were all cheaper just a week or two ago. I try not to go overboard on worrying about price fluctuations as regular capital infusions are more important than nailing down the cheapest price possible, but valuation is still paramount. So, it’s always a balancing act with getting an attractive price vs. waiting for a more attractive price.
I do hope the market offers better deals in the next couple weeks as the Fiscal Cliff hysteria heats up and investors sell positions for tax considerations. It’ll be interesting!
Best regards.
DM,
In the long run, you’re right, the exact timing won’t matter as much as your overall consistency. In the short term though, I would really hate to be in the situation to have to pass up another good buying opportunity again (2 weeks ago) b/c I didn’t have enough funds available. This has more to do with rationing than anything, which I’m still trying to figure out how to do.
So many choices–so little capital. I bought INTC on Monday at $19.67 and am very happy with that price. I hesitated for a few months on it because, as you stated, tech is a tricky business. Staying on the cutting edge is a constant challenge for any tech company no matter how good the leadership team is. It also requires the ability to judge consumer’s next obsession which is often very difficult. It’s not like selling cleaning products or other staples. However, I just couldn’t pass up the 4.5% yield and the extremely low valuation. I think INTC is going to be a great value play but I’ll be watching it closely. I probably won’t be buying too much more of it, though. I prefer companies where I can basically “set it and forget it.”
Your list looks great. KMI defintiely looks good but I am pretty well allocated to energy right now.
I’ve added to utilities this past month because it was pretty much a “no brainer.”
I have been considering CAT as well for my next big purchase. Dividend Growth Investor http://www.dividendgrowthinvestor.com/ just did an analysis on it. I love the fact that a large portion of their sales are international. I have a feeling buying American companies with large international exposure will be an important diversification strategy going forward. The current administration and democrats in congress seem bent on killing the goose laying the golden eggs through increased taxation and regulation. Time will tell.
I do think it’s ironic to follow your blog and others and read the comments that follow the posts. We’re definitely a different lot. While the rest of the country is going crazy spending their hard earned money on cheap (and I don’t mean inexpensive) junk from Amazon and Walmart that will more than likely end up in a landfill before next Christmas, we’re buying too. Only we’re buying the COMPANIES not the products! We’re buying something that will likely last not only years but decades. We’re also buying appreciating items instead of depreciating items. While most Americans are accumulating debt, we’re accumulating assets. While their paying interest, we’re collecting dividends. It’s amazing to me that so many people still “don’t get it.” If companies still issued stock certificates, I’d be tempted to buy a few shares of a company and give them as gifts for Christmas instead of the usual presents just to show my family and friends what it is like to really give something of VALUE for Christmas.
Oh, well. Happy shopping!
Steve
I own 3 of the 4 that you mentioned and would really like to get some more exposure to WFC. GIS is the only one I don’t own. KMI is up on my list as well. I think I need a dip back to at least the $83 range before I’d consider more MCD since it’s my largest position right now. INTC is a little worrisome for me although I think it’ll prove to be a good value play. I keep going back and forth as to whether I want to pick up some more shares or not since it’s trading so far below my cost basis.
Today I purchased TGT which I’ve been watching for a while. The rest of my list includes CVX, VOD, CAT and then the usual suspect of KO although I need that to come down to the $33-34 range.
The one I’m adding to in december you haven’t mentioned. I like OXY a lot at these levels, and they are aggressively growing their dividend in the last 7 years. They generally increase every 3-4 quarters and are due for another ~20% raise. OXY has fallen a lot from its highs and great value play right now in my opinion. I just recently added to my NSC, CAT and my OXY position, and will be adding more to NSC, CAT and OXY in DEC.
Probably an increase in my Chubb position next.
I can see KMI being an eventual purchase for myself as well.
After reaading some people say they would purchase KMI for their investment portfolio I am curious to their reasoning behind it. While looking at the balance sheet and Cash Flows statement I see some red flags that would prevent me from purchasing shares. These include the fact that the retained earnings portion of their Shareholders equity is negative and is decreasing currently. Also they have a large portion of their assets being goodwill. Since Goodwill is an intangible asset, if the company had to write it off, the company would only have 341 million in shareholder equity compared to its 46155 million in liabilities. I see this becoming a potential risk especially since it had to issue more common shares over the past year. One last thing I want to point out is the fact that its net working capital is negative and it is having to issue more long tern debt to increase its cash levels.
