It turns out that many stocks with high dividend yields are now more attractive than sovereign debt in the U.S. and abroad. Part of the allure, besides income or reinvestment, is that dividend stocks often hold up better than other investments during jittery markets. It is hard to imagine, but the high-yield utility sector was one of the top performers of the S&P in 2011. In some cases, half of an investor’s total return through time may come from dividends. Warren Buffett generally picks dividend-paying companies for Berkshire Hathaway Inc. (NYSE: BRK-A) after following some of the principles of Benjamin Graham.

The 24/7 Wall St. 2012 Model Dividend Portfolio includes the following stocks: American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

While exchange-traded products have been avoided in the past, recent trends merit a look at the open-end or closed-end mutual funds and ETF products as follows: SPDR Barclays Capital High Yield Bond (NYSE: JNK); JPMorgan Alerian MLP Index ETN (NYSE: AMJ); ALPS Alerian MLP ETF (NYSE: AMLP); and PowerShares Financial Preferred (NYSE: PGF).

Lastly, there have been some exits due to upside price performance: Altria Group Inc. (NYSE: MO); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD); and Kinder Morgan Energy Partners LP (NYSE: KMP).

We have described the features and outlook for each component of our Model Dividend Portfolio.

We overlaid some of the recent Fitch Ratings analysis after the individual MLPs.  The aim is to show how the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB).

As the end of 2012 approaches rapidly, we wanted to take a year-end look into the sector to see where there is opportunity versus risk.  We have shown the basic fundamentals of some of our top go-to names in the MLP sector and have shown a chart of the key ETF in this sector.  A report from Fitch Ratings earlier this month called MLPs fairly well positioned against economic regulatory risks and has noted that the sector should generate stable operating performance and financial credit measures for 2012.  The belief was that these should remain consistent with recent past performance and the outlook includes natural gas pipelines as well as crude oil and refined products pipelines. 

Income and dividend investors have become more aggressively interested in MLPs after a couple of years of Treasury rates and CD rates not paying anything of substance any more for income.  Retirees need cash flow from their investments in order to live.  Even though these distributions paid to investors act as dividends, there is usually a mixed combination of income and a return of capital.  In short, not all of the distributions paid out are treated the same by the tax-man.

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $39.2 billion now and trades at $45.00, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.5%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.9 billion and trades at $81.00, above its consensus target of $76.11 and against a prior 52-week range of $63.42 to $80.52.  The implied distribution per year based on the last payout was 5.8%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.6 billion.  This unit trades at $54.20, and is under the consensus target of $61.88 and it has a 52-week range of $39.00 to $56.82.  The implied distribution per year based on the last payout was 5.4%.

We have overlaid some of the Fitch Ratings analysis after the individual MLPs because we wanted to show you what the MLPs are valued at today as well as how they compare to their Thomson Reuters consensus price target objective and 52-week trading ranges.  The individual MLPs we are including on our own are as follows: Enterprise Products Partners L.P. (NYSE: EPD); Kinder Morgan Energy Partners LP (NYSE: KMP); MarkWest Energy Partners, L.P. (NYSE: MWE); Plains All American Pipeline, L.P. (NYSE: PAA); Williams Partners L.P. (NYSE: WPZ); Magellan Midstream Partners, L.P. (NYSE: MMP); Buckeye Partners, L.P. (NYSE: BPL); and El Paso Pipeline Partners, L.P. (NYSE: EPB). 

Our individual valuation analysis on some of the key individual MLPs is as follows:

Enterprise Products Partners L.P. (NYSE: EPD) is valued at $40 billion now and trades at $46.10, under its consensus target of $49.11 and it has a 52-week range of $36.00 to $46.70.  The implied distribution per year based on the last payout was about 5.3%.

Kinder Morgan Energy Partners LP (NYSE: KMP) is valued at $26.1 billion and trades at $78.50, above its consensus target of $76.11 and against a 52-week range of $63.42 to $79.34.  The implied distribution per year based on the last payout was 5.9%.

MarkWest Energy Partners, L.P. (NYSE: MWE) is valued at $4.7 billion.  This unit trades at $55.80, and is under the consensus target of $58.38 and it has a 52-week range of $39.00 to $56.40.  The implied distribution per year based on the last payout was 5.3%.

Plains All American Pipeline, L.P. (NYSE: PAA) is valued at $10 billion, and its $67.30 price compares against a price target of $71.96 and its 52-week trading range is $54.90 to $67.74.  The implied distribution per year based on the last payout was 5.9%.

