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