I was just hoping someone would be able to provide me with some more insight as to why they view this company as a potential buy.
Thanks in advance
Thanks DM, for the concise review on these great companies. I am glad you are back with your blog, I enjoy reading every article. I appreciate you opinion.
CVX below 100, like you I have a high amount of INTC and MCD already so I’d rather not put more into them. If MCD gets to 82 or INTC in the 18s I will probably buy more. I’m also looking at adding to my MSFT position, especially after this article http://seekingalpha.com/article/1014981-microsoft-has-been-a-better-business-than-it-has-a-stock-but-that-is-about-to-change
I bought a small amount of MO, STJ and MDLZ. Next Target is TRI. Greetings from doomed europe :D.
Michael
CAT, MCD, and NSC look pretty good. INTC and MSFT, I own both, are also attractive, but I’m weary of adding and going too tech heavy since they can be unpredictable. Check out Kohls (KSS), they don’t have the long dividend history of the others, but its a well run company that I think is on its way to a long string of dividend growth. Its one of those companies where the share price is the same place it was 10 years ago, but sales and eps have been growing and growing.
I agree with the comments on MSFT, it seems like there is a lot going on with them Windows 8, the new surface tablet and they just announces a new XBox for next year. I think Apple has overshined all the other tech giants, and now it is someone elses turn. I am also eyeing INTC as there dividend seems pretty safe.
I purchased 7 stocks during November: BDX, TWGP, VOD, INTC, CVX, NSC, MCD. Also CAT, KMI, NVS and INTC are still high on my buy list for next month.
I’ll have to take a closer look at GIS, but it looks good at a quick glance. So many choices! Take care.
Steve,
Thanks for the great comment there.
I hear you on “set it and forget it”. A high quality, defensive portfolio is what I’m shooting for. One that can stand the test of time.
CAT is an interesting play, and one I’ve been looking at. It appears undervalued based on their historical valuation, and the yield isn’t bad. The DGR leaves a little to be desired, and I’m trying to limit my exposure to cyclical stocks…but CAT does appear to be a long-term winner with a long streak of increasing dividends. Nice pick.
It is funny and ironic that we’re buying the companies that produce the products people buy, rather than the products themselves. I think that it’s all about what you value in life.
I don’t think negatively about people who choose to consume their money away, unless they’re irresponsible about it and hurt others. I don’t think that being a hyper consumer isn’t a bad way to live, just different. If you truly value a bunch of “stuff” and it really makes you happy, then by all means live that way. It’s only the people that are stuck on the hedonic adaptation treadmill that I feel sorry for, because they aren’t aware that they’re on a never-ending quest for happiness that will never come to them as long as they stay on that path. Psychological research proves this.
But, again it’s all about what you value. I value time above all else and that’s why I’m doing what I do. Others don’t value time as much, and that’s their prerogative.
Best wishes!
Passive Income Pursuit,
TGT is an interesting pick. I haven’t watched that one as closely as I probably should. Last I looked, I was a little concerned about their plans to gear strongly towards grocery. Are they still doing that? The margins are a little lower, but TGT is still a nice retailer.
I’m with you on your list there. All solid picks. I’d also love to pick up more KO, and that $33-34 range would be a nice price.
What’s your thoughts on WFC? As a shareholder, you must have a favorable long-term view on them. It does look solid to me, and their focus on old-school banking is a positive, in my view.
Best wishes!
Took2Summit,
I’ll have to take a look at OXY. I’ll be honest and say I don’t really know anything about them.
Their description states that they are a company “specializing in the exploration and production of crude oil and natural gas through enhanced oil recovery”. What exactly is “enhanced recovery” and is it somehow proprietary? From a quick look it does seem attractively valued, the yield is decent, the DGR is strong and the balance sheet isn’t heavily leveraged. They are also fairly big, with a $60 billion market cap, so they can absorb black swan events and other unfavorable conditions. Looks interesting.
