High Dividend Stocks Guide: March 2009

Thursday, March 26, 2009

CANADIAN ENERGY TRUSTS: THE BEST LONG TERM INCOME AND USD HEDGE? Part 7B of a Series: The Income Investor’s Collapsing Dollar Survival Guide

1. EXECUTIVE SUMMARY FOR THIS SERIES

HIGH YIELD STOCKS ARE A FORM OF CASH. THUS INFLATION EATS AWAY AT BOTH YIELD AND PRINCIPLE. AS GOVERNMENTS INFLATE THEIR MONEY SUPPLY TO EASE CREDIT, MOST OBSERVERS BELIEVE INFLATION IS INEVITABLE.

THUS FAR IN THIS SERIES WE EXPLORED:

THE CURRENT STATE OF THE MARKET

THE CASE FOR AND AGAINST THE DOLLAR’S DEMISE

RECOMMENDED CRITERIA FOR SELECTING HIGH DIVIDEND STOCKS THAT ALSO GIVE A HEDGE AGAINST THE U.S. DOLLAR’S LIKELY IMPENDING DEPRECIATION.

SPECIFIC STOCK MARKET HEDGES AND HIGH DIVIDEND STOCKS THAT ARE INFLATION RESISTANT MENTIONED BELOW INCLUDE:

GENERAL MARKET HEDGES

UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM)

INTERNATIONAL

Big Oil

BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)

Utilities

Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)

Communications

Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

Shipping

Diana Shipping (DSX), Nordic American Tanker (NAT), Paragon Shipping (PRGN), Seaspan Corp (SSW)

HERE IN PART 7 WE’LL LOOK IN DETAIL AT:

Canadian Oil/Gas Energy Income Trusts

Advantage Energy Income Fund (AAV, TSX: AVN.UN), ARC Energy Trust (OTC: AETUF, TSX: AET-UN), Claymore/SWM Canadian Energy Income Fund (ENY), Enerplus Resources Fund (ERF), Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN), Provident Energy Trust (PVX, TSX: PVE.UN), Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

IN COMING PARTS WE’LL EXAMINE:

Canadian Clean Energy Income Trusts

Energy Savings Income Fund (OTC: ESIUF, TSX: SIF.UN), Innergex Power Income Fund (OTC: INRGF, TSX: IEF.UN), Macquarie Power & Infrastructure (OTC: MCQPF, TSX: MPT.UN), Great Lakes Hydro Income Fund (OTC: GLHIF, TSX: GLH.UN)

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC: BLIAF, TSX: BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

Canadian Misc Business Trusts

Yellow Pages Income Fund (OTC: YLWPF, TSX: YLO.UN)

UNITED STATES

Communications

AT &T Inc (T), Verizon (VZ), Otelco (OTT), Windstream Corp (WIN)

Energy Infrastructure Master Limited Partnerships (MLPs)

Buckeye Partners (BPL), El Paso Pipeline Partners (EPB), Enterprise Products Partners (EPD), Energy Transfer Partners (ETP), Kinder Morgan Energy Partners (KMP), Magellan Midstream Partners (MMP), Nustar Energy (NS), ONEOK Partners (OKS), Sunoco Logistics Partners (SXL), TEPPCO Partners (TPP), Tortoise Energy Infrastructure Partners (TYG)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Utilities

Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)

2. MARKET STATUS

See Part 7A

3. UPDATE: THE CASE FOR AND AGAINST THE US DOLLAR

See Parts 1, 2, and 7A of this series for the full story.

4. WHAT MAKES A HIGH YIELD STOCK USD INFLATION RESISTANT?

See Part 3 for the full details, but here’s the summary.

We’re seeking stocks of strong companies that mostly earn and distribute a high dividend in a non-USD currency and have a dominant position in a market for an essential product or service.

In this installment, we’ll begin exploring opportunities in the best single country in the world for stocks that combine high reliable dividends and USD hedge, Canada.

5. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES

For those seeking to diversify out of the USD, the CAD is one of the best alternatives. See Part 7A for the full story.

A. Grand Banks

The short version is that the Canadian banking system is among the healthiest in the world. It mostly avoided the entire subprime mess. While they feel some effects of the worldwide slowdown, banking and real estate are stable, credit is available, there is no major bailout needed from the government.

Thus supply of CAD will not be expanding by orders of magnitude, unlike the USD, for massive bailout programs, and the CAD should retain its purchasing power far better.

B. The Loonie Is a Commodity Based Currency

Because commodity exports are such a large part of the Canadian economy, the CAD tends to follow prices of energy, and other key commodities like grain and iron ore, etc. Thus they have all fallen together in the current slowdown.

However, as world populations continue to expand, even less than robust recovery will ultimately drive essential commodities higher. Higher commodity prices and far less expansion of the CAD money supply will support a long term appreciation of the CAD against the USD.

Of course, there are other factors influencing how the CAD and USD fare against each other and other currencies, and the Australian Dollar shares much of the CAD’s USD hedge characteristics. Nonetheless, the CAD is a compelling hedge against the USD.

6. Canadian Oil and Gas Producer Income Trusts- The Big Picture

The best of these already have the price and dividend cuts behind them, still pay high yields at current prices, and probably will continue to do so even if there are further dividend cuts. They will likely double or triple both yields and prices as energy inevitably recovers. Thus for those who can wait 12-18 months, these stocks have the highest likely price appreciation potential of any high dividend stock.

In addition to further temporary energy price declines, risks to these include currency risk (the CAD falls further) and overall market risk (shares move down with the overall market). Some of these are thinly traded, and thus can be extra volatile in either direction. There is also some uncertainty about how tax changes in 2011 will affect these trusts.

The recovery of both price and dividends, however, is only a matter time.

As noted in Part 7A, current prices for oil and gas are about USD 40 and 4. These prices are well below global reserve replacement costs for oil and gas are about USD 80 and USD 8, and also below production costs for many unconventional sources like deep ocean wells, Canadian tar sands, and shale oil properties. Falling energy prices are causing future supply cuts as existing and developing production sites are being scaled back or shut down.

For all the talk about wind, solar, and other alternative sources, they simply aren’t ready to begin seriously replacing traditional fossil fuels (coal included, but that’s a later discussion).

This global supply destruction makes new highs in energy prices inevitable, and the longer prices stay down, the greater the ultimate price spike that must follow. Also, all of the selections below sell at large discounts to book and net asset value, and are thus takeover targets.

Last year shareholders of PWI got about 30% over market value for their shares in a takeover.

Thus the rewards of current yields and very strong potential for robust price recovery more than justify the near term further downside risk.

NOTE:

CANADA HAS A 15% WITHOLDING TAX FOR US SHAREHOLDERS, WHICH CAN BE RECOVERED AS A TAX CREDIT BY SUBMITTING IRS FORM 1116 WITH YOUR TAX RETURN.

ALL AMOUNTS QUOTED ARE IN U.S. DOLLARS (USD) UNLESS OTHERWISE NOTED. ALL STOCK SYMBOLS ARE NEW YORK STOCK EXCHANGE UNLESS OTHERWISE NOTED (OTC = OVER THE COUNTER, TSX = TORONTO EXCHANGE). YIELDS ARE AS OF DAY BEFORE PUBLICATION.

7. Energy Income Trusts – Specific Recommendations

Take only partial positions until energy prices appear to have stabilized, but be ready to load up on these as the market begins to show interest. Both prices and distributions will soar as energy recovers, giving you high yields and capital gains.

A. Advantage Energy Income Fund (AAV, TSX: AVN.UN)

Buy under 3, Strong Buy under 2.5 ONLY IF YOU DON’T NEED THE INCOME and are willing to speculate on the price and dividend recovering, or a possible takeover.

AAV recently suspended dividends until further notice. It chose to use cash to continue development and not jeopardize present survival or future growth. That was the smart move. Because AAV is heavily levered to energy prices, both yield and price will soar fast when oil and gas prices recover, which is likely within the next 24 months.

Natural gas is 67% of output, and is the cleanest fossil fuel, is widely available, and there are plenty of power plants set up to burn it. Thus it’s the quickest, cheapest green fix, and it will benefit more than any other fuel in the near term from the move to cut carbon emissions.

AAV is greatly expanding production and reserves at low cost. For example, it has recently hit a massive new reserve at its Montney Shale property in Alberta, which almost triples its annual oil and gas production at a very low finding and development cost of CAD 3.48 per barrel of oil equivalent. With close to 450 other drilling sites, the picture could get even better.

The recent dividend suspension spurred a selloff from its base of income investors, driving the price back to all-time lows around USD 2.28, meaning that AAV now sells for about 20% of net asset value of reserves. This extreme bargain price (along with its early conversion to a corporation) will ultimately bring in growth investors, and also makes it a prime takeover candidate.

B. ARC Energy Trust (OTC: AETUF, TSX: EIT-UN)

Buy under 13, Strong Buy under 10. Yield 19% prices in dividend cut, which with current payout ratio around 40% seems unlikely unless energy falls much further.

Like its brethren, it has suffered multiple distribution cuts – 4 since August alone.

However, Q4 results blew out expectations. In short, earnings, reserves, and payout ratio improving, debt and costs falling. The good news includes:

· Reserves up: Proven reserves (at least 90% chance of development) up 5%, probable reserves (at least 60% development chance) up 60%. Proven reserve life extended to 10.4 years.

