Since the lows of March 2009, the S&P 500 has doubled, making this one of the longest and most significant bull markets since the Great Depression. Profits have skyrocketed. Margins have improved. Cash sits on balance sheets in record amounts. Yet according to one of the most revered academics of our time, the market is substantially overpriced.
Read on, and I'll show you how to avoid pricey stocks in this potentially inflated market, and cash in on three dividend knockouts. I'll also share with you how to get free access to 13 more outstanding dividend payers, courtesy of The Motley Fool's expert analysts.
The problem … and the solution
Yale economist Robert Shiller successfully called out the tech bubble in 2000 and forecast the housing bust in 2006. Now he's making another a dire prediction: The stock market could be overheated, and it's expensive relative to its historical valuations. Shiller's method illustrates that the general market is priced at about 23 times earnings, way above the average of 16. That 44% premium could represent a huge problem.
Shiller has his fair share of critics, including Jeremy Siegel, but let's assume for the moment that he's correct about the general market. If stocks are so expensive, where can investors go to find continually positive returns?
The answer: dividends.
Companies in the U.S. are doing so well that they have almost no choice but to increase or start paying dividends in order to return wealth to shareholders. Profit margins among non-financial stocks in the S&P 500 could climb to 8.9% this year, the highest level in 18 years, according to Bloomberg. Analysts expect profits to jump 16% in 2011, and companies in the S&P 500 have a record $937 billion in cash on their ledgers.
Already, we're starting to see the positive effects of increased profits and gobs of cash ripple through a wide array of businesses. Financial stocks, forced to slash their payments during the crash of 2008, have come roaring back. JPMorgan (NYSE: JPM ) has quintupled its quarterly dividend and announced a $15 billion buyback plan. Similarly, US Bancorp (NYSE: USB ) boosted its dividend by 150% and announced a 50 million-share buyback program.
But banks aren't the only companies boosting payouts; industrial companies and consumer-facing businesses are getting in the game as well. Cruise line operator Carnival (NYSE: CCL ) more than doubled its dividend last quarter, and even retailer Limited Brands (NYSE: LTD ) found a way to take its dividend from $0.15 to $0.20.
Who cares about these dividend increases?
Dividend payments, coupled with the prospect of earnings growth, are much-coveted characteristics for any stock. It's long been documented that companies that pay dividends outperform their non-paying brethren. According to Bloomberg, companies that return the most money to shareholders have beaten the general market by 11 percentage points since the bull market began in 2009. Furthermore, shares of companies with dividends have gone up by 3.8% in 2011, while shares of companies with no dividends have only risen by 2%. That's a pretty significant difference for such a short amount of time.
To help you find great dividend-paying companies in what could be a very pricey stock environment, I've used certain attributes to uncover three dividend home run companies. Specifically, I looked at the energy sector, owning not only to surging oil prices, but also to what should be an eventual recovery in gas prices as well. I scoured the market for companies (a) paying dividends greater than 5% (b) with a history of dividend growth, and (c) maximum five-star rankings from our 170,000-member investing community.
5-Year Dividend CAGR
|Buckeye Partners (NYSE: BPL )||6.27%||6.15%||*****|
|Enterprise Products Partners (NYSE: EPD )||5.48%||6.4%||*****|
|Teekay LNG Partners (NYSE: TGP )||6.51%||18%||*****|
Source: Capital IQ, a division of Standard & Poor's.
It's important to note that these companies are set up as limited partnerships, so they typically pay out most of their cash flow from operations in the form of distributions to shareholders. Both Buckeye Partners and Enterprise Products Partners help the oil and gas industry by providing miles of pipeline that transports everything from gasoline to heating oil, in addition to offering bulk storage for a large variety of petroleum products.
Pipelines and storage
Buckeye recently spent about $225 million to buy terminals and almost 1,000 miles of additional pipeline in North America, as part of its strategy to expand geographically. It also just raised its dividend by 5.3%, marking its 27th consecutive quarterly increase.
Enterprise recently signed a deal with Anadarko Petroleum to provide midstream services in the Eagle Ford shale area, expanding what was already a strategic objective for the company. The company has some of the most seasoned management in the industry and an extremely integrated midstream system. It's also well-positioned for growth in both established non-conventional shale plays like Eagle Ford, and emerging plays such as Mancos, Avalon, and Bone Spring.
Teekay LNG provides marine transportation for liquefied natural gas and crude oil. It has roughly 21 LNG carriers, five LPG carriers, and 11 conventional crude oil tankers, including those still in the building stage. The company should see potential growth from new orders, most significantly in Australia. There is the potential demand for more than 100 new LNG carriers in the near future, and Teekay plans to be a major player in order to continue building its business. It also recently upped its distribution amount, and I wouldn't be surprised if it continued to do so, since earnings are expected to increase by 13% this year.
The Foolish bottom line
Any of the three companies listed above would be excellent additions to your dividend portfolio, especially if you're focusing on high-yielding companies that are somewhat shielded from the typical gyrations of the volatile commodity market. If you're interested in other great dividend-paying stocks, check out our new free report, "13 High Yielding Stocks You Can Buy Today." You'll be sure to find other home run companies to cash in on during this expensive market!