You’ve got some strong picks. I didn’t mention NSC, but wouldn’t mind adding more if it fell back down to the mid-$50’s. Hard to pass up there, but I already have a strong allocation to it.
CAT looks good, I with the DGR was a little higher, especially with such a low payout ratio. But, it seems prudent to keep a conservative policy on the growth due to the cyclical nature of earnings.
Best regards.
Matt,
Thanks so much for stopping by.
I wish I would have initiated a position in CB a while ago. I went with AFL instead, which has treated me nicely. CB, however, is another strong pick in this space. Gotta love companies that are conservative and love rewarding loyal shareholders.
I’m glad you’re on board with KMI. Would love to see an analysis of KMI/KMP at some point in the future. Would be great to see things from your point of view.
Take care!
Dividend King,
KMI strongly depends on the ability for KMP and EPB to continue paying/raising distributions over time. So, when looking at KMI you should really be looking at KMP and the strength of the MLP. If the underlying partnership is weak, the GP will have problems. Also, MLP’s commonly issue new equity to fuel projects/growth.
MLP’s are significantly different from normal C-Corp structures.
I hope that helps!
Best wishes.
Chris,
I’m glad you continue to read the blog! It would be non-existent without a loyal readership. I hope you continue to find inspiration here.
Best regards!
fiveoh,
I also like CVX below $100. I’ve added to my position a couple times when it’s been at that level.
I’m with you on already having a relatively large position size with both MCD and INTC. I wouldn’t mind adding once more to MCD right now, but I’d feel a little hesitant about adding to INTC based on the industry.
I’ll have to take another look at MSFT. I don’t follow it closely, but I was reading recently that the Surface isn’t selling as well as MSFT was hoping, and Windows 8 isn’t doing as well either. That doesn’t bode well for INTC, either. I’m surprised by this, because the hardware and software for MSFT’s new tablet/laptop products look pretty impressive for me. Perhaps people are put off by the mobile application of Windows 8? As I understand it, the mobile version of Windows 8 (on tablets) isn’t the same as Windows 8 on a PC. I guess we’ll see how this plays out.
Take care!
Michael,
Hope all is well in Europe!
I’ve been looking at MDLZ since the split. Seems very promising! The yield is going to start out fairly small, but the growth could be generous!
Best wishes.
Adam,
I like your picks there. Many industrial plays, including CAT and NSC look pretty good here. MCD, of course, is a long-term winner. I’m also weary of adding too much tech. I’d be okay if tech was only 3-4% of my portfolio long-term. And that should probably be split between 2-3 companies.
I’ll have to take a look at KSS. The only issue I would have with a play like that is whether they have any type of economic moat.
Best regards!
Anonymous,
I agree. The dividend that INTC, while hefty, is well covered by earnings and FCF. I don’t think it’s in any danger any time soon.
MSFT is interesting. The DGR is robust, and they certainly still have a fairly impressive lock on the software market…especially on the corporate side. But, this can all change so quickly and that’s what scares me a bit about companies like MSFT. I would agree, however, that Windows 8 looks great from what I’ve seen so far.
Take care!
austinbroker,
Thanks for stopping by.
You had a heck of a month there! All look to be pretty solid picks and you grew your portfolio leaps and bounds. NVS looks great. I’ve looked at that one before, and it appears to be a solid pick.
GIS is a high quality company trading at a fair price. The yield is over 3%, the balance sheet is solid and the DGR is well above inflation and rising. It’s a global company that has plenty of growth opportunities ahead. I would definitely like to initiate a position in the near-future.
Congrats on a spectacular November! May that success continue for you.
Best wishes.
if it is different from normal strutures, does that exempt them from the risk normal structure companies have?
Dividend King have a point with regards to these cash flow companies like telecom, MLP and REITs. they pay out of depreciation. not a long term problem?
Currently looking at INTC, KMI, and OMI.
If you’re looking at utilities I would suggest passing on UNS. At the current price I would lean more towards selling than buying. I believe there are better values in the sector, although some of that value dried up last week. My $.02 and I could be wrong!
It takes some research to understand MLPs because they are structured differently than C-corps.
