3 Sweet Spots for Income Investors

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Income investors usually invest in those dividend stocks that have a mature business model and a strong balance sheet. My idea of finding a dividend stock is just an extension to it, where I also look for a solid growth opportunity in the stock price. Scouring the investing landscape, I have picked up three such stocks that maintain a higher dividend yield as compared to S&P 500's dividend yield, and their future cash flows look strong. Additionally, their stock price growth in the last 12 months was more than or equal to the S&P 500's growth of 11%. Let’s discuss them in detail

Name of Company

Trailing Annual Dividend Yield

Growth in stock price in last year(~)

Fidelity National Information Services Incorporated (NYSE: FIS)

2.20%

19%

Oaktree Capital Group LLC (NYSE: OAK)

5.90%

15%

Kinder Morgan Incorporated (NYSE: KMI)

3.80%

11%

Source: Yahoo Finance

Fidelity

For the fourth quarter of 2012, Fidelity's total revenue was in-line with the market expectations. The company's EPS for the quarter was just a cent short of the consensus estimate of $0.69. Additionally, it signed 30 new processing agreements in 2012, half of them in 4Q12. Of these contracts, around 40% were of more than $25 million annually. The cross sale initiative was in focus because of its increased growth in the company's top 25 clients. The new deals included a major client, Webster Bank, which will expand the company's consultancy services. This deal will also increase the company's revenue from CapCo segment by 50% in the next three years.

For 2013, Fidelity expects to grow through tuck-in acquisitions. The guidance for capex in FY13 came around $330 million. The company is already making moves to expand its horizons. It recently announced the acquisition of mFoundry for ~$120 million. mFoundry is well known for its payment and banking solutions on mobile. Its clientele of around 850 different organizations includes big names like Bank of America, Starbucks, Zions Bank and many top financial institutions. The acquisition is in line with the company's vision of investing in innovative products like PayNet, mobile banking, P2P payments where the competition is low and opportunities are higher.

Fidelity has ~80% recurring revenue and has increased the return to shareholders by 50% last year. I am optimistic about this dividend stock and its future ability to generate and distribute cash. I'll recommend a Buy.

Oaktree Capital Group

Last quarter of 2012 saw a record distribution of close-ended funds leading to a good incentive income of $210 million, up from last quarter’s $59 million. In 2012 the fund distributed $2.94/unit to unit-holders. For 4Q12 the Fund had an adjusted net income of $1.36 beating the consensus estimate of $0.92. All-in-all the fund’s performance as a stock was better than expected. In the short-term, I see an upside in the revenue of Oaktree Capital because of its Opportunities Fund VIIb, Oaktree's largest fund. Oaktree announced that it will distribute half of the accrued investment (~$700 million) from VIIb to its unit-holders in 2013. The distribution of Opps VIIb fund results in incentive income of ~$195 million in 2013 for Oaktree.

The fund’s long-term growth in value for shareholders should be driven by fundraising and platform build-out. In the last quarter, the company raised ~$2.3 billion from close-ended and open-ended funds bringing the yearly total to ~$11 billion. In 2013 it is expected that the company will raise around $10 billion through Opps Fund IX, Principal Opps fund VI, etc. Looking at the company's history, I am optimistic that it should be able to raise the required amount.

Oaktree Capital has been a performer for its unit-holders and shareholders. The strong incentive income and fund-raising ability makes the current price of this stock a good entry point.

Kinder Morgan

For 4Q12 the company declared dividend of $0.37 per share which was mostly in-line with the consensus estimates. The expected dividend for 2013 comes around $1.57 per share.  For the next few years, I see the Kinder Complex as a regular source of fee-based income and growth for investors of the company. The Complex includes a collection of midstream assets which connect many of the resource basins and demand centers across North America. The complex provides an opportunity of $12 billion for the upcoming five years in form of natural gas pipelines, terminals, CO2 handling, and Canadian oil pipelines. And, the company has a well hedged position which mitigates the downside side for long-term. Only 20% of its earning is subject to commodity prices.

One of the recent events related to the company was Kinder Morgan Energy Partners L.P. (NYSE: KMP) acquiring Copano Energy LLC (NASDAQ: CPNO). Kinder Morgan Energy, Kinder Morgan’s sister concern, acquired Copano with 100% unit for unit exchange. For every unit of Copano, Kinder is offering 0.4563 unit of its own. The value of the transaction is ~$5 billion. Because of the above deal Kinder Morgan Incorporated is giving up its incremental incentive distribution rights (IDR) towards Morgan Energy over next several years. But after netting the IDR effect, Kinder Morgan Incorporated expects accretive cash availability of $25 million in 2014 and $70 million in 2016. This should support the expected higher dividend growth and the investors will receive this incremental cash without deploying any new capital.

The future cash generation ability of the company is intact and despite the fact it will give up IDR for the deal it should still achieve a growth in its dividend payouts.   

Conclusion

For all these dividend stocks, ability to generate cash for distribution in future seems sound and the future growth drivers are strong. Fidelity National’s new long-term deals including the one with Webster Bank and other new acquisitions should provide the stock an upside. Oaktree Capital’s income generation from distribution of Opps VIIb fund gives the stock a short-term boost and the long-term position of the company seems strong due to the fundraising in 2013. And, Kinder Complex and accretive cash generation post the Copano deal should help Kinder Morgan Incorporated achieve the goal of high dividend growth in the future. 


madhudube has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan and Oaktree Capital. 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!

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