· Costs down: Finding, Development and Acquisition costs (FD&A) for proven reserves cut 40%.

C. Claymore/SWM Canadian Energy Income Fund (ENY)

Buy under10, Strong Buy under 8. For those that want to buy a basket that attempts to mimic this sector. Unfortunately, many good assets are not widely traded enough for this fund, which is why I prefer to cherry pick individual stocks.

D. Enerplus Resources Fund (ERF)

Buy under 20, Strong Buy under 16. Yield over 9%. Along with Vermillion (mentioned below), ERF is the safest bet on energy for high income and dollar hedge.

At current dividend levels its payout ratio is a very conservative 29% of Q4 distributable cash flow, making further cuts unlikely barring a radical further decline in energy prices. Management has been here before, having profited even during the major energy price decline a decade ago. Debt/equity is only 15%. Annualized cash flow is about double that of debt payments – among the lowest debt burdens in the industry.

Over the past year, ERF increased its diversified and high quality overall proven reserves by 10% to 9.4 years. Oil sands reserves are up 70%. At current prices ERF sells for about half its asset value, and that’s BEFORE considering the oil sands properties.

With low debt and operating costs, ERF can stay profitable even with oil around USD 10, making this one of the safest energy bets.

Its upside potential is enormous. As the most well known in its industry, it’s a favorite among large investors, and its shares are the first to be bought and last to be sold. When its shares peaked in 2006 at USD 60, it was a smaller company, without the vast natural gas, oil sands and shale assets it has since acquired.

E. Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN)

Buy under 8, Strong Buy under 6.Yield 36% at current price around USD 6.5 even after the recent 20% dividend cut from USD 0.15 to 0.12, prices in more cuts.

Long term survival appears assured. Proven reserves up 16.9% and are now up to 17 years, and industry best. Debt remains modest even with this expansion, and operating costs are among the lowest in the industry.

F. Provident Energy Trust (PVX, TSX: PVE.UN)

Buy under 4, Strong Buy under 3. Yield over 14%.

As of this writing Q4 results were not yet available. Proven conservative management, and at current prices sells for around half of book value and 24% of sales, is worth the risks.

G. Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

Buy under 19.25, Strong Buy under 18.25. Yield over 9.5%.

Along with ERF, Vermillion is the top choice of the group for a bet on energy for income and USD hedge. A testimony to its strength, it is the ONLY one that has not needed to cut distributions.

Global production up 5%, debt cut in half and soon to be entirely eliminated upon completion of pending sale of its stake in Verenex (OTC:VRNXF). Global diversification has helped it take advantage of much higher gas prices in Europe and Asia than in North America. Low payout ratio of just 33% leaves abundant cash for development, acquisitions and distributions. The firm believes distributions can be maintained with oil and gas at USD 40 and 3.85).

While deep energy price declines could hurt the distribution, Vermillion executives own around 9% of the company, so they’re well motivated to keep shareholder interests in mind.

8. THE TAX PICTURE FOR CANADIAN INCOME TRUSTS

To be covered in detail in Part 7C.

9. Conclusion, Disclosure & More Info

This installment looked in detail at the best of the Canadian oil and gas income trusts. Despite near term risks to both stock price and distribution due to possible temporary declines in energy prices, the future rewards more than justify the near term risks.

Part 7C will deal with the tax issues for these and other Canadian income trusts.

The coming articles will examine individual categories and stocks mentioned in the Executive Summary in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Wednesday, March 25, 2009

CANADIAN ENERGY TRUSTS: THE BEST LONG TERM INCOME AND USD HEDGE? Part 7A of a Series: The Income Investor’s Collapsing Dollar Survival Guide

1. EXECUTIVE SUMMARY FOR THIS SERIES

THUS FAR IN THIS SERIES WE EXPLORED:

THE CURRENT STATE OF THE MARKET

THE CASE FOR AND AGAINST THE DOLLAR’S DEMISE

RECOMMENDED CRITERIA FOR SELECTING HIGH DIVIDEND STOCKS THAT ALSO GIVE A HEDGE AGAINST THE U.S. DOLLAR’S LIKELY IMPENDING DEPRECIATION.

SPECIFIC STOCK MARKET HEDGES AND HIGH DIVIDEND STOCKS THAT ARE INFLATION RESISTANT MENTIONED BELOW INCLUDE:

GENERAL MARKET HEDGES

UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM)

INTERNATIONAL

Big Oil

BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)

Utilities

Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)

Communications

Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

Shipping

Diana Shipping (DSX), Nordic American Tanker (NAT), Paragon Shipping (PRGN), Seaspan Corp (SSW)

HERE IN PART 7 WE’LL LOOK IN DETAIL AT:

Canadian Oil/Gas Energy Income Trusts

Advantage Energy Income Fund (AAV, TSX: AVN.UN), ARC Energy Trust (OTC: AETUF, TSX: AET-UN), Claymore/SWM Canadian Energy Income Fund (ENY), Enerplus Resources Fund (ERF), Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN), Provident Energy Trust (PVX, TSX: PVE.UN), Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

IN COMING PARTS WE’LL EXAMINE:

Canadian Clean Energy Income Trusts

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC: BLIAF, TSX: BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

Canadian Misc Business Trusts

Yellow Pages Income Fund (OTC: YLWPF, TSX: YLO.UN)

UNITED STATES

Communications

AT &T Inc (T), Verizon (VZ), Otelco (OTT), Windstream Corp (WIN)

Energy Infrastructure Master Limited Partnerships (MLPs)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Utilities

Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)

2. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices. See Part 6A, Market Update: Warning: Do Not Feed (Yourself to) the Bears for full details. In short, we remain in a confirmed downtrend.

Treasury Secretary Geithner’s plan has revived the rally, but we’ve seen lots of short lived news driven rallies recently. Still, the idea of incentives to private investors to takeover questionable debts is a step in the right direction, since the government should not be in the financial services business any more than absolutely needed.

A. Ramifications for High Dividend Stock Investors

The overall trend continuing down, so use the current rally to unload unwanted stocks or pick up some partial short term hedges in the Ultrashorts at the following strong support levels, with sell stops about 10-15% below strong support in case the rally is prolonged, you’ll get out with small losses. Continue to invest only with funds allocated for longer term investment that you don’t need for the next six to eighteen months at least. What you buy now may well go lower.

· UltraShort S & P 500 Proshares (SDS) – Buy under $75, Strong Buy under $65: GETTING VERY CLOSE

· **UltraShort Financials ProShares (SKF) -- Buy Under $121; Strong Buy below $105: CURRENTLY AT STRONG SUPPORT! BEGIN TAKING POSITIONS

· UltraShort QQQ ProShares (QID) – Buy Under $55, Strong Buy under $50

· UltraShort Real Estate ProShares (SRS) – Buy Under $58, Strong Buy under $48

· UltraShort Russell2000 ProShares (TWM) – Buy Under $75, Strong Buy under $65: CURRENTLY AROUND $73 BEGIN TAKING POSITIONS.

If you look at a chart for these, you’ll note my buys are very conservatively low. Before the current rally some readers suggested we would never see them. Guess what – many are already at or approaching these strong support levels. The SKF is already below and worth at least a small position, since there is renewed optimism regarding the financials, yet they’re far from resolved. USE SELL STOPS as noted above, since these can quickly cut against you.

1. Continue to Take Partial Positions at Our Recommended Strong Support Levels

Beyond the Ultrashort ETFs if you can earn reliable dividends from 8-12 percent or more while you wait for recovery, ongoing investment makes sense. As noted above, with a confirmed downtrend and likelihood for further declines, refer to our below recommended buy levels, which are at strong support levels.

That’s my focus at http://highdividendstocksguide.blogspot.com .

2. Use Sell Stops?

While our emphasis is buy and hold as long as the distribution is safe and fundamentals hold steady, some may want to hedge their bets, especially if they may need the cash within the next year or so. It helps preserve capital, but only if you then buy back before the price exceeds your sell price. Most don’t time the market well.

Again, our focus is on getting high yields from healthy businesses whose price will recover while we earn outsized returns, and we don’t try to time the market too much.

3. UPDATE: THE CASE FOR AND AGAINST THE US DOLLAR

See Parts 1 and 2 of this series for the full story.

Recently China has openly called for replacing the dollar with a special newly created basket of currencies. Given the practical difficulties involved, this is unlikely to happen in the near future, and the Chinese know it. However, it must be noted by those with major USD holdings as a sign of things to come. There are lots of big players and governments holding mountains of dollar assets, and they can’t be happy about exploding supply of greenbacks.

It’s an ominous sign for the U.S. dollar. Unless the Obama administration does an extraordinary job in restoring stability and confidence in its currency, one of the long term ramifications of this U.S. – ignited world crisis will likely be a long term decline in demand for the USD as the large investors prudently seek to diversify out of the USD and limit their currency risk.

4. WHAT MAKES A HIGH YIELD STOCK USD INFLATION RESISTANT?

See Part 3 for the full details, but here’s the summary.

We’re seeking stocks of strong companies that mostly earn and distribute a high dividend in a non-USD currency and have a dominant position in a market for an essential product or service.

In this installment, we’ll begin exploring opportunities in the best single country in the world for stocks that combine high reliable dividends and USD hedge, Canada.

5. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES

For those seeking to diversify out of the USD, the CAD is one of the best alternatives.

A. Grand Banks

Perhaps the most compelling reason to have a stake in the Loonie is the banking system behind it. Unlike most of the world, the Canadian banking system is a source of relative strength. Due to more effective regulation and conservative management, Canadian bank avoided subprime lending. They were not allowed to shift capital into more speculative businesses and endanger their overall health.

Thus the Canadian financial institutions will not be costing taxpayers trillions in bailouts. Loan default rates remain low, the banks’ finances and deposits are sound, and credit is available. Fourth quarter results far exceeded expectations on Wall Street and Bay Street. Most dividends were well covered or affirmed based on expected improving conditions later this year. Profits did suffer due to asset write downs, but the need for government assistance has been limited. The better Canadian real estate firms are actually performing relatively well.

Thus supply of CAD will not be expanding by orders of magnitude, unlike the USD, for massive bailout programs, and the CAD should retain its purchasing power far better.

Last year, a group of international banking experts was formed called The Group of Thirty. In January, this panel of former central bankers, finance ministers, and academics chaired by former US Federal Reserve Chairman Paul Volcker, issued a report with recommendations for repairing the world financial system and preventing a similar crisis in the future.

The report, Financial Reform: a Framework for Financial Stability, essentially recommended imitating much of the Canadian banking system. Its recommendations included:

· Imposing capital limits on bank run trading operations

· Barring large commercial banks from running hedge funds and private-equity firms that mix bank and client funds

· Tightening government oversight of other kinds of financial institutions like insurance companies, investment banks, and broker-dealers.

In short, the report argued that because the financial services industry is so fundamentally essential to economic stability, it become more like the regulated utility industry – dominated by fewer, well capitalized players with more government supervision to preserve their health and continuity, albeit at the expense of avoiding more potentially profitable but speculative and risky businesses.

B. The Loonie Is a Commodity Based Currency

However, as world populations continue to expand, even less than robust recovery will ultimately drive essential commodities higher, and so too support a rising Loonie.

6. Canadian Oil and Gas Producer Income Trusts- The Big Picture

A. The Short Version

However, the near term bears further downside risk.

B. The Longer Version

Except for those with some limited price hedging, however, revenues for energy producers everywhere have indeed deteriorated dramatically along with energy prices (oil from $150 to $40- $50 a barrel and lower, gas from $13 to $4 per MMBtu). Virtually all of the following recommendations have suffered stock price and dividend cuts of similar magnitudes, in order to preserve cash for survival and/or continued developing new supply sources and maintain/grow their reserves for future growth. All could cut further if energy temporarily dips much lower if there is a short-term supply glut.

Current prices for oil and gas are about USD 50 and USD 4. For perspective, these prices are well below global replacement costs for oil and gas (USD 80 and USD 8) and well below production costs for non conventional sources like tar sands, shale, and offshore drilling.

Thus we’re seeing unprecedented and continuing global supply destruction as much current and planned production is being reduced or halted.

The obvious good news is that this supply destruction makes future energy price recovery and new highs virtually inevitable as economies recover. When that happens, these energy trusts will recover their prior prices and dividends.

In Part B, we’ll look in detail at the following best selections for this group, and how the new tax regime coming in 2011 will likely affect them.

NOTE: ALL AMOUNTS QUOTED ARE IN U.S. DOLLARS (USD) UNLESS OTHERWISE NOTED. ALL STOCK SYMBOLS ARE NEW YORK STOCK EXCHANGE UNLESS OTHERWISE NOTED (OTC = OVER THE COUNTER, TSX = TORONTO EXCHANGE).YIELDS ARE AS OF THE DAY PRIOR TO PUBLICATION.

C. Energy Income Trusts – Specific Recommendations

See Part B for full details on each and a look at how the new Canadian tax laws for 2011 will likely affect them.

The short version is that these are great long term income plays with some of the best appreciation potential of any income stock. However, short term risks include further new price lows (especially with the current rally) and dividend cuts if energy prices drop again.

· Advantage Energy Income Fund (AAV, TSX: AVN.UN). UPDATE: Has suspended dividends until further notice. It chose to use cash to continue development and not jeopardize present survival or future growth. The smart move, but income investors were not pleased. Its current price is at about a fifth of its reserves value. Hold if you can, or sell for loss but watch, it will be back.

· ARC Energy Trust (OTC: AETUF, TSX: AET-U): Buy under 13, Strong Buy under 10. Yield 19% prices in dividend cut, which with current payout ratio around 40% seems unlikely unless energy falls further. Reserves expanding, debt and costs falling.

· Claymore/SWM Canadian Energy Income Fund (ENY): Buy under 10, Strong Buy under 8. Yield over 10%. For those that want to buy a basket that attempts to mimic this sector. Unfortunately, many good assets are not widely traded enough for this fund, which is why I prefer to cherry pick individual stocks.

· Enerplus Resources Fund (ERF): Buy under 20, Strong Buy under 16. Yield over 9%. One of the best choices of the group.

· Provident Energy Trust (PVX, TSX: PVE.UN): Buy under 4, Strong Buy under 3. Yield over 14% after the recent 33% dividend cut. Financially stable.

· Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN): Buy under 19.25, Strong Buy under 18.25. Yield 9.7%. One of the best of the group.

· Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN): Buy under 7, Strong Buy under 6. Yield 17% after the recent 20%, dividend cut appear safe, barring further energy price drops. Expanded reserves to17 years, an industry best. Finances solid.

7. Conclusion, Disclosure & More Info

Here in Part 7A we began looking deeper into the overall picture for Canadian High Dividend stocks as a dollar hedge, and reiterated the current buy list.

In Part 7B we’ll look at these selections in greater depth.

The coming articles will other sectors noted in the executive summary.

Disclosure: I have positions in most of the above mentioned investments.

Monday, March 23, 2009

THE HIGH DIVIDEND STOCK INVESTOR’S COLLAPSING DOLLAR SURVIVAL GUIDE PART 6B

WHAT EVERY HIGH YIELD INVESTOR MUST KNOW BEFORE CONSIDERING SHIPPING STOCKS

1. EXECUTIVE SUMMARY

THIS SERIES REVIEWS THE BEST HIGH DIVIDEND STOCKS THAT ALSO PROVIDE A HEDGE AGAINST THE U.S. DOLLAR

SO FAR, WE HAVE EXPLORED:

THE CURRENT STATE OF THE MARKET

RECOMMENDED CRITERIA FOR SELECTING HIGH DIVIDEND STOCKS THAT ALSO GIVE A HEDGE AGAINST THE U.S. DOLLAR’S LIKELY IMPENDING DEPRECIATION.

SPECIFIC STOCK MARKET HEDGES AND SOME OF THE BEST INTERNATIONAL HIGH DIVIDEND U.S. DOLLAR HEDGE STOCKS INCLUDING:

GENERAL MARKET HEDGES

UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM)

INTERNATIONAL

Big Oil

BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)

Utilities

Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)

Communications

Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

HERE IN PART 6B WE LOOK AT:

Shipping

Diana Shipping (DSX), Nordic American Tanker (NAT), Paragon Shipping (PRGN) , Seaspan Corp (SSW)

IN COMING PARTS WE’LL LOOK IN DETAIL AT:

Canadian Oil/Gas Energy Income Trusts

Advantage Energy Income Fund (AAV, TSX: AVN.UN), Enerplus Resources Fund (ERF), Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN), Provident Energy Trust (PVX, TSX: PVE.UN), Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

Canadian Clean Energy Income Trusts

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC: BLIAF, TSX: BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

Canadian Misc Business Trusts

Yellow Pages Income Fund (OTC: YLWPF, TSX: YLO.UN)

UNITED STATES

Communications

AT &T Inc (T), Verizon (VZ), Otelco (OTT), Windstream Corp (WIN)

Energy Infrastructure Master Limited Partnerships (MLPs)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Utilities

Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)

2. MARKET STATUS

3. THE CASE FOR AND AGAINST THE US DOLLAR

See Part 2 of this series.

4. WHAT MAKES A HIGH YIELD STOCK USD INFLATION RESISTANT?

See Part 3 for the full details, but here’s the summary.

Outstanding Business: Before anything, the underlying business should be robust. So as always, the first criterion is great fundamentals and reliable revenue streams that can support and grow distributions, even in recessions.

Based in Hard Assets or a Monopoly-Like Position in Vital Services:

There are a variety of such niches, but there are two basic types.

· The business owns, sells, or otherwise profits from assets with strong intrinsic demand that allows enough pricing power for revenues to keep pace with or exceed inflation. This includes firms tied to energy, vital agricultural or industrial commodities, precious metals, water, etc.

· Alternatively, a provider of critical services that for some reason dominates its market, like a major well run utility or dominant communications company.

In short, we’re seeking stocks of strong companies that mostly earn and distribute a high dividend in a non-USD currency and have a dominant position in a market for an essential product or service.

In this installment, we’ll continue to look at international opportunities. Since avoiding the wrong investments is at least as important as finding the right ones, in this installment I focus on warning high yield investors away from a sector that has been very good to us – shipping.