Williams Partners L.P. (NYSE: WPZ) is worth some $17.3 billion and its $59.65 price compares to a target of $60.81 and a 52-week range of $44.81 to $61.22.  The implied distribution per year based on the last payout was about 5%.

Magellan Midstream Partners, L.P. (NYSE: MMP) is worth $7.35 billion and its $6.30 price is just under the $66.64 consensus price target.  Its 52-week range is $51.00 to $65.92. The implied distribution per year based on the last payout was only about 4.9%.

Buckeye Partners, L.P. (NYSE: BPL) is valued at $5.95 billion and its $63.98 price is pretty far under the consensus price target of $70.25.  It has a 52-week range of $54.51 to $68.92. The implied distribution per year based on the last payout was 6.5%.

El Paso Pipeline Partners, L.P. (NYSE: EPB) is valued at $6.7 billion with a $32.60 share price.  That is one of the largest discounts to the consensus price targets of peers as its target is $39.00.  Its 52-week range is $31.34 to $38.36. The implied distribution per year based on the last payout was 6.1% based on today’s price.

Because many of the largest MLPs are so close to or above the consensus price targets, we recently gave the 24/7 Wall St. Model Dividend Portfolio some changes to focus more on the funds and ETFs (with payout rates based upon the average of the last two payouts): Kayne Anderson MLP Investment Company (NYSE: KYN) with a distribution of about 6.9%; JPMorgan Alerian MLP Index ETN (NYSE: AMJ) with a distribution of about 5.2%; and ALPS Alerian MLP ETF (NYSE: AMLP) with a distribution of about 6.3%.

The deal, which has been approved by the boards of both players, is expected to close in the second quarter of 2012. When it does, Kinder Morgan will have nearly twice the enterprise value of Enterprise, about the same spread as  that between Exxon Mobil Corp. (NYSE: XOM) and its nearest US competitor Chevron Corp. (NYSE: CVX).

The combination gives Kinder Morgan greater pipeline capacity to the US east coast market and additional capacity into southern Arizona and California. Kinder Morgan plans to proceed with plans that El Paso announced last year to sell off El Paso’s exploration and production assets. The sale of those assets will go to reduce the approximately $17 billion of debt Kinder Morgan is assuming from El Paso.

Kinder Morgan shares are up more than 5.5% in the first half hour of trading this morning, at $28.84, in a 52-week range of $23.51-$32.14, and Kinder Morgan Energy Partner shares are up nearly 3.5%, at $73.97, in a 52-week range of $63.42-$78.00. El Paso shares are up more than 23%, at $24.12, after posting a new 52-week high of $24.61 earlier. El Paso Pipeline Partners have seen a share-price drop of more than -10%, to $34.06, in a 52-week range of $31.34-$38.36. Both FBR Capital and Oppenheimer downgraded the shares this morning, from what were essentially ‘buy’ ratings to ‘hold’ ratings.

Paul Ausick

Baker Hughes Inc. (NYSE: BHI) Cut to Market Perform at BMO.
Beam Inc. (NYSE: BEAM) Started as Hold at Argus.
Boeing Co. (NYSE: BA) Cut to Perform at Oppenheimer.
Cisco Systems Inc. (NASDAQ: CSCO) Started as Buy at IS Group.
Ecolab Inc. (NYSE: ECL) Cut to Neutral at Citigroup.
FXCM Inc. (NYSE: FXCM) Cut to Sell at Citigroup.
Gap Inc. (NYSE: GPS) Cut to Market Perform at Wells Fargo.
General Electric Co. (NYSE: GE) Started as Overweight at Barclays.
Hewlett-Packard Co. (NYSE: HPQ) Started as Buy at ISI Group.
International Business Machines Corporation (NYSE: IBM) Started as Outperform at Macquarie.
Interactive Brokers Group (NASDAQ: IBKR) Raised to Outperform as Bull of the Day at Zacks.
ITT Corporation (NYSE: ITT) Started as Equal-Weight at Barclays.
Kinder Morgan Energy Partners (NYSE: KMP) Started as Neutral at JPMorgan.
Plains All American Pipeline (NYSE: PAA) Started as Overweight at JPMorgan.
TAL International Group, Inc. (NYSE: TAL) named Value stock of the day at Zacks.
Teradyne, Inc. (NYSE: TER) lowered target to $12 as Bear of the Day at Zacks.

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JON C. OGG

Low (or no) interest rates are here to stay for at least another two years and investors are being pushed out of the safe debt markets to go find investment income elsewhere.  You are being forced to take on risks for income.  We just showed how the high-yield bond funds and ETFs may have finally hit a floor as spreads reached astronomic levels.

