More Dividends and Diversification

As a followup to Saturday's post I wanted to outline some ideas for building a dividend tranche for a portfolio where someone might have different buckets within a portfolio. So high yielders might be one bucket, themes another, core another and so on. I could see where it might be easier for some people to think of their portfolio this way. Although not my preference it is perfectly reasonable.

Anyone going down this road might want to own high yielders from various parts of the market to capture some business diversification or maybe cyclical diversification. The following are just examples, I don't own any of them for clients.

First is Brookfield Infrastructure Partners (BIP). This is sort of an investment product as opposed to a company. It manages a portfolio of infrastructure assets and it turns the assets over. I wrote about this for theStreet.com a few years ago when it came out and while some of the assets are still the same several are new. The current yield is 5.4% but the company is committed to steadily increasing the payout. The major assets now include utilities assets in Australia, New Zealand, Canada and Chile. BIP also has timber assets in Canada, gas pipelines and storage all over the place and a hospital. The revenue stream seems like it will be reliable but like many of these types of things it carries a lot of debt.

Next is AT&T. It currently yields 5.6% which is well covered. The market cap is enormous as you know, estimates for earnings look to grow 7% with revenue growing a little less. You already know the stock, more often than not it is boring, slow moving and high yielding--but not always.

I've mentioned American Campus Communities (ACC) a few times over the years but have never owned it. It owns apartments near college campuses in 30 states and two Canadian provinces. It has a low beta, a fair bit of debt, the trailing yield is 3.95% and is well covered. The story is simple when compared to other types of apartment stocks which is that the elasticity of demand should be more favorable with college based rentals.

Energy Transfer Partners (ETP) is one of the larger MLPs. You've heard of the name, the yield is 7.5% and the dividends have been very steady. It has a low beta, high debt and the growth estimates for revenue and earnings look pretty good and the dividend looks like it can be maintained.

Bill Gross recommended Annaly Mortgage (NLY) in this week's Barron's Mid Year Round Table. He notes it yields 14% (13.6% per Yahoo). Relative to the world of mortgage REITs this one is well regarded and it has been around for a long time.

I've always been intrigued by the tanker stocks but never owned one. Nordic American Tankers (NAT) seems to be one of the more visible names in the space. It is well off its high and the dividend has been volatile of late. On the plus side, the company cut the dividend when that was the right thing to do and will raise the dividend when (if) that becomes the right thing to do. Over the years I've read a couple of very bearish posts on this company (sorry, no links). The CEO is on TV a lot and there is something about his "performance" that makes me uncomfortable but I don't know what it is. The space is valid but I think actually picking a name here is difficult given the volatility of the group both in terms of the actual business and the stock prices.

The last name to put here is the NFJ Dividend Interest & Premium Fund (NFJ). This fund drastically cut its dividend during the crisis and more recently restored it, it is now at $0.45 per quarter (but it can always change) making the yield pretty close to 10%. I used to write about these a lot, we owned one and the group collectively got crushed during the crisis. If you want to swim in these waters, an important thing to keep an eye on and understand how much of the payout is a return of capital. And with any CEF you need to know how much leverage the fund uses.

The above are a list that simply represents high yield form disparate parts of the market and could comprise a high yield bucket but not a portfolio IMO. I don't own any of them, I've not researched any of them in a way I think of as being thorough so don't add 1+1 and get 11.

Some of the names might be great holds but if not, there are other names from those groups that would be and building in this type of exposure (bucket) as part of a diversified portfolio makes a lot of sense. I picked the above because they are all somewhat fondly regarded in their respective spaces and get a fair bit of attention (NFJ may not get a lot of attention but the AUM is almost $2 billion) so these holdings could easily make it into a diversified portfolio.

The companies are all real (as best as I can tell) and survived the crisis, their dividends are high and in some cases increasing (even if they were cut along the way during the crisis) but none of that prevented the companies (and other related companies in these spaces) from getting crushed during the crisis. The best performer dropped 33% from the October 2007 peak to March 2009 and the worst fell 61% in that time. NLY was on a different timetable, from its peak to trough it fell 31%, the dividend remained surprisingly healthy during the crisis but it endured a serious and prolonged dividend cut from September 2005-March 2008.

The point here is to understand what a dividend can do and cannot and mesh that in with how your brain works during times of market panic. A dividend portfolio should not be expected to be immune from large market declines nor will these types of stocks lead on the way up. Often the more defensive dividend yielders will go down a lot less but that is more likely because of the sector they are in; staples, utilities and healthcare are likely to go down less than other sectors.

If you can truly mentally prepare for going down 30% in a down 50% world then maybe a lopsided exposure to dividend payers is for you but it needs to be understood that the next crisis for the market will be lead by some other segment and if it somehow turns out to be dividend payers then the DZs will be badly shaken. The can't-miss expectation that some seem to have should be altered. Hindsight bias notwithstanding, internet stocks were can't-miss as was housing.