Dividend Monk

Carnival of Financial Planning

April 26, 2013 By Matt Alden S. 13 Comments

For weekend reading, here is a useful list of articles on a variety of money topics for the Carnival of Financial Planning.

If you run a blog and you would like to participate in the next carnival, submit a post at Blogger Carnivals.

BUDGETING AND ECONOMICS

Mr.CBB @ Canadian Budget Binder writes How We Saved $146.90 By Reading The Paper – It’s not everyday reading the paper can score you some money back in your pocket. Being aware of store policies and understanding them as a consumer may work to your advantage like it did for us.

Justin @ The Frugal Path writes Living Below Your Means: There’s no way around it – If you want to achieve wealth or be able to retire with dignity there is one truth that must be obeyed. You must live below your means.

Lance @ Money Life and More writes Brookstone: Who Buys This Stuff Anyway? – Brookstone has a ton of awesome stuff. However, the awesome stuff is… very unique and normally not super useful or practical. Oh yeah… it is normally outrageously expensive too! How expensive and impractical? Let’s take a look!

MR @ Money Reasons writes Is A Millionaire Promise Wrong? – Is my millionaire promise an impossible one? Read about my millionaire promise that I made as a child and how I'm trying to become a millionaire by a certain age range.

Robert @ Beat The 9 to 5 writes Our Tribe is Growing! What Do We Call Ourselves? – irst, I want to thank you for trusting me. Trusting me with your inbox. Supporting me with my journey. I’m honored by the fact that there are already over 100 subscribers to this site vision. Now, I wanted to share a little more about what I want us to do as a tribe. We’re in this together, and you’ve committed you sharing your journey with me!

John @ Card Hub writes Ask The Experts: If I Could Make One Policy Change to Fix the Federal Deficit, I Would… – One of the most pressing issues facing our nation these days is the federal government’s massive budget deficit. There are plenty of proposed solutions out there – both practical and inane – coming from a variety of sources. But evaluating the efficacy of a potential remedy, of course, necessitates making a proper diagnosis first.

CAREER AND INCOME

Buck Inspire @ Buck Inspire writes My First Taste Of Haterade – I’ve always stayed below the radar and not ruffled feathers. Recently I’m coming off the sidelines and getting into the game. Not surprisingly, I also encountered my first taste of Haterade.

Crystal @ Married (with Debt) writes Selling Our House Update – Many of you know that my family is selling our home and moving because I found a new job. It's been almost two months since the house was listed, and I must admit that it feels like our house will never sell.

Michelle @ Making Sense of Cents writes Financial Goals and Increased Income – Many Changes – Recently, I have been receiving many questions about how our financial goals have changed since we now are making more income than we used to make. Even Jordann made a post last week titled How to Spend Your Extra Income. We definitely need to adjust our financial goals. This is mainly because of all of the side hustles that I am doing, especially since how last month I made nearly $8,000 in extra income.

Robert @ The College Investor writes How To Improve Your Credit Score and Why You Should Care – If you aren’t already making timely and full payments, paying down your debt, and obtaining your free yearly copy of your credit report, here are five reasons you should invest in your credit score.

Tushar @ Finance TUBE writes 5 New Websites That Save You Big Bucks – Today I will be taking about 5 New Websites That Save You Big Bucks. The internet is an amazing tool and we can peruse just about everything. Need a job hit the monster or a career builder, wanna sell the old couch post an ad or create ad in Facebook.

Nick @ A Young Pro writes What I Learned from a Lost Purse – Recently my wife lost her purse at a local store. Read this article to discover the wonderful lessons I learned from that lost purse.

DEBT AND CREDIT

John S @ Frugal Rules writes The Cost of a Bad Credit Score – A credit score can be used to determine many things from rates on loans to eligibility for certain jobs. By protecting your credit score you can help yourself potentially save a good amount of money over time.

Alexis @ FITnancials writes I Want a Credit Card – But I Have No Credit – I want a credit card. Yes, I just said that! I’ve been on the hunt for one, and I’ve even applied for some, but I’ve gotten denied. I have no credit (I’m 19, my car loan isn’t in my name, and I have no other credit cards), so it is hard for me to find a card to get approved for.