24/7 Wall St. tracks a myriad of dividend stocks and on August 11, 2011 our “Great Dividend Portfolio” was released.  At the time, the 10-Year Treasury yield was about 2.14% and our average dividend yield in the ten-company portfolio was a whopping 5.5%.  That yield is now about 5.3% due to price appreciation and the DJIA has risen about 4% since then.

The high-yield dividend winners are as follows: Altria Group Inc. (NYSE: MO); American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD) or Kinder Morgan Energy Partners LP (NYSE: KMP); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

All of these ten dividend leaders are trading higher than they were in August, and some are up well over 10% and still offer high implied dividend yields.  We are actually approaching levels now where some of these portfolio positions may need to be reviewed.  Our aim is to find dividends which are safe, but we have to also adjust for issues around projected upside to price targets, market performance, and the ability to continue dividend growth even in choppy times.  If we have grown less enthusiastic or more cautious on these names, we have noted at the end of each summary.

TransCanada stands to lose the most if the project is denied. The entire Keystone pipeline system is nearly fully contracted for a total of 900,000 barrels/day for an average term of 18 years. That is a big loss if the pipeline isn’t built. The largest producer in the oil sands is Syncrude, a joint venture that includes Imperial Oil Resources (wholly owned by Exxon Mobil Corp. (NYSE: XOM)), Suncor Energy Inc. (NYSE: SU), and China Petroleum & Chemical Corp. (NYSE: SNP) — Sinopec — among others. Other producers include ConocoPhillips Corp. (NYSE: COP), Chevron Corp. (NYSE: CVX), Murphy Oil Corp. (NYSE: MUR), Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), BP plc. (NYSE: BP), and Devon Energy Corp. (NYSE: DVN).

These companies won’t lose everything because the bitumen from the oil sands will go somewhere, somehow. Unless, of course, the Canadian government decides to shut down every project in Alberta, and that simply will not happen. One of the big problems facing the producers now is that they’re crude is landlocked and sells at a substantial discount to WTI. For the week ending September 23rd, Heavy Hardesty grade crude sold for $78.28/barrel, while WTI sold for $80.29 and Brent sold for $109.17. Getting crude from Alberta to a coast, any coast, is critical for producers.

If the Keystone XL pipeline is killed, an expansion to an existing pipeline system to the US/Canadian west coast could take up some of the slack. Kinder Morgan Energy Partners LP (NYSE: KMP) is investigating an expansion to its Trans Mountain system and Enbridge Inc. (NYSE: ENB) has already begun the permitting process for a similar pipeline to the west.

Another interesting development are proposals from both of Canada’s major railroads to construct a pipeline-by-rail from Alberta to west coast. And while nothing officially like a pipeline-by-rail has been proposed for the run to the US Gulf Coast, rail traffic has already increased substantially from North Dakota south to Cushing and, eventually producers hope, to the Gulf.

In July weekly US rail carloads of petroleum and petroleum products hit a four-year high, and the August total of about 7,400 carloads is even higher. A rail tanker holds about 1,500 barrels, so every day about 1.6 million barrels of petroleum is moving around on the US rail network. Add to that another half a million barrels a day from the oil sands and that puts about another 2,500 tanker cars on the rails every day.

There were 750 reported rail accidents involving hazardous materials in 2010. The odds of a significant oil spill rise if we add more oil transport by rail.

The same is true if the Canadian crude is moved by truck. Truck transportation by surface road is even more expensive and prone to accidents. There were nearly 12,000 road accidents involving hazardous materials in 2010. Besides being much more expensive, more tanker trucks carrying up to 300 barrels of oil each raises again the odds on an environmentally significant spill.

So while pipeline spills are a concern, rail and truck accidents are far more common. The Keystone XL pipeline should be held to a very high safety standard, but it is probably the safest way to move the most Canadian crude.

The argument that Canada should stop development and extraction in the oil sands may make more environmental sense, but until a large-scale alternative transportation fuel is available at a reasonable price, oil sands development will very likely continue. And moving that oil by pipeline is really the only sensible option.

Paul Ausick

24/7 Wall St. tracks a myriad of dividend stocks, and we have looked through the price performance, compared them to peers, and done a valuation dive to determine which are the safest of the high-yield stocks out there today.  Our list of high-yield dividend winners includes the following: Altria Group Inc. (NYSE: MO); American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD) or Kinder Morgan Energy Partners LP (NYSE: KMP); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

If you use the average yield of this basket it actually comes to about 5.5%.  That is a phenomenal portfolio yield considering that the yield of the 10-Year Treasury auction just went off at 2.14%.  Chasing yields is a tricky game because not all dividends are alike and not all dividends are safe.

