Tag Archives: investing

Add Diversified Yield To Your Dividend Growth Portfolio With 7 Equity ETFs

Summary ETFs can fill critical gaps in a dividend investor’s portfolio, especially for smaller caps and international exposure. Most so-called dividend growth ETFs have average yields in the low 2% range (scarcely above the 2% yield for the S&P 500/SPY). Screening the universe of ETFs by my DGI and qualitative metrics resulted in 7 ETFs with yields from 3% to 7.5% (DIV, EWA, DBEF, FGD, FUTY, VOE, SCHD). These recommended ETFs represent a diversity of strategies and are sorted by yield with commentary as to the pros and cons of each. (click to enlarge) With so much uncertainty in the markets (valuations, Fed, ISIS, Europe, etc), a well-diversified base of investments (especially those that pay a dividend in good times and bad) is critical. However, many people don’t have the time or expertise to assemble their own diversified holdings (this is especially true for smaller cap or international exposure). While Seeking Alpha readers generally like to be stock pickers, ETFs can provide a critical tool to filling the gaps to gaining the exposure that an investor needs but in a package that is much more practical for many. For the dividend growth investor, ETFs are not without their dangers, especially when it comes to chasing yield. A few broad tips: Understand the fund’s holdings – regardless of the marketing materials, it’s the underlying holdings that drive performance. Keep fees low – fund fees subtract directly from any yield. Avoid closed end funds (CEFs) unless you are very confident in the manager and strategy. Understand fund distribution policies to know when and how the yield will be paid. Unfortunately, most of the current offerings for ‘dividend growth funds’ are hardly better than the S&P 500’s 2% yield (as measured by SPY). For example: Vanguard Dividend Appreciation Index Fund ETF (NYSEARCA: VIG ): 2.29% yield WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW ): 2.02% yield iShares Core Dividend Growth ETF (NYSEARCA: DGRO ): 2.25% yield As a dividend growth investor that expects yields in the 3%+ range, I have attempted to locate the ETFs that I feel are most appropriate for the DGI investor looking for a meatier yield. To identify the best ETFs out there, I have developed and applied a screening methodology which yielded 7 attractive tickers that I believe investors should consider for their portfolio. Background Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires. GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns. STRATEGY: ‘Enhanced’ dividend growth ((NYSE: DGI )) and growth at a reasonable price (GARP) hybrid strategy that focuses on a core of diversified holdings (ETFs and individual companies — my screening criteria are generally: P/E

Karoon Gas – Give Me $1.00, I’ll Give You $1.20 And 2 Significant Oil Discoveries