Don @ MoneySmartGuides writes 5 Things to Remember When Buying a Car – Check out these 5 things to remember when buying a car.

Brent @ PersonalFinance-Tips writes Prevent Credit Card Electronic Theft – The rise of online commerce has improved our lives in a number of ways. Today, you have the choice to use your credit card to order millions of types of products from online stores. Sites like Amazon.com and Ebay.com are doing billions of dollars worth of business every year, and still growing at a very impressive rate.

IMB @ Investing Money writes Tips for Real Estate Investing in India – So you are all geared up to purchase the house of your dreams, accrued all your savings, inquired the financial institutions about all the lending criteria and the term for which you will be taking up the loan. But, this is not all.

Kevin @ Passiveincometoretire writes The Hidden Costs Of Home Refinancing – Mortgage refinancing costs and fees will be different depending on the homeowners financial situation and the type of loan they want. With interest rates so low right now, many homeowners can benefit from getting a mortgage refinanced into a new loan with better interest rates, terms, or conditions.

Jon Haver @ Pay My Student Loans writes Next 4 Years – Obama Student Loan Forgiveness – For many Americans, paying for and living under the weight of student loans has become a way of life. The next four years are starting to look a lot more hopeful thanks to President Obama’s “Pay As You Earn” proposal and Representative Hansen Clarke’s proposed Student Loan Forgiveness Act of 2012.

Grayson @ Debt Roundup writes How Debt Started My Quest Toward Financial Literacy – Some start being financially responsible before they get into debt. I decided to do it a little different. After getting into debt, I decided that I needed to gain some financial literacy.

INVESTING AND SAVING

Dividend Growth Investor @ Dividend Growth Investor writes Six Dividend Paying Stocks I Purchased for my IRA – I purchased six dividend stocks in an IRA. By making this IRA contribution, I was able to reduce my tax due by more than half. The amount I put in that IRA produced an instant tax savings that was equivalent to over one third of its value in taxes.

Jules Wilson @ Faithful With a Few writes Wilson Household On the Mend..$250.00 Later – We were so grateful that we had the extra money which is something we wouldn’t have had in the past. I never would have dreamed having a sick household could cost so much.

Daniel @ Sweating the Big Stuff writes The Letter My Wife Will Get If I Don’t Check Gmail For 6 Months – If I pass away, this is the message I would have gmail send my wife after 6 months.

Kyle @ The Penny Hoarder writes There’s a Pot of Gold Waiting for You in New Mexico… – …all you have to do is find it! That’s right, Penny Hoarders! Three years ago, a multimillionaire named Forest Fenn buried a chest (weighing over 40 pounds!) that is filled with a multi-million dollar treasure. It’s filled with gold coins, diamonds, emeralds and other gems, and it’s yours for the taking.

Jacob @ My Personal Finance Journey @ My Personal Finance Journey writes Which Short-Term Bond Mutual Fund Should You Use For Your Fixed Income Asset Allocation in Taxable and Tax-Sheltered Accounts? – Which Short-Term Bond Mutual Fund Should You Use For Your Fixed Income Asset Allocation in Taxable and Tax-Sheltered Accounts?

Sam @ Simplefinancialfreedom writes What does Obamacare Mean for Your Health Coverage – ObamaCare will bring a range of services and benefits to your health care plan. Some of the benefits can already be seen, while others will roll out in 2014.

DJ Wetzel @ Money for College Project writes Payoff Student Loans with a Business Mindset – Student loans can mount quickly, and paying them off can seem a daunting task. Approaching your student loans as you would a business investment helps to reframe your thinking about student loans, and strategize efficient ways to pay them off sooner.

Crystal @ Budgeting in the Fun Stuff writes My Online Addiction – The title might be a little flamboyant, but I do love the online world. I hate errands, wasting any time, and saving money, so I do everything I can online.

