Many income investors — perhaps the person in the cubicle or coffee shop booth next to you — will soon do an unwitting imitation of Linus, the “Peanuts” character who waits in vain for the…
Many income investors — perhaps the person in the cubicle or coffee shop booth next to you — will soon do an unwitting imitation of Linus, the “Peanuts” character who waits in vain for the Great Pumpkin to deliver the goodies come October.
But who says you’re too old to trick or treat, as in using sound investment tricks to pull down stock and dividend treats? For that you don’t need a Great Pumpkin, just great advice. Though a cruise ship might not hurt, either.
“Even the bears we talk with agree that longer term, Royal Caribbean Cruises (ticker: RCL) is likely undervalued,” says Richard Grasfeder, portfolio manager at Boston Private Wealth. Of course, bears will be bears, and Grasfeder says they may sit out the next year on RCL “due to concerns that supply will overwhelm demand.”
But while the bears hibernate, you don’t have to wait. Royal Caribbean is one of three dividend-yielding stocks that experts recommend for the month of October. Here’s a closer look.
Royal Caribbean Cruises
Looked at from a share price perspective, Miami-based RCL has enjoyed a pretty smooth cruise over the last 12 months, up close to 11 percent. And earlier this month, it increased its quarterly dividend to 70 cents per share. Meanwhile, the stock has more than tripled over the last five years, trading at $131 per share.
And yet, it’s a much less glamorous place than the Bahamas of the Amalfi Coast that determines the fate of RCL. As in: shipyards. When yards are full, it gets harder to bring older ships in for overhaul, though it can also mean that new ships will be coming on line — a tricky balance that effects supply and demand of open spots for vacationers.
Looking to 2020, Grasfeder believes that emissions restrictions “will likely make at least a small number of cruise ships in the industry unprofitable to continue running. Hence, we believe supply will tighten more than anticipated; ship retirements are typically announced only months in advance.”
What’s more, consumers are increasingly getting more for their money on the sea as opposed to with land-based vacations, “providing ample ability for cruise lines to continue raising price and increasing yield and profitability.”
While that would make seats on the next boat out of town more expensive, it could also fund a nice little trans-global jaunt if you play your shares and dividends right. And there’s every reason to stock up on tanning butter, as dividend payouts have increased close to eight fold since 2000.
Ares Management ( ARES), a global alternative asset manager based in Los Angeles, recently undertook a change in its corporate structure that could benefit shareholders.
“Ares recently converted from a limited partnership to a C-corp,” says Benjamin Halliburton, chief investment officer at Tradition Capital Management in Summit, New Jersey. “While this increases corporate taxes, it makes the company available to a broader investor group as it simplifies owners’ tax filings.”
Currently, ARES pays out a $1.12 per share annual dividend, which amounts to a healthy yield of 5.38 percent. While quarterly payment amounts were all over the map in 2017 — ranging from 13 cents to 41 cents — the newly reorganized company occupies a unique space in its sector that bodes well for its future.
“The company manages portfolios of loans to medium and small businesses in the business development corporation space, where it has launched several funds and BDCs,” Halliburton says. “The company also managers private equity and real estate.”
Looking ahead, “We feel this company’s estimated organic growth of 6 to 7 percent, coupled with a 5 percent dividend yield make the company attractive for investment,” Halliburton says. “We think the stock will trade in the high 20s in 2019.”
If that comes to pass, then ARES investors could be looking at a share price jump in the 20 percent range, as the stock currently trades at $23 per share.
Summit Midstream Partners
The dividend story has been positive for Summit Midstream Partners ( SMLP), an energy company headquartered in north suburban Houston and with offices in Denver and Atlanta. Summit Midstream operates natural gas, crude oil and “produced water gathering systems,” which collect water that’s a byproduct of removing oil and gas from wells.
Summit operates in what it calls “five unconventional resource basins,” which are primarily shale formations. These include the Piceance Basin in Colorado and Utah to the Fort Worth Basin in Texas, which includes the high-profile Barnett Shale formation. As for the dividend gusher, consider this: Since mid-2013, SMLP quarterly payouts have leaped from 43.5 to 57.5 cents per share — up a full third.
Yet Wall Street analysts sit firmly on the fence, with four rating SMLP a “hold” and one each calling it a “strong buy” and a “sell.” That comes due in part to turbulence that has hit the energy sector over the last few years.
“SMLP had been oversold due to flat revenues and earnings before interest, taxes, depreciation and amortization [EBITDA], and declining distributable cash flow,” says Christopher Ma, director of the George Investments Institute at Stetson University in DeLand, Florida.
That said, “It has done better over the past few months, with a total return of 15.20 percent,” Ma says. Stretch that back to the trough SMLP hit in early April, and the stock is up more than 21 percent. “The yield is 13.49 percent and management has hit its 2018 EBITDA and coverage guidance through the second quarter of 2018.”
After a rosy earnings call last month, expect SMLP’s next report to offer clues as to how much the company’s short-term recovery will stick. Ma believes there’s reason to expect more good news from SMLP in the months and years ahead.
“SMLP has several growth projects, which management says will start coming on board in the second half of 2018 and the first half of 2019,” Ma says.
If those turn a profit, it would mean welcome news for SMLP shareholders — because when you think about it, there’s no better way for investors to greet October than with a smile wider than a jack-o’-lantern.