Ed Note: Canadian Investors be sure to read down to Dividend Hotspot #4: Unfairly-punished Canadian royalty trusts.
The Dividends Are Flowing Again …
Last year’s dividend numbers were the worst in more than half a century, as corporations large and small struggled with a lack of financing, weak economic conditions, and poor earnings. But now, things are finally looking up …
According to the latest data from Standard & Poor’s, February was a very solid month:
- 45 S&P 500 constituents increased their dividends vs. 30 a year earlier
- Two companies initiated new payments (vs. none in the same month last year)
- And only one company decreased its payment vs. 18 cuts in February 2009 …
Plus, for the first two months of 2010, dividend-paying stocks also outperformed non-dividend-paying stocks in terms of capital appreciation — 1.57 percent vs. -0.24 percent!
Does that mean everything is easy from here on out? Of course not.
Actual cash payments still fell on a year-over-year basis, and it will probably take a few more years before total dividend payments return to the highs previously reached in 2008.
So I still think you need to be selective in terms of the sectors and specific issues you choose.
Where Do I See Dividend Opportunities Right Now?
I try to diversify the Dividend Superstars portfolio in terms of sectors and industries. But I can think of at least four areas that I really like right now …
Dividend Hotspot #1: Big-brand consumer staples.
These are the firms that sell products that people won’t — or can’t — live without. Basic necessities like food, beverages, cigarettes and toothpaste.
As such, their businesses tend to be very stable. They often boast big brand names and long track records of success. And it would be very hard for an upstart to compete with them effectively.
In short, they thrive whether the economy plunges into recession or is growing like gangbusters.
Even better, my favorite consumer staples firms almost always boast big operations in foreign countries. That means they’re profiting substantially as fast-growing emerging markets adopt Western lifestyles and flock to American brands.
Most importantly — precisely because these companies are so darn stable and profitable — they typically reward their investors very handsomely by mailing out big, fat dividend checks like clockwork.
Dividend Hotspot #2: Utilities with strong dividend histories.
Wall Street brokers love to call these “widow and orphan” stocks because they’re supposedly so boring. And it’s true that these companies just chug along year in and year out, providing the basic services we need to live our daily lives. Water, electricity and gas are hardly exciting things to talk about. At the same time, what’s not boring about utilities is that many have been paying dividends with amazing regularity and raising their payments every year for decades. And that means investors who buy these stocks get fatter and fatter checks every year.
Dividend Hotspot #3: Select master limited partnerships (MLPs).
While MLPs can operate all kinds of businesses, most are engaged in the transportation of oil, gas and other natural resources … typically through a vast network of pipelines that can span entire continents.
I think of these companies as “trolls at the oil bridge” because whenever oil or gas needs to get from a production field to an end destination, it generally has to go through an MLP’s pipeline. And when you own that pipeline, you get to collect a very nice toll in the process!
Plus, the fact that these companies generally engage in just the transportation of resources also limits the downside they experience when commodities prices take short-term dips.
Dividend Hotspot #4: Unfairly-punished Canadian royalty trusts (CANROYs).
As I mentioned three weeks ago, a lot of investors have written off these Canadian firms that buy the rights to royalties from the production and sale of natural resources. And for a while, I was one of them.
Reason: There has been massive uncertainty surrounding these companies. Namely, a law change that is going to affect them in a major way starting in 2010.
However, I recently did an in-depth analysis of individual CANROYs, including an examination of what would happen to them under a revised legal structure. And my conclusion was that a few of these former dividend darlings are worthy of new investment money right now.
Bottom line: Based on the latest dividend data, payments should only continue rising from here. And if you select the strongest stocks in the strongest sectors, you stand to not only collect fat income checks but also benefit from capital appreciation, too.
P.S. If you’d like a series of special reports that discuss exactly what companies I’m recommending in the four dividend hotspots mentioned above, click here. They’re yours free when you sign up for a year of my Dividend Superstars service. At just $69 for the entire package, it’s a great deal!
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