5. SHIPPING NEWS: ARE THESE STOCKS FOR HIGH DIVIDEND INVESTORS?

Perhaps the one distinct upside of a world-wide stock market collapse is that prices get so beaten down that the previously modest yields of many blue chip companies suddenly become high, as scared investors demand a higher risk premium. For the best of these, their price declines are not due to deteriorating fundamentals, but mostly due to hedge and mutual funds dumping shares to meet redemption and/or other requirements.

For the past number of years, the shipping sector has brought some wonderfully high yields and price gains to income investors. However, times change, and while the below mentioned shipping stocks will probably return one day to being great income plays, avoid them for now.

They deserve mention for their future potential for when conditions improve, so keep an eye on them for the future. Like financials, they provide a necessary service and will at some point be excellent investments when conditions discussed below improve.

ALL AMOUNTS QUOTED ARE IN U.S. DOLLARS (USD) UNLESS OTHERWISE NOTED. ALL STOCK SYMBOLS ARE NEW YORK STOCK EXCHANGE UNLESS OTHERWISE NOTED (OTC = OVER THE COUNTER, TSX = TORONTO EXCHANGE)

A. International -Continued

Because one of our criteria is that the stock price and distribution must be pegged to a non-USD currency, no surprise that most of the best USD hedge high yield stocks based outside of the U.S.

1. Shipping: A Once and Future Dividend King – Currently Dethroned.

For many years there have been good stocks with reliable high yields backed by solid businesses. Many of these businesses are still solid and will survive. Unlike other beaten down sectors, however, there is excessive risk to the dividends themselves in every company that I’ve looked at. There are simply higher yields with less risk in other sectors.

Note that while the market tends to treat the shippers as one group, dividend size and reliability can vary considerably, due to significant differences in their business models. Different conditions apply to dry bulk shippers, oil tankers, liquefied natural gas (LNG) shippers, container shippers etc. Some work mostly on long term contracts, others at spot rates, others use a mix. Different sizes of ships can command different rates under different conditions, so the fleet composition of a given company can be very important.

So what’s the problem?

The main problem is the deteriorating demand vs. supply for most kinds of shipping, and the uncertainty about how much the growing supply of ships ordered during the boom years will hurt revenues as world trade slows. In particular:

· Shipping indices like the Baltic Dry Index (for dry bulk shipping rates) are still seeking a bottom.

· Many shippers bear significant debt.

· Dramatically expanding supply: About 9000 ships under construction worldwide in the dry bulk category alone [ CNN April 22 2008 in Hellenic shipping news March 22] http://www.hellenicshippingnews.com/index.php?option=com_content&task=view&id=5143&Itemid=31 ] While it’s unclear how many will ultimately be built, clearly many of those ordered during the boom years will hit the seas, so supply is expanding. Since the ships are so expensive, they can’t be parked like airliners until rates improve. Thus even slight oversupply can drive down rates significantly as owners struggle to keep ships active in order to keep up construction debt payments.

· This sector is notorious for renegotiating contracts when conditions deteriorate. Thus even firms with long term leases could become vulnerable to collection problems or deeply reduced fees if the supply of ships gets too far ahead of demand. This is a real possibility in a number of the shipping sectors.

Thus I present the following merely as stocks to watch for when shipping rates improve, but to avoid for now.

Diana Shipping (DSX): Like other dry bulk shippers, ( DryShips (DRYs), Eagle Bulk Shipping (EGLE)), has suspended dividends until further notice in order to survive. Thus no longer an income stock.

Nordic American Tanker (NAT): Buy under 26, Strong Buy under 22. Yield over 20% suggests investors are pricing in a dividend cut, though no indications at this time. An oil shipper. No debt, considering acquisitions, and Q4 profits up over nine (yes, nine) times over Q4 of 2008. P/E of about 9x. As good a bet as any for the oil tankers. A spot shipper, so its fortunes are subject to increase in supply of tanker ships. I was not able to find reliable info on this. Suggestions?

If there were one oil shipper to chose, this would be my choice.

Paragon Shipping (PRGN): If you insist on exposure to this sector for diversification, then it rates a Buy under 4, Strong Buy under 3. Yield over 6% at current price of $3.27. Like all other bulk shippers, they’ve cut their dividend. Unlike many, they still have one, and it appears sustainable for the coming year at least. Its fleet is fully booked for 2009 at good rates. Half of 2010 is booked, which could become good news if rates firm. Fourth quarter results were good. It earned about $10 million, or 37 cents per share, up from $7.7 million or 29 cents per share in Q4 of 2007. Excluding a one-time charge, they would have earned 52 cents per share for the quarter. Revenues for the quarter rose 47% to $44.7million.

Currently the best of the bulk shippers for income investors, though again, there are better, safer yields available.

Seaspan Corp.(SSW): Seaspan Corp.(SSW): Watch but avoid for now. While it’s among the best container shippers, and the company that will very likely survive current conditions, avoid until further clarification of dividend. If management signals long term commitment to the dividend, then in the current market it’s a Buy under 10, Strong Buy under 8.

The current yield of over 20% suggests investors are pricing in a dividend cut, and there are plenty of signs suggesting that or complete suspension. These include:

· At some time in the next couple of years the firm will need about another $400 million to complete their building program. Cutting out the dividend for about 3 years would provide the funds without needing to add debt or issue shares, if in fact those options are open to them (?).

· In a recent Reuter’s interview, senior management stated: "But capital is very precious today, so it's much better to hunker down and stay healthy," he said. "Unless we have some good sense of where the capital markets will be, we will be very cautious to use the capital we have."

· I emailed their investor relations department regarding my concerns about the dividend. I received the following response. "Decisions on dividend payments are based on market conditions at the time.” Hardly reassuring.

Unlike much of the shipping industry, all of SSW’s ships are leased on long term usually 10-12 years) contracts, thus revenues and expenses are very steady and predictable. The firm is on schedule to almost double in size through 2011, because it has contracts to build and deliver another 32 ships with long-term charters in place to their current fleet of 35 ships. Improving financials, steadily rising dividend combined with beaten price combines for a dividend around 20%, but as noted above, there is a real chance of that disappearing.

At some point in the future, SSW may well again be a great income play on improving prospects for China and shipping to/from China, which is actually still seeing solidly positive GDP growth

For now, the dividend’s fate is unclear.

This sector will again be worthwhile for high dividend investors, and there may be some stocks I’ve missed. For now, however avoid the sector unless you really do your homework on a given stock.

B. Oh Canada

If you could only invest in one country’s stocks for combined high dividends and USD hedge, Canada would be the clear choice.

Due to the abundance of stocks with solid fundamentals, low tax structures, and their CAD denominated prices and very high yields I give “my Canadians” their own category. In addition to great fundamentals and dividends, these stocks and their yields are in Canadian dollars. The CAD is a prime commodity based currency backed by one of the healthier banking systems. In addition to their share prices being down with the overall market, these carry an extra discount due to the CAD’s recent decline against the USD. Prices quoted are in USD.

Except for the energy producers (their revenues and dividends rise and fall with energy prices), the companies we’ll be discussing are prospering and offer some of the very best risk/reward combinations anywhere.

In part 7 we’ll begin to look at these in depth.

6. Conclusion, Disclosure & More Info

In Part 5 we looked at some of the best high yield dollar hedges among international stocks. Here in Part 6 we warned high yield investors about the current bear market rally, and also warned them about a possibly tempting but still too risky shipping sector.

Next, in Part 7, we begin to analyze the best high dividend Canadian stocks.

Disclosure: I have positions in most of the above mentioned investments.

THE HIGH DIVIDEND STOCK INVESTOR’S COLLAPSING DOLLAR SURVIVAL GUIDE PART 6A

MARKET UPDATE: WARNING! DO NOT FEED (YOURSELF TO)THE BEARS

1. EXECUTIVE SUMMARY

THIS SERIES REVIEWS THE BEST HIGH DIVIDEND STOCKS THAT ALSO PROVIDE A HEDGE AGAINST THE U.S. DOLLAR

SO FAR, WE HAVE EXPLORED:

THE CURRENT STATE OF THE MARKET

RECOMMENDED CRITERIA FOR SELECTING HIGH DIVIDEND STOCKS THAT ALSO GIVE A HEDGE AGAINST THE U.S. DOLLAR’S LIKELY IMPENDING DEPRECIATION.

SPECIFIC STOCK MARKET HEDGES AND SOME OF THE BEST INTERNATIONAL HIGH DIVIDEND U.S. DOLLAR HEDGE STOCKS INCLUDING:

GENERAL MARKET HEDGES

UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM)

INTERNATIONAL

Big Oil

BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)

Utilities

Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)

Communications

Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

HERE IN PART 6A WE LOOK AT:

Shipping

Diana Shipping (DSX), Nordic American Tanker (NAT), Paragon Shipping (PRGN) , Seaspan Corp (SSW)

IN COMING INSTALLMENTS WE’LL LOOK IN DETAIL AT:

Canadian Oil/Gas Energy Income Trusts

Canadian Clean Energy Income Trusts

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC: BLIAF, TSX: BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

Canadian Misc Business Trusts

Yellow Pages Income Fund (OTC: YLWPF, TSX: YLO.UN)

UNITED STATES

Communications

AT &T Inc (T), Verizon (VZ), Otelco (OTT), Windstream Corp (WIN)

Energy Infrastructure Master Limited Partnerships (MLPs)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Utilities

Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)

2. MARKET STATUS – SPECIAL REPORT

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.

