Jim Cramer: Invest Like the Ridiculously Rich in High-Yielding Stocks
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two weeks ago, when commenting on both the newest Powerball millionaire ($590 million, still unclaimed as of this writing) and David Karp’s sale of Tumblr to Yahoo!, Jim Cramer noted that when one has that kind of money, investment goals can be substantially different than those for ordinary people.
People who are that rich don’t need to invest for growth – merely for preservation. They don’t need to take any sort of risk at all; they only have to make sure that their money is not eroded away by inflation.
And Cramer’s recommendations for protecting your assets from inflation? High-end real estate, art, and gold, preferably in the form of bars.
He says he would not consider any fixed-income vehicles at this point in time, noting that their yields are “dangerously” low, and declaring that any entrance into long-term fixed-income vehicles now would be “a huge mistake.”
So what does that leave for the rest of us? We can’t afford to invest in art or high-end real estate, and we might not be interested in investing exclusively in gold. Where else should we look?
Cramer says take some risk with stocks. "I would buy higher yielding master limited partnerships and higher yielding real estate investment trusts and some of the better stocks of companies that are serial raisers of dividends," he said.
So, since I am interested in exactly these sorts of things, I am today examining his recommendations, based on my own system, and determining whether or not I believe they are worth buying at this point.
In my examination, I review companies based on seven different criteria: yield, number of years paying and raising dividends, five-year Dividend Growth Rate (DGR), five-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE, and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the current valuation of the company.
I constructed a rating system that awards points for each of the previously named criteria. A “perfect” score would be 28 points, with four points awarded in all seven categories. I used this system to select 10 companies for what I call my Perfect Dividend Portfolio.
Kinder Morgan Energy Partners, a popular MLP
The first company is Kinder Morgan Energy Partners (NYSE: KMP), an oil and gas pipeline Master Limited Partnership. Kinder Morgan is one of the most popular MLPs and I have examined it many times.
An MLP is great in an income portfolio because it pays out a large part of its income as distributions to its partners, i.e. shareholders. These distributions are then subject to a very favorable tax treatment, which makes investments in these types of partnerships extremely attractive.
Kinder Morgan is currently trading at approximately $85 and yields 6.20%. It has paid and raised dividends consistently for 16 years, its five-year DGR is 7.1%, and the total twelve-month return is 14.1%.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual earnings growth estimate (7.1%) and the company’s PE (34.9).
At first glance, Kinder Morgan's dividend-payout ratio seems unreasonably high, at 425%. Of course, MLPs are different from other dividend-paying companies, in that they tend to pay out more than their earnings. This is because of the way these companies calculate depreciation and depletion expenses, and it also contributes to the way their distributions are considered for tax purposes.
In short, MLPs tend to pay out far more in distributions that one would think possible, and these distributions also tend to be mostly tax-deferred, making them an excellent addition to an income portfolio.
Kinder Morgan Energy partners scores a 13 on my ratings system. Yes, its monthly distribution is attractive, and this company tends to be recommended when people are talking about MLPs, but I’ve looked at it five or six times, and it never scores well. There are better MLPs.
A better MLP in my opinion
And, not coincidentally, the next company on Cramer's list is one of them. Enterprise Products Partners (NYSE: EPD), is another oil and gas pipeline Master Limited Partnership, and this one has been in my portfolio since December.
I recently reviewed Enterprise Products Partners and two other MLPS in Do You Want These 3 “Superior” MLPS for your Dividend Portfolio?
Bottom line, Enterprise Products Partners is currently trading at approximately $61 and yields 4.30%. This is a significant change from when I bought; it was trading at $50 and yielding 5.30% at that time. However, despite the share price increase and commensurate dividend decrease, it still has excellent dividend metrics and I am still delighted that it is in my portfolio.
Another MLP to consider?
The third company on Cramer’s list is Williams Partners (NYSE: WPZ), a smaller MLP that I have not examined in the past.
Williams Partners is currently trading at approximately $52 and yields 6.60%. It has paid and raised dividends consistently for seven years, its five-year DGR is 7.9%, and the total twelve-month return is less than 1%.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual growth estimate (11.9%) and the company’s PE (26.6).
Williams Partners scores an 11 on my ratings system. Great yield and earnings growth estimate, but in January, I chose a different MLP for my portfolio – Sunoco Logistics Partners. Take a look at it instead, if you want to add another MLP.
No REITs in my portfolio
The last company that Cramer recommended that I want to examine is a REIT, Healthcare Trust of America (NYSE: HTA). I’ll state right upfront that I don’t have any REITs in my portfolio, and that every one that I have examined has failed to meet my criteria. But, to be fair, I’ll look at this one now.
Healthcare Trust launched in June, 2012, so immediately, I dislike it for its lack of history. I only choose companies that have paid and raised dividends for at least ten years.
It is currently trading at approximately $11.50 and yields 4.80%. Its share price is up 16% from its launch, but down significantly from its high of $13.34, which was reached early in May; the price has been falling since the 1Q13 earnings release.
I can’t score Healthcare Trust using my system, because it is too new. Jim Cramer and TheStreet.com have been big fans lately of the REIT, with lots of articles and an interview with the CEO, Scott D. Peters.
However, I’m not willing to trust my money to a brand-new REIT. Since the other REITs I have examined have always failed to meet my standards, I'm not willing to make an exception for this one.
Ten better suggestions
Take a look at the ten companies in my Perfect Dividend Portfolio. They might not be yielding 6%, like some of the ones on Cramer’s list, but they are rock-solid and committed to not only paying their dividends, but also to raising them at excellent annual growth rates. And they have the other metrics to back up their dividend strategies.
We don’t all have $590 million to keep us in jewels and furs for the rest of our lives. We have to invest in the real world. Make smart decisions.
The growing production of natural gas from hydraulic fracturing and horizontal drilling is flooding the North American market and resulting in record-low prices for natural gas. Enterprise Products Partners, with its superior integrated asset base, can profit from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To help investors decide whether Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.
Karin Hernandez is long Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!