Summary Karoon is a depressed stock trading 20% below cash backing due to a low oil price, and several major shareholders exiting the stock. A major selloff has resulted in Karoon being significantly undervalued. Provides fantastic long term exposure to a rising oil price with 85 mmbbls of 2C reserves from 2 recent oil discoveries. Karoon Gas is currently in the process of buying back up to 10% of stock on issue. Overview Karoon Gas (ASX: KAR, OTCPK:KRNGF , OTC:KRNGY ) is an Australia-headquartered oil and gas company with exploration opportunities focused in North-West Australia, Peru, and Brazil. With a set of great oil prospects, and no major gas prospects, they should consider changing their name to Karoon Oil. Of all the sell-offs in the oil and gas sector, this one has intrigued me the most. On a market cap of AU$450 (US$319) Million at the current share price, they sit on cash of AU$550 (US$390) Million. This cash came from their recent sale of their Browse Basin permits to Origin for the following: An upfront payment of US$600 Million (Received) A deferred cash payment of US$75 Million payable on FID A deferred cash payment of US$75 Million payable on first production A deferred cash payment of US$5 Million for every 100 BCFe of independently certified 2P reserves exceeding 3.25 TCFe Reimbursement of the costs associated with drilling its 40% held Pharos-1 well. (Received) So why are they trading so low? Apart from the oil price, I think it is primarily due to these 3 factors: Several major investors have exited the stock over the last year. IOOF Holdings, Future Fund Board of Guardians, and Paradise Investment Management all ceased to be substantial holders, selling out a major portion of the stock. The company has some corporate governance issues. There are concerns that family members of the chairman Bob Hosking are appointed on key positions at the company, as pointed out by the activist hedge fund manager Pegasus. The majority of shareholders may or may not agree with this, and I myself have questions regarding it, but none of the three candidates that Pegasus put up for election were voted in. A lot of Australian companies have corporate governance issues, and activist investment is much lower than in the US. Like any market risk, this is a risk that must be weighed against the benefits. Speculators pushed the price up to obscene levels, and then pushed the price back down in fear Despite these issues, Karoon has a great track record of increasing the long-term value of shareholders when you normalize for the boom and bust cycle. Past speculation during the boom had driven the share price as high as $12.10 – it currently sits at $1.81 at the time of writing. Karoon is, at present, up over 950% from 2004 and has managed to unlock plenty of cash for the exploration and appraisal of their major Brazil operation in the Santos Basin. (click to enlarge) ( Google Finance ) Offshore Brazil (Two Significant Oil Discoveries) The map below shows the Kangaroo and Echidna resource as well as the Bilby oil discovery dating back to 2014. (click to enlarge) ( Source – Karoon Annual Report 2015) Kangaroo went through further appraisal in 2014, production testing at rates that signaled a single vertical well could flow 6,000-8,000 bopd from a net pay of 135 meters ( Source ). It needs to be noted that Kangaroo 2 also had two side tracks as part of the appraisal that indicate that this may be a complex reservoir which would enhance the cost and difficulty of production. Despite the complexity, it remains a significant find that has a great chance of commerciality. Echidna followed up the Kangaroo discovery with a 103 meter net oil column and a facility constrained flow test 4650 bopd, further enhancing the chance of a commercial discovery for the region. (click to enlarge) ( Source ) From an operational perspective , Karoon is looking at a variety of options for producing the Echidna and Kangaroo discoveries that are less than 50km apart. The lowest capital cost method includes a Floating Production Storage and Offloading Vessel (FPSO) producing roughly 20,000 barrels of oil per day (bopd), then expanding that to 50,000 – 70,000 bopd once the field has been proven. Discussions for the development of Kangaroo have also involved Petrobras for an integrated oil hub in the region, which could be economic as low as $43/bbl according to Citigroup ( Source ). The same article also denotes the drop in costs which could make the project economic at even lower prices “Because it’s a distressed market now worldwide, we are looking at redeployed assets, for example, a redeployed FPSO [floating production storage and offloading vessel]. The labor market is getting cheaper, the labor is getting cheaper; we see there’s a lot of cost savings for us.” One of the primary reasons for investing in Karoon is that there is almost no value attributed to the Kangaroo and Echidna discoveries. After writing off Karoon’s AU$105 (US$76) million tax liability against its cash reserves, the 2C reserves equate to a value of AU$0.41 (US$0.29) /bbl. However, investors must keep in mind that production isn’t likely oncoming until 2018 at the earliest while Karoon moves through engineering and approvals, and this may hold the share price back for the medium term. Offshore Peru and Offshore Australia After all this, Karoon still has more to offer. A possibility of more major discoveries exists offshore Peru and Australia. Nearly 27000 square kilometers of permits sit on the acreage outside of Brazil, with significant long-term potential for Karoon. They have a habit of bringing in joint venture partners to free carry them through the initial drilling stages to minimize the capital outlay from Karoon. These are likely to sit for several years during the current supply glut, however, they provide some great upside for an oil recovery. (click to enlarge) (Karoon Annual Report 2015) Share Buyback One of my favorite things to see a company do is an all-cash share buyback – specifically when their share price is trading at an all-time low. Karoon has bought back 9.4 million shares at $3.27 over the last 12 months as well as announcing plans to buy back a further 25 million shares. That comprises up to 10% of the company’s ordinary shares on issue and will further expose investors to the upside of an oil price recovery in 2-3 years. On top of all that, Karoon has a significant amount of built up exploration expense of $AU485 Million that can be written off against future cash flows. Risks and Uncertainties Karoon is in the early stages of several significant oil discoveries. There are plenty of issues that need to be sorted out, and a significant amount of cash that needs to be spent to bring these oil fields into production. Production is not likely to begin for several years, and the oil price currently sits at levels that would make these projects uneconomic. Most investors would agree that the current supply glut will not extend out to 2018, however, it is possible and poses a significant risk as Karoon spends more on the appraisal process. Karoon also has no source of cash flow, and Origins deferred payments are unlikely in the current environment. Conclusion Having several major investors exit the stock over the last 18 months has left the share price in the doldrums. While Citigroup has calculated a combined development for Kangaroo and Echidna would be economic as low as $43, I would not expect the project to go ahead unless oil moved well into the 60’s – unless the resource is found to be much larger than current estimates. There is plenty of unrealized value in this stock with hardly any value attributed to the Kangaroo and Echidna discoveries, and no value to the significant amount of exploration expense that Karoon can write off against future cash flow. Karoon’s cash reserves can be used to develop these discoveries and increase shareholder value at the same time the share buyback is increasing investors oil exposure per share. As for the remaining Australian/Peruvian blocks, Karoon will likely delay drilling as much as possible to preserve cash for the Kangaroo and Echidna discoveries. Overall, there is a significant amount of risk around Karoon going forward. They are in the early stages of appraising these reservoirs while the oil price has crashed. However, a crashed oil price means cheaper drilling, completions, procurement, and construction. Karoon would not be likely to produce oil until 2018 at the earliest, and there is plenty of time for the oil price to recover in that time period. As the Financial Review quoted from an RBC Capital Markets report “Whilst high risk, this is a freebie and success would open a significant new oil play.” I love Karoon as an asymmetric bet on an oil recovery, and I can confidently see an upside of well over 100% in the next 3-5 years in the event that the oil price recovers. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