Our aim is to find dividends which are not only considered to be safe.  We think every one of these businesses can grow their dividends through time and some of these companies even classify as “value stocks” that investors seek when looking for havens in rough markets.

Altria Group Inc. (NYSE: MO) recently closed at $24.53 and its 52-week trading range is $22.15 to $28.13.  Its market cap is $50.4 billion and the shares trade at 11.2 times forward earnings.  The company’s return on equity is 74.4% and the latest dividend yield was 6.2%. With Obama and Boehner both being smokers, maybe this ultimate continued-surprise winner is truly immune from Washington D.C.  The state penalty issues have mostly been resolved, with a few exceptions.  Also in the favor of Altria is that juries seem to no longer award cases for smokers “who got duped into smoking and were told smoking didn’t kill you” in the case.  Altria carries almost no currency risk for its core tobacco business.  It also holds a stake in SAB/Miller.  That dividend has never wavered.

American Electric Power Co., Inc. (NYSE: AEP) recently closed at $34.27 and its 52-week trading range is $33.09 to $38.99.  Its market cap is $16.5 billion and the shares trade at 10.6 times forward earnings.  The company’s return on equity is 9.0% and the latest dividend yield was 5.4%.  Low interest rates work hugely in the favor of power companies.  AEP has a blend of power sources for its client base, it covers millions of Americans in many states, and is now cheap compared to the market and cheap against many peers.  AEP is due soon for yet another dividend hike and this company is very proactive when it comes to protecting the dividend.

American Water Works Company, Inc. (NYSE: AWK) recently closed at $26.82 and its 52-week trading range is $21.72 to $30.70.  Its market cap is $4.7 billion and the shares trade at 14.5 times forward earnings.  The company’s return on equity is 7.0% and the latest dividend yield was 3.6%.  This is the best water stock out there and it is extremely rare that this water utility is off by more than 10% from highs.  The company has said that it can keep raising its dividend and it seems to be unstoppable.  As a utility, it benefits greatly when interest rates are so low as it can borrow on the cheap and has the franchise to lock in low-rate borrowing for the long-term.

Westport Innovations Inc. (NASDAQ: WPRT), a technology provider for engines that run on natural gas, hydrogen, and other biofuels, is another potential beneficiary of Chesapeake’s venture fund. Natural gas producers such as Exxon Mobil Corp. (NYSE: XOM), which now claims the nation’s largest natural gas reserves due to its acquisition of XTO Energy, and Devon Energy Corp. (NYSE: DVN), another major onshore natural gas producer, stand to gain from Chesapeake’s investment as well.

While Chesapeake’s announcement was couched in terms of saving the US from the nefarious deeds of OPEC, natural gas producers have go to do something to lift the price of natural gas to a point where they actually make a profit on the gas. Right now, producers are relying on the oil and natural gas liquids that they can produce as their profit-making products. In order to make a profit on gas production alone, producers need a price above $6/thousand cubic feet, about 25% above today’s price.

Abundant reserves of shale gas make it hard to get any kind of price boost. Production in the Marcellus shale in Pennsylvania and New York has lowered transportation costs for natural gas to the most populated region in the US. Even Kinder Morgan Energy Partners LP (NYSE: KMP) is considering spending several million dollars to reverse the flow of its Rockies Express pipeline which now carries natural gas from Wyoming and Colorado to the eastern US.

Chesapeake and other gas producers need to find more uses for natural gas than simply generating electricity and fueling home heating and cooking. Compressed and liquefied natural gas for transportation, particularly in over-the-road trucks, could provide a solid boost to demand and Chesapeake is trying to prime the pump.

The venture investment of $1 billion over 10 years is already one-third committed, and the projects that have been funded are really just a small drop in a very large bucket. Chesapeake should get credit for what it’s doing, but a lot more is needed if the US is going to replace a significant amount of imported oil with any alternative fuel.

Chesapeake shares closed yesterday at $29.75, within the stock’s 52-week range of $19.68-$35.95. But it’s worth remembering that three years ago the stock was approaching $70/share. That’s where the company would like to be again.

Paul Ausick

F5 (NASDAQ: FFIV) received an upgrade from Barclays which its shares up. Western Digital moved higher on postitive comments by Morgan Stanely

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