Given the recent bounce, declarations that “the bottom is in” are echoing from Washington and Wall Street.

Because avoiding bad investments is even more important than finding good ones,

I present arguments that further downside is more likely.

In order to allow enough room for a full discussion, I’ve broken Part 6 into two parts. Part 6A focuses exclusively on the market, Part 6B on shipping stocks.

I draw heavily from Dr. Nuriel Roubini, perhaps the most prominent seer of the current crash and its still unfolding ramifications for the past number of years.

Debate over whether the markets have bottomed focus around the following issues.

A. The Rate of Economic Decline

The optimists say that the world wide rate of economic decline is slowing, suggesting bottoming in late 09. The pessimists, lead by Roubini, argue that in fact most indicators remain strongly negative in Europe and Japan, near negative in the U.S. and China, and even these upticks in the U.S and China were temporary.

1. THE U.S.

The Empire State and Philly Fed index of manufacturing are still plummeting, initial claims for unemployment benefits are rising and suggest accelerating job losses; the sales increase in January is an aberrational rebound fueled by bargain hunters from a depressed December.

Despite a slight recent improvement in the ISM index, the latest data that have come out - industrial production and Empire State economic conditions index - have been as depressing as any and suggest that the March ISM may show another sharp dip:

· Industrial production was down 1.4% in February after a revised -1.9% in January.

· Capacity utilization down to 70.9%, the lowest level ever recorded. And the Empire State report on economic condition fell to -38.2, the lowest level ever recorded (data from 2001 on), from -34.7 in February.

Thus, the belief that some economic indicators are showing a bottoming out of the rate of contraction is just not justified by the data.

U.S. domestic consumption, a major part of its GNP, needs to fall further as households increase savings to compensate for their loss in net worth from massive declines in housing prices (25% and another 20% likely) and stock prices (50% so far, more likely). Continuing rising unemployment will compound the decline in consumer demand.

2. CHINA

In China, credit growth was not used for investing in future growth but rather for investing in higher returning deposits. Chinese imports, mostly of raw and intermediate materials used for exports, are down 40%, falling faster than exports. Thus while Chinese exports have up to now fallen less than the rest of Asia, these free falling import figures suggest exports will soon power dive as well.

Elsewhere in Asia, Japan, Taiwan, and Korea’s exports are down 40%-50%. Per Roubini (in his March 16 article at www.rgemonitor.com : Dr. Roubini writes:

“The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression) with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capex spending around the world. And now many emerging market economies – as argued here for a while- are on the verge of a fully fledged financial crisis starting with Emerging Europe”.

B. The Effectiveness of Government Stimulus Programs

The optimists argue that policy stimulus, both monetary but especially fiscal, in the US, China and the rest of the world is starting to kick in and will contribute to the recovery in late 09. Dr. Roubini and others counter with the following.

1. THE U.S.

In the U.S., monetary easing is ineffective (“like pushing a string”) when there is too much productive capacity for the available demand. Cash strapped and nervous households and businesses don’t spend just because borrowing is cheaper.

Fiscal stimulus (i.e. government spending) will have limited effect. In the U.S., only about 25% of the $800 billion will be deployed in 09, the rest in the coming years. Half of that $200 billion is in the form of tax cuts that are more likely to be saved by anxious household. For example, only 30% of the 2008 tax cuts were spent, the rest saved. Dr. Roubini concludes in the above mentioned article,

“Thus, given the collapse of five out of six components of aggregate demand in the U.S. (consumption, residential investment, capex spending of the corporate sector, business inventories and exports) the stimulus from government spending will be puny this year.”

2. CHINA

The picture in China isn’t any more encouraging. China’s much heralded $480 billion spending will not be effective in the long run. China’s economy is extremely dependent on trade as opposed to domestic consumption. With exports plummeting, thousands of firms closing and millions of jobs lost, domestic consumption will not compensate for declining exports. While government infrastructure spending will be helpful in the long term, any near term spending on more export production capacity while there is already excess capacity may just lead to increasing loan defaults. Moreover, because most of this spending will be capital rather than labor intensive, unemployment and thus domestic consumption will remain a problem.

Thus without recovery of demand from the West, China will not recover.

C. The U.S. Financial System

The optimists claim and financial stocks are oversold, many major institutions say they’ll be profitable in 09, don’t need help, the financial system is solvent. The pessimists, I paraphrase much of Roubini here, paint a starkly different picture.

First, these ‘profits’ are only with the Fed and Treasury heavily subsidizing the financial sector. The Fed Funds - at 0%, with massive quantitative easing, with credit easing allowing banks to dump toxic assets on the Fed balance sheet and with a new government program that allowed banks to borrow at riskless rates almost $200 billion dollars at medium term maturities

Second, the latest version of the TALF now allows even hedge funds to borrow – up to a trillion dollars - at government rates – and leverage their investments 20 times to purchases new ABS issued by banks and reap a nice spread over LIBOR with very limited risk. With policy and borrowing rates equal to zero or close to zero for banks and broker dealers their intermediation margins are obviously positive as lending rates are much higher. But this is a direct huge subsidy of the financial institutions that is being paid by savers that are now earning 0% or close to 0% on $10 trillion of bank deposits.

Third, even with this massive subsidy, the government has allowed the banks vastly understate their write downs and bad debts. How? Via government regulators allowing over-valuation of bad assets, parking illiquid assets in level 3 “unrealistic” valuations, easing of capital requirements, using AIG to bail out its counterparties to the tune of $160 billion, and eventually, suspension of mark to market accounting.

So no surprise that Citibank, Bank of America and JP Morgan can argue that they will be making this year a profit “before provisions for write downs”. There’s the rub: while operational margins can be positive if you borrow at 0% and lend at much higher rates, the actual P&L and balance sheet of banks and broker dealers depends also on write downs. These write downs, delinquencies and write-offs are growing and spreading as the recession worsens.

In sum, without the above forms of assistance, most of the banks would already be gone, and as is are de facto wards of the government. The government is already the biggest shareholder of Citibank, and many others survive purely on government life support.

Dare we say it? Nationalization has at least partially arrived already.

D. The U.S. Stock Market

The optimists say that stock markets have already fallen in the US and globally by over 50% and are now way oversold. Earnings have fallen a lot but will recover soon as economic activity will soon stabilize. And since stock markets are forward looking and bottom out 6 to 9 months before the end of the recession we must be now at the bottom if the economy will recover at latest by year end. The pessimists counter as follows.

Earnings per share (EPS) for the S&P 500 are widely expected to be between $40-60 per share. Then, the question is what the P/E will be on such earnings. In past severe recessions, it could fall to 10-12. Thus in a best case scenario of $60 EPS and P/E of 12 puts the S&P at 720 as a ceiling, and a worst case scenario of $40 EPS and P/E of 10 at 400 – as much as another 50% drop, though even Roubini seems to see this as unlikely, with 500 the more likely floor. With the S&P currently around 760, there’s at best some additional downside, possibly much more.

Roubini has also noted that the generalization that the stock market looks ahead six to nine months is merely that, a generalization. The last recession bottomed in late 2008, GDP growth was solid in 2002, yet the U.S. stock market kept declining until the beginning of 2003. Thus in the last recession the market actually lagged the recovery by 18 months. Thus even if the economy bottoms in 2009-10, the markets could stay down into 2011-12.

E. Ramifications for High Dividend Stock Investors

In sum, we’re still in a near term trading range, with the overall trend continuing down. Continue to invest only with funds allocated for longer term investment that you don’t need for the next six to eighteen months at least. What you buy now may well go lower. Buy only at strong support levels recommended below.

1. Consider a Partial Hedge with Selected Ultrashort ETFs

See Part 4 and 5 for details. For now, however, consider taking partial positions in the following.

· UltraShort S & P 500 Proshares (SDS) – Buy under $75, Strong Buy under $65

· UltraShort Financials ProShares (SKF) -- Buy Under $141; Strong Buy below $125

· UltraShort QQQ ProShares (QID) – Buy Under $55, Strong Buy under $50

· UltraShort Real Estate ProShares (SRS) – Buy Under $58, Strong Buy under $48

· UltraShort Russell2000 ProShares (TWM) – Buy Under $75, Strong Buy under $65

NB: Over the past weeks as the market broke to new lows, a number of readers said my buy levels were too conservative i.e. at such low prices they were unlikely to be hit. The brief rally over the past week has brought many of these already quite close. Again, these move at twice the rate of the index they short, so when the market is volatile, these can get positively hyperactive.

2. Continue to Take Partial Positions at Our Recommended Strong Support Levels

Beyond the Ultrashort ETFs if you can earn reliable dividends from 8-12 percent or more while you wait for recovery, ongoing investment makes sense.

That’s my focus at http://highdividendstocksguide.blogspot.com .

3. Use Sell Stops?

While our emphasis is buy and hold as long as the distribution is safe and fundamentals hold steady, some may want to hedge their bets, especially if they may need the cash within the next year or so. Those in that position should consider using sell stops around 15% below the Strong Buy price as partial principle protection, though you risk getting knocked out of your positions, only to see them come back soon and possibly rise higher while you miss the dividend. It’s a judgment call, though not a bad one for at least some of your holdings given the current pessimism (which of course can change, fast).