MLPs exist because of the huge capital investment required to build the infrastructure to manage energy storage and transportation. The large multinational energy companies want to be in the business of drilling and selling energy but not the transportation.
In the same way REITs exist to disassociate a business from the real estate. Wendy’s is in the business of selling burgers, they don’t want to issue billions in debt or equity to buy real estate. This money is better used to fund their companies.
Since an MLP or REIT has huge investments in real estate or infrastructure, they are able to declare large writeoffs through depreciating the assets. Depreciation is an accounting construct, it doesn’t impact the basics of any business: earning an adequate return on its cost of capital. Kinder is the largest player in this space and has earned lots of money over the years.
KMI is a holding company that owns shares of KMP. Due to its incentive distribution rights (IDR) it gets a larger share of the future earnings increases from KMP.
So, KMP will pay you a 6% yield today, with growth of 5-6% going forward. Due to IDR, KMI doesn’t get 6%, but it’s projected to be about 12% for the next 5 years.
Drizzt,
In addition to what SFI explained, some of the best advice I can give on investing is to not sell yourself an investment.
By that, I mean if you either don’t understand an investment or don’t feel comfortable with it then one should move on to other opportunities. There are many high quality equities out there, so one should not talk themselves into investing hard earned cash if they’re not totally comfortable.
Best wishes!
Compounding Income,
Nice picks there. All are attractive, and INTC, in particular, is well undervalued. If I were to pick up additional INTC shares next month that would be my last purchase for quite a while. We shall see.
I’m not looking hard at utilities, but wouldn’t mind picking something up in this sector at some point in the next few months. I’d like utilities to be around 5% of my portfolio long-term, so I’m currently a little under-allocated. I’d also consider waste disposal companies (WM, RSG) in this slot.
I’m hoping for a little market weakness over the next couple weeks. We’ll see what we get.
Best regards!
For my December purchase I’m looking at MCD. My only hesitation with it is that it’s already 5.5% of my portfolio. If I don’t go with them, I’m also looking at KMI, INTC, MSFT, and WM. All 5 look undervalued to me and all look like great long-term.
Right now I’d like to add to my positions in AFL, MCD, MSFT and WAG. I’m also kind of interested in NSC and MO but haven’t looked too deeply into them yet. I’m hoping to get an end of year bonus this coming up which could allow me to make a couple purchases if I can get my list narrowed down!
Probably will buy VOD on Monday. Also interested very strongly in WPO and TAP. Please DM, what do you think of these ? Am rather new to dividend growth investing and it quite looks like you made me a disciple ! Good to you.
Aspenhawk,
VOD looks pretty good at these levels. I think once southern Europe stabilizes VOD will really take off.
I took a real quick look at WPO and TAP. TAP would be the better choice of the two, in my opinion. I’m not a big fan of media companies in general, even though the Post has diversified away from newspapers. The media changes, and is a lot like technology in that aspect. Anyone can be media now. The only concern I might have with TAP, from my quick look, would be declining revenues.
Best wishes!
Chad,
I hear you on the allocation with MCD. It’s also a large position for me, but I do like the quality of the company, the brand name, the valuation and the yield among other aspects.
I’ve looked at WM in the past. I’ll have to take another look!
Thanks for stopping by.
Best regards.
Dan Mac,
I see the blog is still going well! Glad to see you around.
I thought about adding to my MO position when it recently dipped to $30. I probably should have added, but I’m still concerned about the long-term prospects of the company.
WAG looks great from a number of fundamental angles, but I’m a little concerned about competition as well as the recent Express Scripts debacle regarding reimbursements. I’m not sure if there’s a long-term effect from that.
I hope you get that year-end bonus! That would be sweet.
Best wishes.
I’m thinking about selling my two positions in KMP and SEP and replacing them with PG. PG pays dividends on the same month as the two I’d be replacing. My motive is simply to make my taxes less complicated. PG isn’t a partnership like the other two. I’d be losing some div yield though if I did that.
p.s. – I just picked up some INTC myself.
I want to add a REIT to my holdings. Have you looked at any that you would consider adding ? I have been adding MCD, INTC, and PM. I will likely add to VOD next week.