Invest It Wisely @ Invest It Wisely writes You Can Avoid Living Paycheck to Paycheck – Here are your best steps to avoid living paycheck to paycheck and to move forward.

Roger the Amateur Financier @ The Amateur Financier writes Roger’s Rants: Switch to the Metric System, Already! – This article represents the first one where I take a step away from a strict personal finance issue to wail, rave, and generally, well, rant about subjects that

Pete @ Intelligent Speculator writes Are You Ready For The Next Market Crash? – We look at the potential of another market crash.

Lauren @ L Bee and the Money Tree writes A Very Leaky Bucket – Ever have one of those weeks months where you feel your wallet is a bucket with a really big hole in it? I’m not talking about a small leak, more like a full on deluge, kinda like this: Yeah. That’s happening for me, right now. Ha. Here are all of the things I have to The post A Very Leaky Bucket appeared first on L Bee and the Moneytree.

Luke @ Learn Bonds writes Why Aren’t Gold Bonds Plunging Along With The Stocks? – With the price of gold and gold mining equities in free fall, surely investors could expect a decent spread widening in gold bonds, right? Not quite.

Rich @ Growing Money Smart writes Growing Money is More Than Math – Growing Money is more than math, read all of the other reasons to take into consideration on your journey to wealth.

Amanda L Grossman @ Frugal Confessions writes Finding and Pursuing Work You are Passionate About – The key to a good work life is finding and pursuing work you are passionate about

harry campbell @ Your Personal Finance Pro writes What is Bitcoin and Should You Invest in it? – If you’re like me, you’ve probably sent a peer to peer payment before. Whether its the monthly rent, or gambling debts owed to a friend, sending money through Paypal or similar services is pretty easy(and free!). Bitcoin essentially does the same thing but with its own currency. Yes that’s right, Bitcoin has its own currency that can be used to pay for merchandise/services all across the web.

RISK MANAGEMENT AND INSURANCE

Michael Kitces @ Nerd’s Eye View writes Why Cancelling An Existing Whole Life Or Universal Life Policy May Be A Bad Idea – Normally, most people who don’t need life insurance simply cancel the coverage. But in today’s low return environment, the reality is that an existing life insurance policy can actually provide a remarkably appealing fixed return if held until death, which means even if you wouldn’t buy the coverage today, it may make a lot of sense to keep what you’ve already got!

Maria @ The Money Principle writes Would Batman need Life Insurance? – Batman doesn't; but whether you need life insurance and how much you should check carefully.

REAL ESTATE AND PROPERTY

SBB @ Simple Budget Blog writes Happy Birthday: Budgeting Your Child’s Birthday Party – Child's birthday coming up? It doesn't have to break your finances. Read here for tips on successfully budgeting your child's next birthday party.

Suba @ Broke Professionals writes Our House Is Back On The Market – After taking the winter off, our home is back on the market – and this time, we’re being more aggressive with the list price and Realtor’s fees.

RETIREMENT AND TAXATION

Corey @ 20s Finances writes Is It Bad to Get a Large Tax Refund? – It all begs the question: is it good to have a large tax refund?

Ted Jenkin @ Your Smart Money Moves writes The Government Will Tell You What To Do With Your 401(k)? – Find out how the Government Accountability Office is making your 401(k) options confusing and putting a damper on your personal finances through regulations!

MMD @ My Money Design writes When Can I Retire – It All Depends On How Badly You Want To! – The answer to When can I retire is not something that comes with age. Depending on how well you plan and prepare, it could be a lot sooner than you think!

Oneok Partners LP (OKS) MLP Analysis

April 23, 2013 By Matt Alden S. 5 Comments

Oneok Partners LP is a large midstream natural gas partnership with assets throughout the central United States.

-Distribution Yield: 5.10%
-Seven Year Distribution Growth Rate: 7.1%
-Credit Rating: BBB, Stable Investment Grade

Overall, I view OKS as one of the better income investments on the market currently, with an appealing combination of yield and growth at a reasonable valuation.

Overview

Oneok Partners LP (NYSE: OKS) is a $12 billion vertically integrated master limited partnership that focuses on natural gas and natural gas liquids.