Again, our focus is on getting high yields from healthy businesses whose price will recover while we earn outsized returns. Ultrashorts are a bet on near term market direction, and we don’t try to time the market too much, since very few are successful at it.

3. CONCLUSION

Despite the rally, we believe the downtrend remains in place.

Now let’s proceed to Part 6B, and look at what was once a classic haven for high dividend investors – the shipping sector.

Sunday, March 15, 2009

THE HIGH DIVIDEND STOCK INVESTOR’S COLLAPSING DOLLAR SURVIVAL GUIDE PART 5: A Closer Look at Some Top International High Yielders

1. EXECUTIVE SUMMARY FOR THIS SERIES

PART 5 REVIEWS SOME OF OUR TOP INTERNATIONAL PICKS IN GREATER DETAIL

IN PART 5 WE EXPLORE:

THE CURRENT STATE OF THE MARKET

RECOMMENDED CRITERIA FOR SELECTING HIGH DIVIDEND STOCKS THAT ALSO GIVE A HEDGE AGAINST THE U.S. DOLLAR’S LIKELY IMPENDING DEPRECIATION.

SPECIFIC STOCK MARKET HEDGES AND SOME OF THE BEST INTERNATIONAL HIGH DIVIDEND U.S. DOLLAR HEDGE STOCKS INCLUDING:

GENERAL MARKET HEDGES

UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM)

INTERNATIONAL

Big Oil

BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)

Utilities

Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)

Communications

Brasil Telecom Part. S/A. (BRP), Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

COMING PARTS WILL LOOK AT

Shipping

Nordic American Tanker (NAT), Seaspan Corp (SSW)

Canadian Oil/Gas Energy Income Trusts

Canadian Clean Energy Income Trusts

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC: BLIAF, TSX: BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

Canadian Misc Business Trusts

Yellow Pages Income Fund (OTC: YLWPF, TSX: YLO.UN)

UNITED STATES

Communications

AT &T Inc (T), Verizon (VZ), Otelco (OTT), Windstream Corp (WIN)

Energy Infrastructure Master Limited Partnerships (MLPs)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Utilities

Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)

2. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.

A. The Short Version

As anticipated in my last post, a bit of good news has brought a rally, though it has yet to really test significant resistance. The fundamental problems remain and there is no credible plan to fix them at this time. News driven and remains unpredictable.

Good news from China (more stimulus coming), Citibank (we don’t need help),GE (ditto), even some hope with credit as the three month LIBOR actually ticks down a bit. The sentiment indicators are very bearish, which is very bullish, since it means lots of buyers are waiting to dive in – as the past days have shown.

B. Ramifications for High Dividend Stock Investors

In sum, we’re still in a near term trading range, amidst a short term rally with the overall trend continuing down. Continue to invest only with funds allocated for longer term investment. What you buy now may well go lower. If the current rally gets the below Ultrashort ETFs down to our very conservative buy prices, consider allocating a portion of your portfolio to these short term bear market hedges.

1. Hedge a Bit With Ultrashorts?

The rally will need to continue before these hit support levels.

· UltraShort S & P 500 Proshares (SDS) – Buy under $75, Strong Buy under $65

· UltraShort Financials ProShares (SKF) -- Buy Under $141; Strong Buy below $125

· UltraShort QQQ ProShares (QID) – Buy Under $55, Strong Buy under $50

· UltraShort Real Estate ProShares (SRS) – Buy Under $58, Strong Buy under $48

· UltraShort Russell2000 ProShares (TWM) – Buy Under $75, Strong Buy under $65

2. Continue to Take Partial Positions at Our Recommended Strong Support Levels

Beyond the Ultrashort ETFs if you can earn reliable dividends from 8-12 percent or more while you wait for recovery, ongoing investment makes sense.

3. Use Sell Stops?

While our emphasis is buy and hold as long as the distribution is safe and fundamentals hold steady, some may want to limit their paper losses, especially if they may need the cash within the next year or so. Those in that position should consider using sell stops around 15% below the Strong Buy price as partial principle protection, though you risk getting knocked out of your positions, only to see them come back soon and possibly rise higher while you miss the dividend. It’s a judgment call.

Again, our focus is on getting high yields from healthy businesses whose price will recover while we earn outsized returns, and we don’t try to time the market much.

4. Inflation or Deflation, Quality High Yield Stocks Protect You

As noted in prior articles, it is by no means assured that in the near term the dollar will fade against other major currencies, nor that inflation will set in. Indeed, there is evidence for near term deflation.

The beauty of well selected high dividend stocks is that you’re at least partly protected in either scenario. If there’s inflation, their hard assets and/or pricing power helps preserve our purchasing power. If there’s deflation, we’re getting relatively steady cash.

3. WHAT MAKES A HIGH YIELD STOCK USD INFLATION RESISTANT?

Here in Part 5, we look in more detail at some of the top international stocks for providing both reliable high yields and U.S. Dollar hedge.

See Part 3 of this series for a more detailed explanation, but here’s a quick overview of the three key criteria for selecting stocks that provide both high yields and a hedge against a weakening U.S. Dollar.

Outstandingly Profitable Business with Dependable Revenues and Cash Flows

Based in Hard Assets or a Monopoly-Like Position in Vital Services that Allow It to Raise Prices to Pass on Rising Costs

There are a variety of such niches, but there are two basic types.

· The business owns, sells, or otherwise profits from tangible assets with strong intrinsic demand that allows enough pricing power for revenues to keep pace with or exceed inflation. This includes firms tied to energy, vital agricultural or industrial commodities, precious metals, water, etc. Most have come way down from a year ago, and, it’s a temporary condition to be exploited, not feared. The underlying long term demand for the above commodities is growing along with the populations and economies of China, India, and others.

· Alternatively, a provider of critical services that for some reason dominates its market, like a major well run utility or dominant communications company.

Non-USD Denominated: Shares and/or distributions are priced in another currency, ideally a commodity based currency like Canadian or Australian dollars, but any other major currency would provide some hedge. We can include here U.S. dollar denominated and U.S. firms that get the majority of their earnings in other currencies. Beware, however, the dollar could strengthen against your alternative currency. But if you’re already overloaded in USD, then some hedge in another currency makes sense, especially hard asset based currencies.

4. INTERNATIONAL STOCKS PART 1

ALL AMOUNTS QUOTED ARE IN U.S. DOLLARS (USD) UNLESS OTHERWISE NOTED. ALL STOCK SYMBOLS ARE NEW YORK STOCK EXCHANGE UNLESS OTHERWISE NOTED (OTC = OVER THE COUNTER, TSX = TORONTO EXCHANGE)

A. International

Because one of our criteria is that the stock price and distribution must be pegged to a non-USD currency, no surprise that most of the best USD hedge high yield stocks based outside of the U.S.

1. Energy

The return of high oil and gas prices is a matter of when, not if. Some of the best income plays are in energy, and the stock prices and dividends of many have been beaten down along with oil and gas prices.

Big Integrated Oil: Yes, definite risk of further price and even dividend cuts while oil prices remain low. At the below recommended buy prices, most of that risk is priced in, and far outweighed by the rewards when energy prices resume their long term uptrends.

· BP, plc (BP): Buy below 40, Strong Buy Below 37. Unique as the only big integrated oil with a large, reasonably safe (barring further deterioration of energy prices). Currently around 40, its 8.7% yield is among the highest of the big oils.

· CNOOC Ltd. (CEO): Buy below 85, Strong Buy below 80. A subsidiary of China National Offshore Oil Company, CNOOC is a unique triple combination play on income, China and energy, so I’ll accept the lower dividend. The dividend is only around 5%, and even then only when price is around 87.

Volatile price can move very fast either way along with oil prices, and its yield is lower than we normally accept, so don’t chase this one much above $85. However, likely fast appreciation when oil prices recover makes this stock worthwhile as a combined income / growth play. I’d buy up to 95 if oil shows definitive signs of rising. The firm is aggressively expanding production. Just this week, CEO announced that oil and gas production at the OML 130 project in Nigeria was beginning ahead of schedule. The project is expected to produce 175,000 barrels of oil per day by this summer. CEO owns 45% of the project.

· Eni SpA (E): Buy below 40, Strong Buy below 35. Yield 10%. This Italian integrated oil can profit on production (upstream) and the refining, marketing, and distribution (downstream) side. Expects to grow output around 3% per year, debt manageable. The past two dividends have been reduced, not uncommon given energy prices, though analyst opinion is very positive, with 2 recent upgrades.

2. Communications

Brasil Telecom Part. S/A. (BRP): Buy below 32.5, Strong Buy below 30. Yield 9%. One of Brazil’s leading telecoms. Pays divvy 1-3 times per year, depending on …?

Cellcom Israel Ltd. (CEL): Buy below 22, Strong Buy below 20. Yield 12%.Operating income up, profits up (32% despite slightly lower revenues), dividends up, free cash and domestic demand steady. Like other well run wireless operations, the firm is benefiting from growing sales of more advanced phones, which offer more services and revenue opportunities.

Israeli economy weakening along with the world, but its banking system is relatively healthy, and the likely new PM Netanyahu has a solid economic track record, as does Bank Head Stanley Fischer. CEL is not only healthy but a rare quality income and diversification play into the Mideast’s most dynamic economy and only real democracy.

