Harry's Notes

Harry's Notes

by Harry Domash

9/27/12: Lockheed Martin raised its quarterly dividend by 15% to $1.15 per share, bringing the yield up to 5.0%. Yes, the outlook for the aerospace industry isn't great, but the 5% yield makes Lockheed look interesting.

9/25/12: You'd have a big leg-up if you knew ahead of time when a company is about to announce a special dividend. Our new Premium feature, "Future Special Dividend Suspects," attempts to do just that. Come January, I'll tell you how well it worked.

9/3/12: A DD subscriber asked: I'm very interested in BDCs-business development companies. This sector has done much better than the S&P in recent months. But you are only recommending two out of the entire universe of BDCs-why is that?" Here's my response.

I'm guessing that you received a blurb from one of my competitors touting BDCs. We do follow all publicly traded BDCs. You can see our list here.

For us, the number of picks in each portfolio reflects our view of how subscribers should weight their own portfolios, in terms of industries or sectors. Compared to other categories such as preferreds, REITs and MLPs, in our view, BDCs are relatively risky bets. Should the economy weaken, BDCs' clients, which are relatively small companies, would be the hardest hit. So, limiting our portfolio to our two best ideas is our way of telling you to tread lightly in that sector, compared to other categories.

7/10/12: A subscriber wrote: "You have a "buy" rating on Exterran Partners (EXLP), but it's P/E ratio is 108. What gives? Here's how I answered.

As you probably know, P/E compares trading price to earnings per share. Accounting rules require that firms with capital assets (buildings, capital equipment, etc.) must depreciate those assets over a fixed time period, say 20 years. That depreciation subtracts from earnings.

For example, say that you bought an office property and the improvements (not the land) were worth $20 million at the time of purchase. In that instance, you would have to depreciate $1 million or so per per year from your income for depreciation, even though, in fact, the building was appreciating in value. Thus, even though cash income exceeds expenses, from a accounting point of view, you might be losing money. So, because of depreciation deductions, reported earnings doesn't mean much.

When evaluating a stock such as EXLP, you must look at operating cash flow, which is the amount of cash that flowed in or out of its bank accounts due to its main operations. What matters most is how operating cash flow compares to dividends paid. You can see that on Yahoo as well as many other financial sites. For EXLP's December 2011 quarter, cash flow was $26.4 million and dividends paid totaled $17.1 million. That's about the ratio that you would expect from an MLP.

6/18/12: Kohlberg Capital (KCAP) announces 33% dividend hike, yield now 14.1% but be careful here. Kohlberg, a business development company (BDC) said a recent acquisition powered the raise. But Kohlberg has been in hot water with the SEC recently over accounting and reporting issues. Kohlberg recently hired a new CFO to straighten out the mess, but the financial outcome is still in doubt.

6/8/12: What's the scoop on dividend capture strategies, a subscriber recently asked. He was referring to Generac Holdings (GNRC), which, although only trading around $26.70, is paying a $6.00/share dividend on June 30. That's a sweet 23% yield. The subscriber asked, "Won't it drop $6.00 on the ex-dividend date? So, what's the point?" Here's my answer.

You are right, while many subscribers tell me that they're making money doing it, the dividend capture strategy is controversial, to say the least. Here's why it's appealing.

Although stocks usually drop on the ex-dividend date, they don't always, and when they do, they don't necessarily drop by the dividend amount. Also, if they do drop, they often recover that loss. So a player might wait for that to happen before selling. Some dividend capture players take a different approach. They sell on the day before the ex-date because the share price has already risen by the dividend amount. Bottom line, although people are making money doing it, capturing dividends is more art than science. Everyone does it differently.

5/21/12: Buffeted by European debt problems and mixed U.S. economic numbers, the last few weeks have been tough on stocks, including our picks. During times like this, it’s tempting to throw in the towel, sell everything, thinking that you’ll get back in when the market recovers. But that never works out.

Time and time again, we don’t get the memo telling us to get back in because the market is about to recover. Instead, the market rockets without warning, and by the time we realize what’s going on, we’ve missed much of the snapback.

Of course, it’s always possible that this time is different and the market will never come back. But there’s not much evidence to support that scenario. The U.S. economy is still in recovery mode, albeit slower than we’d like. Growth in China and other emerging markets is slower than it was, but still strong. Whatever happens in Europe could temporarily jolt the markets, but probably won’t drive the U.S. and other markets into a major recession.

We initially pick our stocks and continuously reevaluate them based on one major criterion: their dividend growth prospects. Sure, our picks will drop with the market, but as long as their dividend prospects remain solid, their share prices will eventually recover.

