Throughout the weekend, I got flooded with emails from Income & Prosperity readers regarding their dividend stocks. It was great to hear from so many readers, and today I’ll answer several of your messages.
Several readers wrote in with investment questions about Master Limited Partnerships or MLPs.
E.D. Davidson wrote: “I’d like to hear your evaluation and opinion in two areas. First – what do you think about MLP’s as an investment? Strengths? Shortcomings? Second- I’d like your thoughts on the natural gas industry and fracking.” And Ed Rocca wrote “I am long on MLPs. What is your take on these?”
For readers who are unfamiliar with MLPs, these are companies that operate oil and gas pipelines, refineries and processing facilities. Unlike big oil companies like ExxonMobil and Chevron, these companies legally avoid federal income tax. As a result, they’re able to reward their shareholders with bigger distributions (note: distributions are essentially the same thing as dividends).
I’m bullish on MLPs, and think they’re the single best way for income investors to profit from the U.S. energy boom. The JP Morgan Alerian MLP Index (AMJ) is the biggest ETF with nearly $6 billion in assets. It’s delivered a 16% total return in 2013, including appreciation and dividends.
MLPs have done well over the past few years. Looking forward to 2014, the better performers should be those that are growing their distributions. I recommend focusing more on distribution growth than current yield. The MLPs that are investing in themselves and growing their businesses will perform much better over the next few years.
Three to look at are Access Midstream Partners (NYSE: ACMP) with a 3.8% yield, MarkWest Energy Partners (NYSE: MWE) with a 4.9% yield, and Targa Resources Partners (NYSE: NGLS) with a 5.6% yield.
Switching gears, two top holdings among Income & Prosperity readers are the big U.S. automakers: Ford (NYSE: F) and General Motors (NYSE: GM).
Gary McLain wrote “I have two stocks that I am having concerns about. They haven’t performed like I thought they should. I greatly appreciate your insight. Trying to build my retirement income. [One of them is] Ford.”
Gary – I’m not sure when you bought Ford. Shares have been flat over the past six months or so. But over the last year or two, the stock is posting decent gains.
Income investors have favored Ford, since it pays a 2.4% dividend (the quarterly dividend doubled to 10 cents a share in January). Meanwhile, General Motors hasn’t paid a dividend since 2008.
Both of the big automakers have done well this year: Ford is up 27% and GM has jumped 38%. Even after those big gains, the stocks are reasonably priced at 9 times earnings.
If I were going to buy only one of these stocks, my pick would be General Motors. There are two reasons I prefer the stock. First, the U.S. government should sell its investment by the end of this year. That would allow the company to initiate a dividend or a share buyback program in 2014. Second, the company is expected to grow both revenues and EPS faster than Ford.
With GM growing at a decent clip, shareholder-friendly activities including a buyback or dividend could attract more investors to the stock. With the stock trading at a 40% discount to the S&P 500, there looks to be good upside potential.
I know I was only able to answer a few reader emails in today’s issue. But I have a big stack of your emails on my desk, and will be addressing your investment questions in upcoming reader mailbag issues later this month.
If you have investment questions about a sector or specific stocks, please email me. Note: I’m much more likely to respond to messages that provide background information and your specific questions about an investment. You can reach me at firstname.lastname@example.org
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