France Telecom (FTE): Buy under 14, Strong Buy under 12. Yield over 7%. Expanding into South American Internet market, payout ratio about 90%. Typically pays only one dividend per year, usually in the spring. The last one, in September was about half of the prior one, though at this level it appears safe.

Telefonica SA. (TEF): Buy under 14, Strong Buy under 12. Yield over 7%. Expanding into Czechoslovakia, still able to get credit as sign of financial strength

3. Utilities

Veolia Environmental SA (VE): Buy under 25, Strong Buy under 21. Yield 9%.

Veolia Environnement, together with its subsidiaries, provides environmental management services to public authorities, individuals, and industrial and commercial customers worldwide. It operates in four segments: Water, Environmental Services, Energy Services, and Transportation.

This French firm one is unique because it’s the only serious dividend in the high potential growth water sector. A dominant player in a hot sector, price beaten down with the market transforms its formerly modest yield into a generous one.

One of the largest integrated water infrastructure companies in the world, solid financials, is a prime beneficiary of the increasing investment in water worldwide, including the U.S. Based in France, it earns all over the world. VE provides solution to every water infrastructure issue, from supply to conservation to wastewater processing and recycling. Steadily rising but modest dividend, combined with a stock price that has fallen harder than the overall market, (from around 90 to about 20), has transformed this formerly modest yield into a generous one close to 10%, based on last May’s 1.89 dividend (it only distributes once a year).

It’s the leading provider in the world in both the water/wastewater and public passenger transportation, and the second largest waste management firm.

Not surprisingly, revenues from commercial and industrial customers are down. Multiple profit warnings have hit the stock, and there are those questioning management’s ability to maintain profits and dividends in this down cycle. However, the dividend seems safe for the now, given

· Manageable debt levels

· No major near term debt repayments

· Healthy cash flow

Note that they only pay one dividend per year, usually in mid May. This dividend has more than tripled over the past 5 years.

ENEL-SOCIETA PER AZI (ENLAY.PK): Buy under 5.50, Strong Buy under 4.50. Yield about 11%. An Italian utility with interests in Spain as well, Enel Spa is the short name for Ente Nazionale per l’energia Elettrica - Societa Per Azioni. Price has dropped over 50% over the past year, due mostly to euro weakness, debt used to buy the huge Spanish utility Edsa (OTC: ELEZF), and a dividend heavily cut. Thinly traded on the OTC market. Profits for 2008 were up 45%, debt is declining, and the firm as stated it will maintain its dividend in 2009.

5. Conclusion, Disclosure & More Info

In Part 1 we looked at the current market, and the case against the US Dollar.

In Part 2 we reviewed the current market, the case for the USD, and the key criteria that make a high dividend stock a USD hedge.

In Part 3 we briefly described the best sectors and listed specific recommendations that fit these criteria. Thus we saw a listing of the best high dividend stocks outside of the U.S.

In Part 4 we listed the best high yield dollar hedges among the U.S. stocks.

Here in Part 5, we went beyond a mere listing to describe in greater detail some of the best international high dividend dollar hedges.

The coming articles will continue to review our favorite international high yield dollar hedge stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Tuesday, March 10, 2009

COVER YOUR ASSETS: THE HIGH DIVIDEND STOCK INVESTOR’S COLLAPSING DOLLAR SURVIVAL GUIDE PART 4

The Best American Stocks for Dollar Hedge & Reliable High Dividend: Possibly THE Best Long Stock Investment

1. EXECUTIVE SUMMARY FOR THIS SERIES

IN THIS SERIES WE EXPLORE:

THE CURRENT STATE OF THE MARKET

THE CASE FOR AND AGAINST THE DOLLAR’S DEMISE

RECOMMENDED CRITERIA FOR SELECTING HIGH DIVIDEND STOCKS THAT ALSO GIVE A HEDGE AGAINST THE U.S. DOLLAR’S LIKELY IMPENDING DEPRECIATION.

SPECIFIC STOCK MARKET HEDGES AND HIGH DIVIDEND STOCKS THAT ARE INFLATION RESISTANT MENTIONED BELOW INCLUDE:

GENERAL MARKET HEDGES

UltraShort S & P 500 Proshares (SDS), UltraShort Financials ProShares (SKF), UltraShort QQQ ProShares (QID), UltraShort Real Estate ProShares (SRS), UltraShort Russell2000 ProShares (TWM)

INTERNATIONAL

Big Oil

BP, plc (BP), CNOOC Ltd. (CEO), Eni SpA (E), Total Fina Elf (TOT)

Utilities

Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)

Communications

Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

Shipping

Nordic American Tanker (NAT), Seaspan Corp (SSW)

Canadian Oil/Gas Energy Income Trusts

Canadian Clean Energy Income Trusts

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX:ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC:BLIAF, TSX:BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund(OTC:CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT(OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC:NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC:RIOCF, TSX: REI.UN

Canadian Misc Business Trusts

Yellow Pages Income Fund (OTC:YLWPF, TSX: YLO.UN)

UNITED STATES

Communications

AT &T Inc (T), Verizon (VZ), Otelco (OTT), Windstream Corp (WIN)

Energy Infrastructure Master Limited Partnerships (MLPs)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Utilities

Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)

2. MARKET STATUS

Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.

A. The Short Version

Still trending down, invest only funds not needed for the near term expenses. While there may be rallies, even multi-week or month ones, the fundamental problems remain and there is no credible plan to fix them at this time. News driven and thus even more unpredictable than usual.

While the markets remain oversold by traditional measures, few seem prepared to take any multi-day rally seriously enough for it to get past near-term resistance before selling starts anew.

Nouriel Roubini continues to see a minimum of another 20% drop at least, for reasons mentioned in my last installment of this series, Part 3. Moreover, there’s widespread belief that this is not a ‘normal’ downturn, but one of historical proportions (though not yet Great Depression magnitude) for which the usual metrics may well not apply. Typically, when most believe “this one’s different,” it’s a classic bottoming sign. However, a number of sentiment levels that usually suggest bottoming have been decisively shattered and remain so.

B. Ramifications for High Dividend Stock Investors

In sum, we’re still in in a near term trading range, with the overall trend continuing down. Continue to invest only with funds allocated for longer term investment. What you buy now is likely to go lower.

1. Balance Current Income vs. Catching a Better Price and Yield

You need to strike a balance between holding cash equivalents (and earning virtually nothing) while hoping to catch stocks near a bottom (which few succeed at doing), and getting 7-16% returns for the coming years on good businesses whose stock prices should recover.

2. Partial Near Term Simple Hedging with Ultrashort ETFs

As mentioned in Part 3, consider investing small portions of your portfolio in the following Ultrashort ETFs for a short term hedge, but only when the market is in rally mode and they hit the below mentioned buy levels.

· UltraShort S & P 500 Proshares (SDS) – Buy under $75, Strong Buy under $65

· UltraShort Financials ProShares (SKF) -- Buy Under $141; Strong Buy below $125

· UltraShort QQQ ProShares (QID) – Buy Under $55, Strong Buy under $50

· UltraShort Real Estate ProShares (SRS) – Buy Under $58, Strong Buy under $48

· UltraShort Russell2000 ProShares (TWM) – Buy Under $75, Strong Buy under $65

The idea is to use them as a simple hedge and hold them through the next down stage, then sell them whenever the next rally starts. Unless you get the exact top of the rally (unlikely), be prepared to take initial paper losses with these as the market continues to rise after you buy them. Again, few are good at market timing, so only allocate a small portion of your portfolio to this kind of trading. They are not ideal long term shorts on the market due to their structure (the explanation of which is beyond the scope of this article).

If you look at a chart for these, you’ll note my buys are conservatively low As the past few months have shown, any glimmer of positive news brings stampeding buyers who have been waiting to buy or cover their short sales. Lots of cash on the sidelines provides lots of fuel in the tanks for a rally.

Thus Ultrashorts can plummet fast, so you only want to buy them at strong support. Then, if that support fails, you’ll know quickly and can get out before taking a big loss. Consider placing sell stops no more than 10% below the Strong Buy levels to protect your capital.

3. AMERICAN HIGH DIVIDEND STOCKS WITH A DOLLAR HEDGE

In Part 3 of this series we gave an overview of the best sectors and stocks for high yields that also provide a hedge against the U.S. Dollar. Not surprisingly, these were international stocks.

Here in Part 4, we survey the second tier, U.S. companies that earn in USD and thus lack a large degree of USD hedge. However, they have strong businesses dominating vital commodities or services. That should allow enough pricing power to provide at least partial insulation against dollar inflation.

It’s also worth repeating that while the dollar is in trouble, it’s hardly assured that it will do worse than other currencies or that it will lose its role as the primary international currency.

In addition, while my focus thus far has been to hedge inflation, there is a distinct chance of the opposite happening, deflation, a downward spiral in prices. That would reduce earnings and ultimately many dividends, though it’s unclear whether dividend cuts would be greater than the increased purchasing power of those dividends. What is clear is that unlike many other forms of investment, we’d be sitting with cash generating assets while cash is becoming more valuable.

1. Communications

Yes, communications companies depend on credit markets for their substantial capital spending needed for growth, and thus are sensitive to tight credit. Also, to the extent that their revenues are regulated, they are vulnerable to imposed limits on those revenues. That will be discussed in depth at a later time.