Here’s an analogy that I think is appropriate. Say that you owned an apartment building, which is fully occupied and your tenants are paying their rents on time. Now, say that real estate prices drop, including multifamily properties, but your rents stay up and your property remains fully rented. Would you sell?

That’s the way you have to look at high-dividend stocks. We can’t predict how long this market downdraft will persist, or how deep it will go. But, we can keep our eye on our pick’s dividend prospects and let you know of changes in that regard. Meanwhile, you'll still be collecting the dividends.

If you’re in the mood to pick up some bargains, here are some suggestions . . .

5/18/12: Roundy's, a Wisconsin based grocery store chain was founded in 1872, but just got around to going public via an IPO in February 2012. Yesterday, the operator of 159 grocery stores and 98 pharmacies declared its first quarterly dividend, $0.23 per share, which equates to a 9.0% yield. Roundy's isn't growing much, but that dividend gets my attention.

5/10/12: “The closed-end fund Aberdeen Chile (CH) has been falling like a rock. What’s up?” I received that question the other day from a Premium Subscriber and I thought that you might be interested in my answer.

To start with; closed-end funds, unlike conventional mutual funds, do not trade at their net asset values (per-share value of fund’s holdings). Instead, they trade like regular stocks. Their trading prices vary with supply and demand for their shares, and can be above (premium) or below (discount) their net asset values (NAV).

In the case of Aberdeen Chile, its market price had plunged from $19.23 on March 30 to $16.66 on May 9. That’s a 13% drop. But here’s the catch.

On March 30, Aberdeen Chile was trading at a 14% premium to its NAV, which was $16.81. By May 9, the NAV was $16.12, down only 4% from its March 30 peak, but it was only trading at a 1% premium.

Thus, most of Aberdeen Chile’s 13% price drop was due to a change in market sentiment, not its fundamental value.

As noted, Aberdeen Chile is now trading close to its NAV. Whether it trades at a premium or discount in the future depends on market sentiment for emerging market stocks, particularly Latin America. It will trade at a premium if market players are excited about Latin America and at a discount if they’re negative about the prospects. You can see current and historical premium/discount values for closed-end funds at “www.cefconnect.com.”

5/10/12: Furniture component manufacturer Leggett & Platt (LEG) issued a dividend press release today that confused at least one financial wire service. The company announced a 2Q $0.28 per share dividend that it said was "an increase of 3.7% versus 2Q 2011." Reuters, and possibly other wire services interpreted that as meaning that LEG had just increased its dividend by 3.7%. In fact, it had been paying $0.28 since September 2011. However, it was true that its 2Q $0.28 payout is 3.7% above 2Q 2010.

4/30/12: On May 1, Conoco Phillips (COP) spun-off its chemical business and its refining and marketing assets into a separate publicly traded corporation, Phillips 66 (ticker PSX). Conoco Phillips shareholders of record on April 16 received one share of Phillips 66 for every two Conoco Phillips share held. Conoco Phillips is now a pure-play exploration and production company.

4/25/12: Exxon Mobil (XOM) made headlines today when it hiked its quarterly dividend by 21%, a record for Exxon. But those headlines are deceiving. Even with that increase, it's still only paying 2.6%. By contrast, Chevron (CVX), which raised also raised its payout today, but only by 11%, is paying 3.5%. Royal Dutch Shell (RDS-B), which is overdue for a hike, is paying 4.8%.

4/13/12: Dow Chemical (DOW) raised its quarterly dividend by 28% to $1.28 per share. The new yield is 3.9%. This is a big raise for a company with a $39 billion market-cap that was already yielding 3.1%. The new dividend will be Dow's 403rd consecutive quarterly payout. It started paying quarterly dividend in 1912.

4/11/12: This might be a good time to invest in commercial real estate, which you can do via real estate investment trusts (REITs). REITs don’t pay U.S. federal income taxes as long as they pay out at least 90% of their taxable income to shareholders. There are two basic types of REITs: Property REITs and mortgage REITs.

Property REITs own commercial real estate properties such as apartment complexes, office buildings, or shopping centers, while mortgage REITs invest in mortgages backed by real estate. Today, we’ll focus on property REITs.

Property REITs provide the customary management services associated with leasing properties such as apartment buildings, shopping centers and office buildings. But they can’t operate properties requiring a high degree of personal service such as hotels and healthcare facilities. Instead, they must lease those properties out to third-party operators.

You can use the free screener at FINVIZ.com to find REITs. Click here for tips on using it to find the best REITs.

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