Thinking Dividends

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

Several times in this blog I have stressed how important it is to focus on how you, as a minority passive investor, get your cash back. You should think of stocks as actual cash for cash investments (if you make a cash investment, you should receive a stream of cash payments). Unfortunately, most "investors" just buy speculatively. This means people buy because they think others are buying and, eventually, prices are going to rise. That behavior has been the logic driving most booms and busts in financial history. John Kenneth Galbraith explains this very clearly in his book A Short History Of Financial Euphoria. He goes from the 17th century tulip euphoria in the Netherlands to many other historical episodes when people bought goods on the sole basis they thought those assets were going to increase in price. The main lesson is: Focus on operating cash flows and how you can get your hands on them. The magic words, when investing in equities as a passive investor, should be "Sustainable Cash Dividends." Here I will show a small portfolio I am assembling for a friend who asked me to build his equity portfolio. All four stocks here have, from my point of view, high and sustainable cash dividend yields.

15% Philip Morris (NYSE: PM), the international side of the business that was spun off from Altria, has 16% of the international cigarette market outside of the US. The company is also the main brand owner across high growth Emerging Markets within Middle East, Africa and Asia. With EBITDA margins above 47%, and trading at 2013 11.5 EV/EBITDA, the company pays a $0.85 quarterly dividend. Selling for $93, it pays at 3.6% cash dividend yield.

20% El Paso Pipeline Partners (NYSE: EPB), the master limited partnership formed to own and operate natural gas transportation pipelines and storage assets pays a wonderful 5.9% distribution yield. The company generates around 90% of its revenues from fee based long term capacity contracts. This makes EPB a predictable cash flow machine and a very secure dividend provider. Given its current 2013 11.7 EV/EBITDA valuation, I don’t think there is much upside potential ahead. But if you are looking for dividends, then El Paso is a great way to get them.

30% Banco Santander (NYSE: SAN). I own shares of Banco Santander and I am sure that, as I have written in many articles, the bank will sustain its $0.195 quarterly dividend payment. This cash dividend, at the current $7.6 price, represents a 10.4% dividend yield. I started buying shares at $8.22 and I continued doing so until this day. Although the payout ratio seems unsustainable at 116% for 2013, I think most Spanish property impairments were already absorbed by the bank's balance sheet and numbers are going to ameliorate fast from their current position. Matter of fact, I expect the bank to have a much more sustainable 96% payout ratio by 2014. Mr. Botin (Santander's Chairman) has supported the idea that the bank will keep its dividend and I believe his view is the correct one. The bank seems correctly capitalized with a core tier 1 capital ratio of 10.3% and I am sure earnings will support Basel III regulations by the end of 2014.

35% Eni (NYSE: E) is not yet part of my portfolio. I intend to add it as soon as it goes below $45 per share. As I said in my previous post about Eni the company is growing its upstream, increasing the amount of its exploratory sources out of Libya (although it will constitute a major exploratory region for the company) and consolidating its businesses. If you buy Eni at $45 you will be buying a company set to grow its EBITDA by 5% year over year and paying an always growing 6.3% cash dividend yield.

Even if this portfolio is expected to have a very high degree of volatility, I don’t think it provides a huge amount of long term risk unless you chose to leverage it. I define risk in Buffett's terms: The probability of permanent capital loss. The expected non leverage cash yield that you should get from the portfolio described above is 7%. If you want to build it you can do it and I am sure it will bring good results. That said, I strongly warn against putting any leverage in it. It could kill you fast. I hope I am right. Time shall say!


martinzaldua owns Banco Santander. The Motley Fool recommends El Paso Pipeline Partners LP. The Motley Fool owns shares of Philip Morris International. 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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