As an MLP, it offers a substantial distribution yield, significant distribution growth, and a tax-advantaged investment. MLPs are flow-through entities, and therefore they avoid the double taxation of the corporate/dividend tax duo.

MLPs like Oneok generally increase their number of outstanding units over time (rather than decrease them as blue chip corporations tend to do), because as a flow-through entity they can generally get a good enough rate of return on their newly issued units in order to grow the distributions on all units, if managed well. This has allowed MLPs to dramatically outperform many standard utility companies (a stronghold of dividend investors) over the last decade, and there isn’t a structural reason why this general outperformance should not continue.

The limited partners benefit when distributions increase, and the general partner benefits both when the distributions increase and when the number of units and overall partnership size increases.

The disadvantage to this tax-advantaged structure is that individual investors are responsible for an additional tax form during tax season.

Distribution Growth

Oneok Distribution Chart
(Chart Source: DividendMonk.com)

The current distribution yield for Oneok is 5.10%.

Over the seven year period ending in 2012, Oneok increased its distribution by an average rate of approximately 7.1% per year. Distribution growth was rather consistent over this period, with an increase each year. In particular, the distribution increased almost every quarter, with an exception in 2009 at the most uncertain point in the recession when the distribution was held flat for a few quarters.

The distribution for the first quarter of 2013 is 16.4% higher than the distribution for the first quarter of 2012. According to the most recent annual report, management expects to increase the distribution by 8-12% per year through 2015.

Approximate historical distribution yield at beginning of each year:

Year	Yield
Current	5.1%
2012	4.1%
2011	5.7%
2010	6.8%
2009	8.9%
2008	6.4%
2007	6.2%

Particularly for shares/units with a consistent and large dividend/distribution, tracking the yield over time for the units is a relevant valuation method. As can be seen, the price dip in 2009 presented investors with an attractive opportunity to pick up very high yielding healthy units. Apart from that, the yield has fluctuated between 4% and over 6%. The current 5.1% yield offers a better value than this time last year, because the unit price has remained flat while the distribution and partnership assets have continued to grow, and indeed actually accelerate in growth.

Balance Sheet

Oneok Partners has a BBB/Baa2 investment grade credit rating, and an interest coverage ratio that is comfortably over 4.

The partnership compares fairly to its peers in terms of balance sheet strength.

Investment Thesis

Oneok Partners LP is an option if you want to diversify into a bit more energy assets outside of Texas. Many MLPs like Energy Transfer Partners (ETP) and Kinder Morgan Energy Partners (KMP) have a substantial asset density on the Texas Gulf Coast, and while Oneok does have Texan assets, the bulk of their assets are further north.

The central hub of Oneok assets is Oklahoma, and the partnership has natural gas and NGL pipelines in the central United States. In particular, the partnership has exposure to the Bakken Shale and Williston Basin in North Dakota, and the Niobrara Shale and Piceance Basin in the central U.S.

The company has $5 billion in growth projects underway or planned for the 2011-2015 period. This is significantly greater than the 2006-2010 period, and the partnership also claims a $2 billion backlog of unannounced natural gas and NGL infrastructure growth prospects with EBITDA multiples of 5-7. Half of the $5 billion is being invested into infrastructure related to the major Bakkin Shale and Williston Basin. The other half is going towards infrastructure projects in the central United States and the Gulf Coast.

The partnership has invested heavily into Natural Gas Liquids, which are expected according to partnership guidance to account for 61% of partnership operating income in 2013. The rest comes from Natural Gas gathering, processing, and pipelines.

The holder of the general partner, including the Incentive Distribution Rights (IDRs) of Oneok Partners LP (NYSE: OKS) is publicly traded as Oneok, Inc. (NYSE: OKE). OKE offers a substantially lower dividend yield, but faster dividend growth, and the investor can avoid the special tax aspects of MLPs by investing in OKE instead. OKE does have a premium valuation, however, because expected growth is substantial due to their general partner holding of OKS. This is similar to how Kinder Morgan Inc. (KMI) is the publicly traded general partner of Kinder Morgan Energy Partners (KMP). OKE, however, offers a moderately lower current dividend yield than KMI by about 1 yield percentage point.

