1. EXECUTIVE SUMMARY FOR THIS SERIES
PART 5 REVIEWS SOME OF OUR TOP INTERNATIONAL PICKS IN GREATER DETAIL
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 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)
BP, plc (BP), CNOOC Ltd. (CEO), Enid SpA (E), Total Fina Elf (TOT)
Veolia Environmental SA (VE), ENEL-SOCIETA PER AZI (ESOCF.PK or ENLAY.PK)
Brasil Telecom Part. S/A. (BRP), Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)
COMING PARTS WILL LOOK AT
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)
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)
Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)
Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)
Dominion Resources Inc. (D), Duke Energy Corp (DUK), Progress Energy (PGN), Southern Company (SO)
Before ever considering investing in stocks, we must always first look at the overall market, since almost all stocks follow the major indices.
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.
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
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.
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.
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.
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.
4. INTERNATIONAL STOCKS PART 1
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. The below list is not comprehensive, merely the stocks which I’ve found thus far. Suggestions for additional combination high dividend and U.S. dollar hedge stocks are welcomed.
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)
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.
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.
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
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.