Bonds often form the bulk of the portfolios of income investors, particularly retirees who see safety in holding until their bonds mature. But yields as low as they are, there are better income-generators out there in stocks, and among them stocks that offer a history of solid total returns (income plus growth) as well. And, as any financial planner worth his salt will tell you, even the most conservative investors need to own some stocks for growth to offset the inescapable loss of buying power from inflation. So consider these two of my required stocks for any and all income investors.
First, look at Kinder Morgan Energy Partners, LP (KMP). The company is an oil and gas pipeline and storage company that owns some 80,000 miles of pipeline and 180 terminals . Those numbers help make it the largest “midstream” and third-largest energy company in the country. The upside is that KMP is riding the U.S. oil and gas production boom that ‘s already made this country a net energy exporter and is projected to make us the world’s largest oil and gas producer within the next few years.
While 10-year Treasurys and high-grade corporate bonds are yielding around 3 percent, KMP currently pays a yield of 7.16%. It has an unbroken record of increasing dividends dating back to 1992. What’s more, it’s generated average total returns of 11.15% over the last three years, 14.04% over the last five, and 12.46% for the last 10 years. You just don’t find that kind of consistent performance in high-quality bonds.
The stock price has taken a hit over the last year, having fallen from a high of around $90 last spring. In the process, it returned a loss of 2.55% in 2013, after essentially a flat (-0.07%) 2012. But that was after three straight years of returns north of 20%, one of them 39% (2009). The good news is that the recent price decline has brought back the stock to more sustainable valuations – from a P/E north of 70 last year to around 20. That makes it all the more attractive for the income investor to grab some of this industry leader.
My second recommendation is PG&E Corp (PCG), a California utility with over 5.2 million electricity customers and 4.3 million natural gas customers. It has a massive backbone of transmission and natural gas lines, and is over 100 years old. It’s always going to be a part of the California landscape.
Utilities in general are solid, dependable dividend payers because they are regional monopolies. Furthermore, if you’ve ever studied your utility bills over the years, prices always move in one direction — up. The stock’s average annual total return is a lackluster 7.66% over the past 10 years, but that doesn’t bother me because the dividend has gone up almost 52% during that period, and presently offers a 4.16% yield. This is as safe a fixed-income bet as you’ll find
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at email@example.com.
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