Risks

The bulk of Oneok’s revenues are generated with stable fees, but there are areas of risk.

There is commodity price risk in the natural gas gathering and processing operations, which the partnership hedges against. There is also volume risk in the NGL operations, including from ethane rejection.

As an asset-heavy business that necessarily uses substantial debt, Oneok is vulnerable to substantial increases in interest rates.

Since Oneok is at a high level of distributions per unit, a considerably high percentage of their cash flow goes to the general partner (over 24% for 2012), which can eventually limit distribution growth to limited partners. Some partnerships can maintain distribution growth for very long stretches of time (Kinder Morgan, as an example), while others run into issues and have to halt distribution growth due to hefty IDR payments (Energy Transfer Partners, for example, had to have several IDR rights temporarily waived by the general partner for acquisitions to work).

Conclusion and Valuation

In conclusion, Oneok is a $12 billion diverse collection of natural gas and NGL assets throughout the central United States that offers investors a good combination of distribution yield and growth.

Using a 10% discount rate as the target rate of return for a two stage Dividend Discount Model estimation, the units have an estimated fair price of $66 if the partnership can grow the distribution at an average rate of just 7% over the next decade (which is conservative) and only 5% thereafter. Considering that management expects 8-12% distribution growth over the next three years, there is potentially a higher upside than that. Compared to the current price of approximately $56, I consider there to be an attractive margin of safety, and I view OKS to be one of the rarer attractively valued income investments in a market that otherwise seems to offer a limited number of attractively priced stocks for dividend growth investors.

Full Disclosure: As of this writing, I have no position in OKS, though it is on my watch list. I am long ETE and KMI.
You can see my dividend portfolio here.

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5 Dividend Stocks Trading at Appealing Valuations

April 17, 2013 By Matt Alden S. 10 Comments

The S&P 500 has had a strong upward rise over the last four years, including a sustained increase for the year-to-date in 2013. This pushed dividend yields lower throughout the market, meaning investors can’t buy as large of an income stream with their money.

Despite that, there have been some blue-chip stocks that have missed out on part of this increase. Here are five of them at that trade at valuations that are lower than the rest of the market.

Chevron Corporation (CVX)

Chevron’s stock performance over the past four years has been admirable, but most of the increase in price occurred in in the 2009-2011 period. The stock has been fairly flat and choppy since then, and currently offers a dividend yield of 3.14%, a five-year dividend growth rate of approximately 9%, and a dividend payout ratio of under 40%. The dividend is likely to increase this quarter.

Cost over-runs at the enormous $50+ billion Australian Gorgon LNG gas project, as well as continued litigation risk from their ceased Ecuadorian operations seem to be keeping the stock valuation in check.

Chevron has a pristine balance sheet, and gas output in 2015 from the Gorgon project should be a driver for growth.

Intel Corporation (INTC)

Intel’s #1 problem is that they have the dominant position in the softening PC market. As the world’s largest semiconductor producer, they use their immense capital resources to keep ahead of AMD with the tick-tock method, but ARM has strongly outperformed Intel in the proliferating market of mobile computing devices. This leaves Intel holding the bag in the PC market, but fortunately they do have strong positioning in the growing server market.

Another strike against the company is that their billions spent on acquisitions over the last several years doesn’t seem to be having a material benefit. I pointed out in my 2010 analysis of the company that their McAfee acquisition, at 40 times earnings, doesn’t seem particularly justifiable unless several bullish assumptions all take place.

The company offers a hefty dividend yield of 4.1%, the most recent increase was over 7% (which I believe is a more practical measure of dividend growth at this point compared to their much larger five-year dividend growth rate), and so with a P/E of only 10, the company doesn’t require almost any core growth to offer investors a shot at double-digit returns. The company likely isn’t looking at a whole lot of growth, but since most of their cash goes to investors in the form of dividends and share buybacks (which fuels EPS/dividend growth), Intel stock is still in a reasonably appealing position.

