Don’t Fear a Correction With 2 Dividend Stocks You Can Hold Forever

Calls for a market correction intensify daily, and the bull run won't last forever. Follow two simple rules for adding strong dividend plays that you can hold without worrying about where the market goes.

Joseph Hogue
Joseph Hogue
Jul 24, 2014 at 7:29AM
Energy, Materials, and Utilities

It has been nearly three years since the market has faced a drop in prices of 10% or more, and investors are more than a little worried. The memory of two stock market crashes in less than a decade still has investors on their toes for another sell-off and daily calls by pundits for a bubble.

Investing does not have to be like this for most people. Unless you are a money manager or advisor, always tasked with beating the markets, investing can be a long-term decision and your money can be safe in stocks you can hold forever.

Two simple rules for your forever portfolio
As an analyst, I am constantly revising my estimates for individual companies and making recommendations for investment. While I do not believe that investors can time the general market, there is some profit in finding undervalued stocks on potential earnings. These investments account for a small portion of my personal portfolio, however, with most of my money in stocks I can buy and not worry about forecasting quarterly earnings.

These are my forever stocks, companies that should be around for decades and will continue to see higher sales. For these investments, I look to two general rules:

  1. Even if the stock market crashes and asset prices crumble, there is one thing that cannot be taken from your portfolio: the dividends you've collected. Since 1946, dividends have accounted for 55% of the real return to stocks, though yields have dropped lately to just 2% for those in the S&P 500. Nearly all of the investments in my forever portfolio offer a yield of 3% or more.
  2. While no one can predict the future, there are several themes that are likely to challenge the world over the next several decades. These are durable trends with the potential to move trillions of dollars into a sector or industry. One-off events might mean these sectors or stocks underperform in any given year, but the long-term trend should give them extremely strong growth drivers.

Potash Corp (NYSE:POT) is the world's second-largest producer of potash and the third largest producer of nitrogen and phosphate. Fertilizer stocks are one of my strongest megatrend bets with about 10% of my total portfolio in different companies. The sector has taken a hit lately on weakness in the pricing structure and record crop production, but the long-term drivers are undeniable. To feed a global population that could reach eight billion by 2020, producers will need to increase crop yield through higher nutrient use.

The company increased the dividend by 19% last year and finally looks like it is committed to returning shareholder cash. Shares now pay an attractive 3.6% dividend yield. Besides the $997 million in dividend payments, Potash Corp also bought back $411 million in shares over the last year.

Revenue is expected to plunge 8.3% this year and drive a 20% drop in earnings to $1.68 per share before rebounding to $2.05 per share in 2015. The consensus is based on a continued competitive price environment, but the risk is clearly to the upside. Uralkali had to accept a 24% price cut on China potash prices, and no one will benefit from the breakup of the oligopoly pricing structure. Higher operational expenses from increased production will depress margins. Facing top-line and bottom-line weakness, companies will be forced to the negotiating table and near-term potash prices will rise.

Potash Corp management believes that global potash shipments could improve 5% this year as price discovery brings buyers back into the market. Even on the consensus for 2014 earnings, the shares are trading just slightly above their five-year average of 20.7 times. Over the longer-term, I think sales growth can average 4% to 5% a year and the shares should provide a strong price return as well as the cash yield. 

Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) is the third-largest energy company in North America and the largest independent transporter of petroleum products. Energy transportation is another favorite megatrend of mine, with surging production in the United States outstripping the ability to build pipelines. Pipeline and storage companies base most of their revenue on volume so cash flow is not exposed to volatile commodity prices. Estimates by the Energy Information Administration (EIA) do not show production growth topping out until almost the end of the decade so transportation demand should be strong for quite some time.

Revenue growth at the partnership surged 45% in 2013 on an aggressive acquisition program and a doubling of capital expenditures to $3.2 billion. Expectations are for 12.6% growth this year and 7.4% in 2015. Distributions have increased at a relatively consistent pace, increasing 8.4% last year and 7.4% on a 10-year annualized basis.

My estimate is for $5.85 in distributable cash flow per unit this year, making the partnership one of the least expensive at just 13.9 times DCF. That is against a median price of 19.7 times DCF for the 22 midstream MLPs I follow. The current distribution of $5.52 means a coverage ratio of 1.06 times, which is below the 1.21 median for the group but growth projects should help increase DCF over the next several years.

Kinder Morgan recently announced that it would spend $1 billion to build and operate a 213-mile carbon dioxide pipeline through the Permian Basin and Eastern New Mexico. The project could significantly boost extraction at the company's fields while also providing revenue from gas sold to other fields. Gas injection can permit explorers to extract up to 60% of a reservoir's oil against rates between just 20% and 40% for primary extraction methods. Carbon dioxide is the most commonly used fluid because it reduces the oil viscosity and is less expensive than natural gas or nitrogen injection.