However, the dominant players provide critical services and will have the pricing power to prosper in the long run. The best communications companies have already shown that broadband and wireless service growth can more than compensate for declining landline revenues. Because these services can increase efficiency, they are arguably recession resistant. Below are two pairs of telecoms that represent two valid ways to play this too-vital-to-fail industry for income.

Two Giant Telecoms: The more conservative approach.

AT &T Inc (T): Buy under 24, Strong Buy under 20. Yield 7%

Verizon (VZ): Buy under 28.5, Strong Buy under 26. Yield 7.5%

The most dominant communications companies, they have shown the management and financial strength to benefit from continued growth in broadband, wireless and cable networks (internet, cable TV) usage to more than balance problems in their traditional landline business. Dividends around 7%, split your position between them.

Note, these dividend yields are normally at far more modest levels typical of such blue chip low risk companies.

Two Rural Telecoms: The higher dividend approach, with solid fundamentals to sustain and grow these dividends. Some of the safest 12% plus dividends, plus potential for substantial capital gains as the current fear and risk premium subsides and bids up the share prices. They carry higher risk, for they lack the size, capital, and too-big-to-fail qualities of the T and VZ.

Otelco (OTT): Buy under 9.5, Strong Buy under 7.5. Yield 21% prices in a dividend cut, though financials are solid. A rural phone company with reliable cash flows, buy back of debt and stock, successful up-selling of broadband services and cost cutting.

Windstream Corp (WIN): Buy under 8.25, Strong Buy under 7.25. Over 15% yield and the solid fundamentals to maintain the dividend, even under worst case projected 2009 revenue losses of up to 4%. Like OTT above, its plan is to cut expenses, increase up-selling of broadband services (half of its residential customers don’t yet have broadband), and improve economies of scale.

2. Energy infrastructure MLPs – Distributions Steady or Growing

All the below offer yields currently above 8%, which are backed by prospering businesses with reliable cash flows.

Also, as noted in my earlier articles, Energy Infrastructure MLPs: Among the Very Best High Dividend Stocks and Top 10 Energy Stocks..., many investors have wrongly believed that revenues of these energy distribution and storage companies are directly tied to energy prices. In fact most revenues come from simple volume moved or stored. Thus share prices have been unfairly reduced both by market sentiment and declining energy prices. The good news is, that means those already generous yet stable yields have gone even higher. Six of these have actually raised their dividends in the past year.

1. Buckeye Partners (BPL): Buy under 41, Strong Buy under 36. Raised dividend 6% over the past year. Yield over 10%.

2. Enterprise Products Partners (EPD): Buy under 22.5, Strong Buy under 20. Raised dividend 6% over the past year. Yield over 11%.

3. Energy Transfer Partners (ETP): Buy under 36, Strong Buy under 32. Yield 11%.

4. Kinder Morgan Energy Partners :(KMP) Buy under 49, Strong Buy under 46. Raised dividend 14% over the past year. Yield over 10%.

5. Linn Energy Partners (LINE): Buy under 16.5, Strong Buy under 14. Yield 19% prices in dividend cut though unclear if any likely near term.

6. Magellan Midstream Partners (MMP): Buy under 32, Strong Buy under 30. Raised dividend 8% over the past year. Yield 11%.

7. Nustar Energy (NS): Buy under 46, Strong Buy under 43. Raised dividend 7.4% over the past year. Yield over 10%.

8. ONEOK Partners (OKS): Buy under 45, Strong Buy under 42. Raised dividend 5.3% over the past year. Yield 12.6% though predicts about 25% revenue cut in ‘09.

9. Sunoco Logistics Partners (SXL) :Buy under 49, Strong Buy under 43. Yield over 8%.

10. TEPPCO Partners (TPP): Buy under 23, Strong Buy under 20. Yield over 14%.

11. Tortoise Energy Infrastructure Partners(TYG): Buy under 20, Strong Buy under 16. Yield over 11%.

3. Coal MLPs

In addition to a depressed overall market and energy prices, coal is not an especially clean fuel source and President Obama has specifically warned utilities not to build new coal fired plants. Nonetheless, coal demand is not fading anytime soon, and is more likely to grow due to lack of alternatives and improved environmental technologies, even under the current economic and political climate. Coal prices and the below stocks will soar as energy recovers, or if events in the Middle East or elsewhere make energy imports more problematic.

Alliance Resource Partners (ARLP): Buy under 26, Strong Buy under 22. Yield over 11%.

Northern Resource Partners (NRP): Buy under 20, Strong Buy under 16. Yield over 11%.

Penn Virginia Resources Partners (PVR): Buy under 13, Strong Buy under 9. Yield over 19%.

4. Other Sector MLP

Terra Nitrogen Company, L.P. (TNH): Buy under 105, Strong Buy under 95. Yield over 11%. A rare income play on the long term growth in fertilizer demand. Because it only trades a bit over 100,000 shares per day, its price can be very volatile, so don’t chase it. Like any low volume stock, it’s a good stock to leave a low priced order in that can get hit when a few big shareholders need to sell.

StoneMor Partners (STON): Buy under 13, Strong Buy under 11. Yield Operates Cemeteries, aging population keeps demand alive and growing.

5. Utilities

All of the below are classic cases of blue chip companies with formerly modest blue chip style dividends beaten down mostly due to wholesale selling across the markets. While they remain at 10 year lows, their dividends, while not huge, are now high enough to actually leave you something after real inflation and taxes. While major economic downturns will slow down their growth rates, things need to get very bad before their dividends get cut. Also, to varying degrees, their revenues are regulated, and thus depend on cooperative local and state governments. Overall these have been good, but a prolonged and severe recession could put politically sensitive regulators in a stingy mood.

Dominion Resources Inc. (D): Buy under 30, Strong Buy under 26. Yield over 6%.

Duke Energy Corp (DUK): Buy under 14, Strong Buy under 12. Yield over 7%.

Progress Energy (PGN): Buy under 33, Strong Buy under 28. Yield over 7%.

Southern Company (SO): Buy under 30, Strong Buy under 27. Yield about 6%.

4. Conclusion, Disclosure & More Info

In Part I we looked at the current market, and the case against the US Dollar.

In Part II we reviewed the current market, the case for the USD, and the key criteria that make a high dividend stock a USD hedge.

In Part III we briefly described the best sectors and listed specific recommendations that fit these criteria. Thus we saw a listing of the best high dividend stocks outside of the U.S.

In Part IV we’ve looked at some of the best high yield dollar hedges among the U.S. stocks.

The coming articles will examine individual categories and stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Thursday, March 26, 2009

1. EXECUTIVE SUMMARY FOR THIS SERIES

2. MARKET STATUS

5. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES

A. Grand Banks

B. The Loonie Is a Commodity Based Currency

6. Canadian Oil and Gas Producer Income Trusts- The Big Picture

7. Energy Income Trusts – Specific Recommendations

A. Advantage Energy Income Fund (AAV, TSX: AVN.UN)

B. ARC Energy Trust (OTC: AETUF, TSX: EIT-UN)

C. Claymore/SWM Canadian Energy Income Fund (ENY)

D. Enerplus Resources Fund (ERF)

E. Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN)

F. Provident Energy Trust (PVX, TSX: PVE.UN)

G. Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

8. THE TAX PICTURE FOR CANADIAN INCOME TRUSTS

9. Conclusion, Disclosure & More Info

Wednesday, March 25, 2009

1. EXECUTIVE SUMMARY FOR THIS SERIES

2. MARKET STATUS

5. WHY THE CANADIAN DOLLAR IS ONE OF THE BEST U.S. DOLLAR HEDGES

A. Grand Banks

B. The Loonie Is a Commodity Based Currency

6. Canadian Oil and Gas Producer Income Trusts- The Big Picture

A. The Short Version

B. The Longer Version

C. Energy Income Trusts – Specific Recommendations

7. Conclusion, Disclosure & More Info

Monday, March 23, 2009

2. MARKET STATUS

5. SHIPPING NEWS: ARE THESE STOCKS FOR HIGH DIVIDEND INVESTORS?

A. International -Continued

1. Shipping: A Once and Future Dividend King – Currently Dethroned.

B. Oh Canada

6. Conclusion, Disclosure & More Info

2. MARKET STATUS – SPECIAL REPORT

A. The Rate of Economic Decline

1. THE U.S.

2. CHINA

B. The Effectiveness of Government Stimulus Programs

1. THE U.S.

2. CHINA

C. The U.S. Financial System

D. The U.S. Stock Market

E. Ramifications for High Dividend Stock Investors

1. Consider a Partial Hedge with Selected Ultrashort ETFs

2. Continue to Take Partial Positions at Our Recommended Strong Support Levels

3. Use Sell Stops?

3. CONCLUSION

Sunday, March 15, 2009

1. EXECUTIVE SUMMARY FOR THIS SERIES

1. Hedge a Bit With Ultrashorts?

4. Inflation or Deflation, Quality High Yield Stocks Protect You

4. INTERNATIONAL STOCKS PART 1

A. International

1. Energy

2. Communications

3. Utilities

5. Conclusion, Disclosure & More Info

Tuesday, March 10, 2009

1. EXECUTIVE SUMMARY FOR THIS SERIES

3. AMERICAN HIGH DIVIDEND STOCKS WITH A DOLLAR HEDGE

2. Energy infrastructure MLPs – Distributions Steady or Growing

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