Oneok Partners LP (OKS)

NGL prices haven’t been helping Oneok, but over the long term, their $5 billion in projects seem to present a clear path to growth over the next several years. I was a bit wary of this MLP back in 2011 when the unit price was soaring, but after a flat unit price of 2012 and 2013 along with continued distribution growth, OKS is looking a bit more attractive compared to the market these days.

With a 5.21% distribution yield and 6% annualized distribution growth over the last five years, the partnership is a strong income producer. Pipelines represent consistent, wide-moat infrastructure investments that are perfect for dividend investors.

For those interested in MLPs, two other partnerships that I’m bullish on (and own) for yield and growth, are Kinder Morgan Inc. (KMI) (full analysis) and Energy Transfer Equity LP (ETE) (recent analysis).

Air Products and Chemicals (APD)

With 30 years of consecutive dividend growth, APD has had some consistency. This company is the largest supplier of hydrogen to companies in the world, and generally signs long-term contracts with customers. The focus recently has been on cost-cutting and selling of non-core business units, and so their revenue for 2012 wasn’t as strong as 2011.

The dividend yield is a decent 3.31%, the dividend growth rate over the last 5 years has averaged more than 10% per year, and the balance sheet is quite strong with an interest coverage ratio of 10.

BHP Billiton ADR (BBL, BHP)

BHP Billiton, headquartered in Australia, is the largest mining company in the world. Two ADRs (with equal economic and voting rights) trade on the NYSE: BBL and BHP. BBL trades at a discount to BHP and therefore offers a higher dividend yield.

The market has boomed in 2013 while the stock price of BHP Billiton has fallen. On April 17th alone, BBL fell over 4.5%. The reason is, commodity prices have fallen compared to 2011, and institutional investors have pulled back a bit. That leaves BBL ADR shares with a 4.2% dividend yield. The 2007-2012 period saw annualized dividend growth of nearly 19% per year in USD, although the 2012-2013 dividend change has so far been 3.6% in USD.

Looking at this from a long-term view rather than a short-term one, BHP Billiton offers a strong combination of yield and growth, has highly diversified mining operations, and it will continue to offer materials that the world needs. At a P/E ratio of 15, the company is on sale compared to the market.

A Snapshot of the Market

The Shiller P/E of the market is currently in the range of 22-23, which places it well above its historical average of under 17, but lower than it was prior to the latest recession. Using the Shiller P/E as the metric of choice, the market’s overall valuation has been fairly flat over the last three years as both earnings and stock prices have risen.

While these five investments don’t necessarily represent recommended picks, they may be good places to look. The most recent issue of the dividend newsletter included three other stock picks that seem to be trading at reasonable valuations. Even in this moderately highly valued market, values can still be found.

Good Dividend Growth Candidates Often Have:
-A sum of dividend yield and expected future EPS growth that sums to 10 or higher. Assuming a constant stock valuation over time, the sum of yield and EPS growth is the best estimate for long-term returns, which can be quantitatively demonstrated with methods like the Dividend Discount Model.

-A sturdy balance sheet with an interest coverage ratio of 8 or higher. A company with a balance sheet that’s stronger than its peers has flexibility to make opportunistic investments, to take advantage of low interest rates to temporarily increase their debt and buy back shares, and to weather major economic downturns. Of course, for asset-heavy businesses like utilities or MLPs, a much lower interest coverage ratio is allowed and expected, and the credit rating becomes a more relevant assessment.

-A specific plan for the future. Rather than operating quarter by quarter, successful companies plan years ahead. Look for companies that proudly explain their plans over the next five years or so, including specific projects or specific growth targets and explanations of how they’ll meet those targets. Blue-chip stocks that have mild to moderate growth and that spend much of their money on dividends and buybacks are often consistent enough for investors and managers to make fairly accurate predictions about EPS and dividend growth over a business cycle.

Full Disclosure: As of this writing, I am long CVX, ETE, and KMI.
You can see my dividend portfolio here.