Profit From Special Situation Dividend Stocks

Investors can make big money from unknown and misunderstood companies. In the past few weeks, I found three dividend stocks whose special situations make them great opportunities for investors. I especially love dividend special situations, since the market quickly reacts to a raised dividend, and often unfairly punishes stocks whose dividends drop. Investors who take the time to understand these situations can profit, while most others will only find out about the opportunity after the fact.

Let's get started:

1. Spinoff and new dividend, oh my!
El Paso
(NYSE: EP  ) , a diversified natural gas company, is spinning off its exploration and production division. The division produces nearly 800 MMcfe's per day, with 85% of that being natural gas. The yet-to-be-named company will be slightly larger than Petrohawk Energy (NYSE: HK  ) , which produces an average of 675 MMcfe per day. The real opportunity, though, lies in what will be left after the spinoff.

The parent company will consist of pipelines, midstream assets, and general and limited partner interests in El Paso Pipeline Partners LP (NYSE: EPB  ) . The big news is that starting in 2012, the parent company will have a dividend of $0.60, a big boost over the current $0.04 dividend. At current levels, the yield will only be roughly 3%. However, once adjusted for the value of the spinoff, that yield will increase. Should the shares trade at the same yield as Kinder Morgan (NYSE: KMI  ) , they'll definitely have upside potential. As a further kicker, management believes that it will be able to achieve low double-digit dividend growth moving forward.

2. Increased dividend from an undervalued subsidiary
British telephone giant Vodafone (Nasdaq: VOD  ) , which currently yields 5.3%, has a 45% stake in Verizon Wireless, with Verizon (NYSE: VZ  ) owning the rest. For the past few years, all of Verizon Wireless' cash flow has gone to paying down its debt. Vodafone consolidates income from Verizon Wireless in its statements, giving it a payout ratio of 56.1%, but has so far not received cash from the Verizon Wireless venture, making its free cash flow ratio a higher 60%.

However, this situation will soon change. Verizon Wireless' debt is nearly gone, which means the company will likely soon begin paying dividends to its parents. This increased cash flow will allow Vodafone to increase its own dividend, at which point the market should revalue the company upward.

3. Rock-solid balance sheet and a new dividend
In the last 10 years, my final candidate has been wildly mispriced more than once. In 2000, its shares traded for more than 200 times earnings. Today, they trade for just 10 times earnings after adjusting for net cash.

The company is Cisco (Nasdaq: CSCO  ) , a dominant player in the networking industry, which is expected to grow faster than the overall economy thanks to all the digital content we now consume. At the same time, the company has a solid balance sheet with nearly $5 per share of net cash (cash minus debt), and profitable operations with earnings per share of $1.28, and free cash flow per share of $1.68.

Just a few weeks ago, the company initiated a quarterly dividend of $0.06 a share. While that's only a 1.5% yield, Cisco continues to generate massive amounts of cash, which it can use to grow its dividend.

The Foolish bottom line
Special situations can provide great returns. Consider the three tickers above, along with the 13 names from a new, free report from Motley Fool's expert analysts called "13 High-Yielding Stocks to Buy Today," including one named by a senior retail analyst as "the dividend play of a lifetime." Hundreds of thousands have requested access to this report, and today I invite you to download it at no cost to you. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. He owns shares of Vodafone, but no other stock mentioned in this article.

The Motley Fool owns shares of El Paso. The Fool has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (58)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2011, at 5:42 PM, PeakOilBill wrote:

    Buying any stock before the clowns in Congress get the debt ceiling solved is VERY risky. In the remote chance that the USA misses a debt payment, the entire market could take a massive hit. Think Lehman X 10. I could be wrong. Remember that there are something like $650 TRILLION of derivatives out there. How many are somehow related to a USA debt default?

    Did you see how fast Bill Clinton had to issue a clarification about his statement on a default for a short time not being a big deal? Treasury & the Fed set him straight in a couple of days.

  • Report this Comment On June 01, 2011, at 6:51 PM, gcmagone wrote:

    I believe that the statement about Vodaphon makes sense. The Verizon Wireless debt retirement is a matter of record and has been audited by CPAs. Dividend payments to VOD could start as early as this year.

  • Report this Comment On June 01, 2011, at 9:04 PM, mm5525 wrote:

    I love EP, and it is the only stock I own that doesn't pay a massive dividend. Soon it's going to pay a decent dividend. EP has been on fire for the past 6 months well before the spinoff announcement and especially afterward.

  • Report this Comment On June 02, 2011, at 9:18 AM, JeramyUtara wrote:

    I admit that this is somewhat unrelated and I apologize in advance. When reading this article, I thought it had to do with companies releasing "special dividends." For example, a company that normally pays out $1/quarter makes an extra payment of $5/share in August.

    I was wondering if there was a way to set up a search here on the Fool to find stocks that will be releasing these one-time much larger dividends?

    Thanks in advance!

  • Report this Comment On June 02, 2011, at 10:47 AM, TMFDanDzombak wrote:

    @PeakOilBill I really doubt the US will default, I think the Treasury/Fed/Bond Market will make sure that doesn't happen. A few WSJ columns have noted lawmakers have been working very hard to communicate to Wall Street that the talk of letting the US default is political posturing and will not happen.

  • Report this Comment On June 02, 2011, at 10:50 AM, TMFDanDzombak wrote:

    @qcmagone Thanks

    Here's another article about it

    http://www.fool.com/investing/general/2011/04/18/1-special-d...

  • Report this Comment On June 02, 2011, at 10:50 AM, TMFDanDzombak wrote:

    @mm5525 thanks

  • Report this Comment On June 02, 2011, at 10:52 AM, TMFDanDzombak wrote:

    @JeramyUtara

    The best method is to set up a google news alert on "special dividend"

    http://www.google.com/alerts

  • Report this Comment On June 02, 2011, at 4:19 PM, JeramyUtara wrote:

    Thanks, Dan! Great article and keep up the good work.

  • Report this Comment On June 02, 2011, at 9:00 PM, karlm1 wrote:

    What is going to happen with EP's 14 billion debt after the spinoff?

  • Report this Comment On June 03, 2011, at 4:19 PM, gimponthego wrote:

    EVEP..the ideal stock for that "special situation" (oil prices go sky high) or you just want to make money in any situation (Dividend of $3.04).

  • Report this Comment On June 11, 2011, at 6:42 PM, UFOFred wrote:

    Will El Paso after the spinoff have the tax complications of other pipeline partnerships? If so, then it may not be so worthwhile.

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12/31/1969 7:00 PM
EP.DL $0.00 Down +0.00 +0.00%
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