Special Report

The 24/7 Wall St. 2012 Model Dividend Portfolio (AEP, AWK, T, GE, GOV, KMB, SNH, WMT, JNK, AMJ, AMLP, PGF, MO, DLR, EPD, KMP)

Wal-Mart Stores Inc. (NYSE: WMT) was just featured as one of the least attractive DJIA stocks for 2012. It is not. The confusion arises because Walmart’s stock is trying to stage a breakout to multiyear highs. The king of retail is due for a dividend hike in the near future and that 2.4% yield might soon be about 2.7% or 2.8% again. The company does not exactly need massive amounts of capital for cap-ex, and dividends are better for investors generally than share buybacks. Walmart is a defensive stock now and trades at about 12-times expected earnings. The Thomson Reuters consensus price target is currently $61.70, but Wamart shares may surge to as high as $65 if its chart truly breaks out as it has been signaling.

JUNK BONDS AND HIGH YIELD

Corporate bond defaults are expected to rise somewhat in 2012, but the mutual fund or ETF approach should insulate junk bond investors and the dividends associated with the sector. The trick is to know what you are investing in and to know which high-yield (or junk) funds invest in risky corporate debt and which invest internationally in risky sovereign or agency paper. Junk bonds have recently traded at spreads over equivalent Treasury yields wider than 700 basis points (7%), giving investors yields of 8% or even higher.

The SPDR Barclays Capital High Yield Bond (NYSE: JNK) is the king of junk bond ETFs and aims to track the price and yield performance of the Barclays Capital High Yield Very Liquid Index. Its advisers also have some room to invest in “similar securities” and while some tracking error can exist this product is very liquid, with more than 5 million shares trading per day. It also offers a yield of close to 8%. There are many closed-end funds investing in junk bonds, and this ETF can be used as a substitute or it can be used as a hedge with stock options for many of those closed-end funds. Some of the many closed-end funds in the high-yield bond sector are managed by large firms such as BlackRock, FirstTrust, Helios, MFS, Nuveen, PIMCO and Western Asset Management.

MASTER LIMITED PARTNERSHIPS

Too few investors know much about Master Limited Partnerships, or MLPs. Some regard them as just high-yield oil companies. The payouts are high, but they are distributions with some “return of capital” rather than just all income. That means the tax consequences have to be considered. MLPs generally own pipelines, storage facilitie, and terminals and can be considered “the toll roads and utilities” of the oil and gas sector. Investors view the payouts as a dividend yield, but you should consider it a “yield equivalent” because of the structure.

The two key ETF products in the world of MLPs we track are liquid and have high payouts: JPMorgan Alerian MLP Index ETN (NYSE: AMJ) and ALPS Alerian MLP ETF (NYSE: AMLP) with more than 5% and 6% in “payout rates,” respectively. There are often opportunities in the closed-end funds from Kayne Anderson, Tortoise and ClearBridge that can easily be hedged with put options tracking the exchange-traded products mentioned above.

A RUNNER-UP IN FINANCIALS … PREFERRED SHARES

24/7 Wall St. has not selected a single financial stock for the Model Dividend Portfolio for 2012 for many reasons. The exposure to sovereign debt rating risks, endless attacks by politicians (and the public), lawsuits lasting forever, limited earning power, a lack of carry interest and on and on. Preferred trust securities are generally far safer than picking an individual bank stock these days and they offer opportunities for “widows and orphans” investors to collect high dividends without as much implied volatility in prices.  Trust preferred shares are also generally higher in the creditor line should defaults and bankruptcies ever arise in individual situations.

The PowerShares Financial Preferred (NYSE: PGF) aims to track the price and yield of the Wells Fargo Hybrid & Preferred Securities Financial Index, and it invests at least 90% of total assets in preferred securities in that index. The current holdings as of December 2011 were HSBC (NYSE: HBC), ING (NYSE: ING), Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), MetLife (NYSE: MET) and others. How many bank securities pay 7% in dividends these days? And it is much less volatile than the underlying banks’ common stocks. It trades at $16.35 and its 52-week range is $14.70 to $18.45.

GIVING THE BOOT: STOCKS BEING REMOVED FROM THE PORTFOLIO

24/7 Wall St. has consistently made adjustments to its dividend portfolios. 2011 was an incredible year for those investors who have sought safety rather than aggressive growth. Imagine making more money on stocks that were supposed to be less risky. Some stocks have performed so well that they have been kicked out because of appreciation and some over fundamental changes. Do not chase stocks indefinitely just because they did well before.

The shares removed from the 24/7 Wall St. 2012 Model Dividend Portfolio are: 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 given a brief description of each below, as well as what change led to the removal of the stock from the model portfolio.

Altria Group Inc. (NYSE: MO) has outperformed our top expectations and Barron’s just emphasized many of our fears for its cover story to start off 2012. We could become interested in Altria again, but shares may have to get back to $26 or so. While we have some fundamental concerns about case volumes and pricing changes, these probably would be addressed if the price dropped considerably. Currently we are not substituting anything for the tobacco dividends.

Digital Realty Trust Inc. (NYSE: DLR) was a favorite of 24/7 Wall St. due to its high dividend of 4.3% and its shares rose even after we removed it from the portfolio. This is the “Landlord of Technology and the Cloud” and we exited after shares went to $64.50, having passed our $62 cut-off. The price would have to get back down to $58 or so to be reconsidered. Digital Realty is a great REIT and this noninclusion is only because it has performed incredibly well to the point that we cannot chase it. For technology and dividends, we have included Intel Corporation (NASDAQ: INTC) merely as a runner-up candidate after the sell-off. It has a 3.5% dividend yield for those income-seeking investors who insist on having a technology holding.

Enterprise Products Partners LP (NYSE: EPD) and Kinder Morgan Energy Partners LP (NYSE: KMP) have been replaced as the two go-to individual MLP income products due to their price performance, which exceeded our expectations. Enterprise’s price target has been raised closer to $49, but the Kinder Morgan MLP trades now almost $10 above its published consensus price target from Thomson Reuters. These have not been removed because of fundamentals as they are both very well run. We currently prefer the ETFs or closed-end funds in these sectors that include many of the smaller partnerships.

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JON C. OGG

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