Scott
Sofaking,
I also like to make my taxes as simple as possible, and that’s why I currently own no MLP or REIT entities in my portfolio. I do my own taxes. However, many who own these entities states that it doesn’t really add much to the tax complexity. I suppose in the end, it’s best just to own the best opportunities regardless of tax issues. However, I still think I’ve done that.
PG is a stalwart. Certainly won’t go wrong owning that.
INTC is cheap here. I wish I would have waited on at least one of my lot purchases, and instead purchased it at current levels. Of course, hindsight is 20/20!
Take care.
Scott,
From what I’ve looked at, REITs have had quite a run in 2012 and are pretty pricey compared to their historical valuations. I wouldn’t mind owning an REIT or two, even though as I commented above I like to keep my taxes as simple as possible. If I were to own an REIT, I would probably look at O, NNN and SNH.
Nice pickups there. PM had a real nice dip there in the middle of the month. I would have added to it, but it’s already my largest position by a large margin. I really thought about that one. I may end up regretting it, but I just don’t want one company to have an outsized effect on my dividend income.
Best regards.
It is good to be concerned about the financials, King. SFI already provided a good explanation, though there are a few other things worth mentioning.
An MLP is one step removed from a regular stock due to a variety of reasons; primarily tax-based and depreciation-based. It takes a related but different subset of metrics to evaluate them.
But a general partner of an MLP is one step removed from an MLP and therefore more like two steps removed from a regular stock. Due to the Incentive Distribution Rights (IDRs), a general partner holds a leveraged position on an MLP; when the MLP performs well, the general partner should perform even better, and if an MLP gets a reduction in cash flow, the general partner could hurt worse.
The reason for the possible outperformance is, a general partner benefits BOTH when the MLP increases the distribution per unit, and also when they increase the number of units outstanding, which MLPs tend to aggressively do. An MLP is the most specifically designed dividend/distribution growth vehicle there is.
But there’s no free lunch, so to offset this lucrative position, general partners often carry parent debt, which is on top of the debt of the underlying MLP. In other words, they have high return potential but are rather leveraged, even to the point of sometimes having nonexistent equity.
KMI is a general partner. So is ETE. BAM is another one. OKE and ENB hold general partners as well.
I published a 3500 word analysis of ETE over a year ago (it really needs updating), but the reason it’s so long is that it serves as a tutorial on general partners:
http://dividendmonk.com/energy-transfer-equity-lp-ete-partnership-analysis/
The short way to put it is that general partners are investments that can provide above average returns but also are usually a very leveraged and complex structure.
KMI has the additional benefit of not being in a partnership structure itself and therefore not complicating taxes like ETE and other partnerships do.
DM
I was under the impression that with a REIT you still receive a 1099. But, the MLP’s send K1’s (usually in Feb. or March) making the tax return slightly more complicated. Am I incorrect about REITs?
Scott
DM,
My picks are EMCI, WFC, GSK, WM, NUE, INTC, VOD, NSC, KMB and GSI stocks. ETFs are FXA and SPLV.
Long NUE, INTC, VOD, NSC, and work for EMCI (low volume), but good dividend.
ETFs have reasonable yields and can provide diversification.
RTD
Scott,
REIT dividend income is usually taxed as normal income, so that doesn’t necessarily complicate taxes but simply reduces the real yield on the investment.
The complication comes into play because a portion of the dividend from an REIT may constitute a nontaxable return of capital, which can then defer taxes to when units in the REIT are sold. This event, these payments, can then in turn reduce the cost basis on the investment, and this is where the “complication” comes into play. For some, this is just a little extra paperwork and nothing a simple spreadsheet can’t handle. Over years, this can actually reduce your cost basis to a negative amount.
I’m not saying that this extra work isn’t worth an outstanding investment, but at this time I don’t see anything outstanding in this asset class. Just my take on it.
Best wishes!
RTD,
Thanks for stopping by!
Interesting picks there, especially GSI. Never seen that one before. EMCI looks promising, but the lack of sustained dividend growth would preclude me from investing in it. Also looks like they had a rough 2011.
NUE is popular in dividend growth circles. I may end up owning that name at some point in time. I wouldn’t want to own a lot of cyclical names like that, but the yield is strong and the growth is there.
Best wishes!