SPHD: A Monthly Dividend ETF With A 3.5% Yield That Is Growing Stronger

Summary SPHD offers an excellent dividend yield of 3.5% with monthly payments. The ETF has a moderate expense ratio. The sector allocations look great and the volatility over the last few years has been lower than the domestic equity market. The PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a very solid ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. As you’ll see in the article, I find the sector allocation to be a bigger selling point than the individual holdings. Expenses The expense ratio is a .30%. This is fairly mediocre for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 3.50%. For the investor that wants a very strong dividend yield to support them in retirement, this should certainly qualify. Investors can create a stronger yield by selecting individual companies, but they are creating a high yield portfolio that is exposed to substantial risk of dividend cuts when they allocate aggressively to companies that are yielding materially higher than this portfolio. There are two other things to like about the dividend here. One is that the dividend is paid out on a monthly basis which many investors appreciate because it is easier for them to plan around. The other is that the 3.5% dividend yield is based on trailing dividends rather than forward dividends and the dividends have been moving slightly higher over the last year. The dividend went from around 9 and a half cents per month to over 10 cents per month. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with medium weights is one area where I tend to feel conflicted. Investors won’t see the Verizon in the chart, but I rarely find ETFs that only hold one. When I checked the rest of the holdings I found Verizon was represented with 2.22% of the portfolio. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Since the allocations are less than 5% of the portfolio combined, I think the representation here is pretty reasonable. I also see Realty Income Corp (NYSE: O ) as an easy choice for investors looking for solid growth in income. The triple net lease REIT has an excellent history of raising dividends. They pay their dividends monthly and have raised the dividend 81 times already. They have done an incredible job of executing their investment strategy and it is simpler than it seems. The REIT enters into net lease operations where the tenant is paying most of the operating costs. Realty Income Corporation is acting as an alternative format of financing for their tenant. Their strategy is so successful that they have been acquiring over a billion dollars in real estate each of the last few years. They already acquired almost a billion dollars in real estate in 2015. Sectors Heavy allocation to utilities makes sense for an equity fund seeking lower total volatility levels. The utility companies have a tendency to be partially correlated to equity and partially correlated to bonds which creates a method for a pure equity ETF to reduce volatility by incorporating some exposure that is very similar to bonds. For investors with a diversified portfolio, that means this fund may not get as large of a benefit from being combined with treasuries and other long duration bonds as a total market portfolio would get. Regardless, with investors needing stronger yields in retirement and often going light on bonds in favor of equity, this would be a more rational allocation model than simply going with full market exposure. The allocation to financials provides the shareholders with exposure to REITs that would fall with utilities when rates go up, but it also gives them access to banks that would benefit from higher rates paid on excess reserves. The combination works fairly well to create a portfolio with lower volatility. The heavy allocations to consumer staples also makes sense in that context since consumer staples tend to be a solid sector for taking smaller losses during a recession. I was a little curious about their decision to put 10% into industrials, but when I looked at the individual holdings for the sector it made sense. While General Electric (NYSE: GE ) is seeing their share prices just getting back to where they before the crash, their still offer a sold 3% yield. Volatility Measured since October 2012, this fund has demonstrated annualized volatility of 10.9% compared to 12.6% for the S&P 500. The beta on the fund has been a mere .75. While the fund has not kept up with the S&P 500, it is a very attractive allocation strategy with the market at fairly high valuation levels. For the investor that would like to reduce their risk and is willing to accept a lower long term projected return, this fund fits the bill. If market prices had fallen by 40%, I would try to look at more aggressive allocations. When prices still seem high, I prefer using defensive allocations and this fund offers a great deal of them. Conclusion All around this looks like a solid fund. The only thing I can find not to be excited about is the expense ratio. Even there, the ratio isn’t terrible. It is simply higher than what I am used to paying as I favor the Vanguard and Schwab ETFs. If this fund got larger and dropped the expense ratio, it would be absolutely excellent. I think that might be a viable option for the fund’s sponsor as well since the strong yield and monthly payment with a low expense ratio would create enough demand to warrant significantly more shares of this ETF being created.