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Just Pay Me

By Neil J. George on June 27, 2007

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“Do as we say, not as we do” seems to be the way of the leading companies in the US stock market. Over and over again we’re told—by the executives of the big companies making up the bulk of the S&P 500, the Dow Jones Industrials and the Nasdaq Composite—how swell business is. They get out in the media with their grandiose discussions of how great their earnings per share numbers were and how they did a splendid job delivering to shareholders for yet another quarter.

But when it comes down to seeing our cut of all of that great success, it always seems to get shoved under the rug. Management will urge us not to worry about getting paid now because our reward will come later, if we just stay quiet and keep buying and holding their shares.

Faith-based investing has never cut it with us, nor should it with you. Nor does it seem to be the case with the leadership of the big public companies. The real measure of success is getting a check, and that’s exactly what management does for itself.

According to a leading corporate executive compensation advisory firm, the average check size for CEOs of the S&P 500 last year was around 15 million bucks. There are some nice perks as part of those biggie pay packages, but the bulk is pure cash on the barrelhead.

And those checks keep getting bigger and bigger; last year’s average compensation package soared by 9.4 percent over the prior year, on top of a near 16 percent pay raise the year before that.

And what do investors’ pay packages look like? If you take a gander at the graph “Chunks v. Crumbs,” you’ll see the crumbs. The average payday—in the form of dividends—from the S&P 500 is running at a paltry 1.8 percent. Some companies are paying a smidge more (those in the Dow Jones pay 2.1 percent), but plenty of others mirror the long list of Nasdaq Composite companies paying an average of only 0.7 percent in dividends.



Dividends Aren’t For Dorks

While CEOs like to get their big checks, their cohorts on Wall Street keep doing their job to dissuade investors from looking for theirs. How many times have you read that income investing is for losers—you know, little old ladies just scraping by on pensions?

If you’re a real investor, it’s all about letting management keep the cash; they know best when it comes to providing real investment performance.

“Hold-and-hope” ranks with other grand bits of strategy like the greater fool theory, according to which we’re supposed to keep buying on the faith that somebody after us will bid our lousy stocks’ prices up.

The results for investors following these game plans haven’t been all that great. The past year has presented some reprieve for S&P 500 buyers, but even a 12-month upward trend has only made folks barely whole after seven fallow years for the general market. Even a savings account would have paid better in that time frame.

The Cash Cows, the foundation of the Growth Portfolio, average an investor pay package exceeding 7.2 percent per year. We have a much better chance of making money than most of the S&P 500 guys. We’ve never met a man gone broke with regular checks coming in.

But it’s taken a bit more work to find the substantial, consistent dividends. Many of our big payers aren’t among Wall Street’s usual suspects nor are they stocks alone; a subcollection of the Cash Cows is made up of some of the best of the closed-end bond investment companies.

We’ve also recommended several different kinds of public-share structures, including publicly traded partnerships (PTPs) and Canadian income and royalty trusts. Underlying our stocks, no matter the form, are solid businesses. But they’ve given newcomers some pause because they differ from what many have been investing in for most of their lives.

We continue to encourage you to buy our best picks from these markets. At the same time, there are plenty of plain vanilla companies out there that keep doing their jobs: cutting checks to investors. And we own them inside the Growth and Income portfolios.

Very Vanilla

Let’s start with one of the tried-and-true segments of the cash-paying market: real estate.

We own a host of real estate companies with properties around the world. Despite pitfalls in some parts of the home market, our picks continue to deliver year after year.

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) leads off our lineup of apartment companies. The Calgary-based REIT, along with Canadian Apartment Properties REIT (CAP REIT, TSX: CAR-U, OTC: CDPYF), is right in the thick of a great, resource-boom-based market. Rental properties in high-growth regions like oil-and-gas rich Alberta are scarce—and getting scarcer by the day. Condo conversions and other construction dynamics have resulted in a drop in available vacancies to the low single-digits on a percentage basis. With demand for labor rising by double-digit rates, it’s a landlord’s dream market.

Results for Northern Property and CAP REIT show the real cash; revenues are gaining by 30 to more than 40 percent in the past two years alone. And from those substantial revenues comes our cut: distributions paid out in the solid 5.5 percent-plus rate every month. Continue to buy Northern Property REIT up to 27 and Canadian Apartment Properties REIT up to 22.

These two are joined by our US apartment companies, Home Properties (NYSE: HME) and Mid-America Apartment Communities (NYSE: MAA). With a tougher mortgage market more folks are demanding rental properties rather than buying their own places. The results are similar to our Canadian REITs, with revenues expanding at solid, double-digit rates. And we keep getting our checks. Home Properties and Mid-America both pay us in the mid-to-upper 4 percent range. Buy Home Properties and Mid-America Apartment Communities, both under 60 a share.

Last up is our commercial property company, WP Carey (NYSE: WPC). This company focuses on the same S&P 500 companies that sell their real estate, properties ranging from headquarter buildings to distribution centers, then lease them back under long-term contracts. This is a risk-averse business that WP Carey has pioneered and led with impressive and consistent results, the major one being the quarterly payday. With a 6 percent annualized dividend rate, WP Carey is a buy under 35.

Everyday Earners

Ever look at some of the really wealthy guys in town? They tend to be those who own basic (if not boring) companies that generate piles of cash year round. It’s this understanding that’s led us to the laundromat and concession stand businesses via Coinmach (AMEX: DRY) and Centerplate (AMEX: CVP).

Coinmach owns and runs coin-operated laundries in stand-alone and multi-family residences throughout the US. Everyday folks plunk in their quarters and dollar bills to clean their clothes; all the company has to do is maintain the equipment and collect the cash. It’s a simple business.

That simplicity has given us an average annual return of more than 25 percent per year, including a dividend amounting to nearly 8 percent. And it’s also drawn the attention of private equity. Coinmach has agreed to be purchased by a subsidiary of Babcock & Brown in a $1.331 billion all cash deal. B&B will be paying $13.55 for all class A and B shares, which represents a 22 percent premium over the 30-day volume-weighted average price, and will repurchase the 11 percent senior secured notes due 2024.

We own the Coinmach Income Deposit Security, which is made up of one class A share and a note, so we don’t have an exact purchase price for our shares as of yet; we’ll know more when the price B&B is paying for the notes is announced.

Centerplate runs the hotdog, soda and beer stands at sports facilities and convention centers in just about all major and many minor cities around the country. Everyday folks lay down their dollars to be fed, and we get a cut adding up to more than 9 percent.

Their day-to-day operations are basic and predictable, but the respective stocks will trade up and down throughout the year. It may be those trying to time dividends or others shorting them because they don’t believe something so simple can pay so well. Whatever the case, the way to invest in these stocks is to add shares on the down days. Coinmach is now a watch pending the outcome of the B&B acquisition; Centerplate is a buy under 22.

Core Competency

Last of our plain vanilla collection of dividend companies are those providing our economy’s core infrastructure. We’re talking about the leaders in the most basic part of what carries commerce: the roads, parking lots, ports and airport facilities.

These assets were once owned by taxpayers. But government budgets are stretched and politicians are less eager to ask for more taxes for the basics. The solution is either long-term leases or outright sales. So we get to be the tolltaker through our combination of Macquarie Infrastructure Group (OTC: MCQRF) and Macquarie Infrastructure Company (NYSE: MIC).

We own the roads—and the cash that rolls in on a daily basis. Dividends for both run in the mid-to-upper 5 percent range. Buy Macquarie Infrastructure Group (up to 4) and Macquarie Infrastructure Company (up to 50) as a package to get the best mix of cash-laden assets.

Let’s move into the heartland of America for our last group of big dividend payers, phones—though not the companies like AT&T that pay the CEO millions, but FairPoint Communications (NYSE: FRP), Iowa Telecom (NYSE: IWA), Consolidated Communications (NSDQ: CNSL) and Otelco (AMEX: OTT).

Wall Street ignores them, and even dismisses them as antiquated. Meanwhile, the pros pitch their view of telecom investing; their not-so-pretty story includes little or no dividends, lots of disappointment and even a few Chapter 11s.

It all comes down to cashflow. These four are boosting revenues by an average of 7 percent and paying us regularly at a rate of about 8 percent. Buy FairPoint Communications (under 22), Consolidated Communications (24), Iowa Telecom (25) and Otelco (27) as a bunch for the best diversity.

And don’t get freaked by some of the short-term ups and downs in the stock prices. Just keep owning them and add some more shares when they’re on sale.

Neil George is editor of Personal Finance, By George, Inner Circle, Bond Desk and The Partnership.

 

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