Seadrill (Nasdaq: SDRL) has declared a quarterly dividend of $0.675 per common share, $2.70 annualized. The dividend is a 44.4% increase from the current rate of $0.4675.
Yield on the dividend is 7.3%.
The Board also declared a special dividend of $0.20 per share.
Yield on the special dividend is 0.5%.
Disclosure I am Long SDRL shares.
Showing posts with label Black Gold(OIL). Show all posts
Showing posts with label Black Gold(OIL). Show all posts
Thursday, February 24, 2011
Sunday, February 20, 2011
Dividend Investing KMP Master Limited Partnership
Dividend Investing KMP or inside ya Ira KMR
So many investments to consider, so little time --- I stumbled across this gem recently (this morning).
From Kinder Morgan’s company website:
“Kinder Morgan owns or operates approximately 37,000 miles of pipelines and 180 terminals in North America. Our companies include Kinder Morgan Energy Partners, L.P. (NYSE: KMP), Kinder Morgan Management, LLC (NYSE: KMR) and Kinder Morgan, Inc., a private company which owns the general partner of KMP.
Kinder Morgan has a large footprint of diversified and strategically located assets, and we are a market leader in most of our businesses. For example, in North America, we are:
We have been executing the same strategy since 1997. Our business model is simple. We own, operate, expand, build and acquire primarily midstream energy assets that provide a return substantially in excess of our capital costs, and then we distribute that excess to our limited partners and general partner.
We have minimal exposure to commodity price volatility because we typically don’t own the energy products that we transport, store or handle. As a result, our businesses are relatively stable and our fee-based assets have consistently generated superb cash flow in all types of market conditions. Where we do own the commodity, such as in our CO2 business, we hedge to lessen the impact of price swings.
Our business model has worked well and KMP has delivered a compound average annual return of 25 percent to unitholders over the past 12 years. In addition to delivering value to our unitholders, our focus is on operating our assets safely to protect the public and the environment. We spend millions of dollars each year on integrity management programs and maintenance to operate our assets safely.
At Kinder Morgan, we pride ourselves on being a different kind of energy company. What makes us different?
It starts at the top with Chairman and CEO Richard D. Kinder, who earns a salary of $1 per year and does not receive a bonus, stock options or restricted stock grants. As a shareholder/unitholder, Kinder’s financial rewards are directly aligned with the company’s investors – if the company does well, he does well.
We also eliminate unnecessary overhead expenses such as corporate aircraft, sponsorships, sports tickets and executive perks. In addition, we cap senior executives’ base salaries far below industry standards. Their financial incentives, such as bonuses, are tied directly to the performance of the company and their own personal performances.
Kinder Morgan has been conducting its business transparently long before it became a corporate buzz word. To our knowledge, we are the only S&P 500 company that publishes its annual budget on its web site, which enables investors and others to follow our progress throughout the year. We also post our environmental, health and safety (EHS) performance on our web site. KMP continues to outperform the industry averages in most EHS categories.
Kinder Morgan does not have a Political Action Committee (PAC), nor do we make any political contributions. Any political contributions made by executives or employees are made individually as private citizens with their own personal money. KMR is a limited partner in and manages and controls the business and affairs of KMP. KMR has no properties and its success is dependent upon its operation and management of KMP and KMP's resulting performance.
KMI owns the general partner and limited partner units in KMP. KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market.
Kinder Morgan has approximately 8,000 employees.” www.kne.com
Holy cow is this company for real! Lets see if they put their money where their mouth is. The stock is trading at $72.47 and has been upward trending since 2009. 52 week low was at around $63. They have also increased the quarterly dividend from $1.07 to $1.13 in the past year. KMR has a solid history of dividend increases. Not only that but their net profit margin is 15.38%.
Current dividend yield is 6.24%. I don’t see any downside to owning this stock. Pipelines wear out and need upgrading and replacement over the years but they are actively accomplishing this too. Put this in my “THUMBS UP” category.
Disclaimer I plan to purchase KMR down the road.
So many investments to consider, so little time --- I stumbled across this gem recently (this morning).
From Kinder Morgan’s company website:
“Kinder Morgan owns or operates approximately 37,000 miles of pipelines and 180 terminals in North America. Our companies include Kinder Morgan Energy Partners, L.P. (NYSE: KMP), Kinder Morgan Management, LLC (NYSE: KMR) and Kinder Morgan, Inc., a private company which owns the general partner of KMP.
Kinder Morgan has a large footprint of diversified and strategically located assets, and we are a market leader in most of our businesses. For example, in North America, we are:
- The largest independent transporter of refined petroleum products
- One of the largest natural gas transporters and storage operators
- The largest independent terminal operator
- The largest transporter and marketer of CO2
- The largest handler of petroleum coke
We have been executing the same strategy since 1997. Our business model is simple. We own, operate, expand, build and acquire primarily midstream energy assets that provide a return substantially in excess of our capital costs, and then we distribute that excess to our limited partners and general partner.
We have minimal exposure to commodity price volatility because we typically don’t own the energy products that we transport, store or handle. As a result, our businesses are relatively stable and our fee-based assets have consistently generated superb cash flow in all types of market conditions. Where we do own the commodity, such as in our CO2 business, we hedge to lessen the impact of price swings.
Our business model has worked well and KMP has delivered a compound average annual return of 25 percent to unitholders over the past 12 years. In addition to delivering value to our unitholders, our focus is on operating our assets safely to protect the public and the environment. We spend millions of dollars each year on integrity management programs and maintenance to operate our assets safely.
At Kinder Morgan, we pride ourselves on being a different kind of energy company. What makes us different?
It starts at the top with Chairman and CEO Richard D. Kinder, who earns a salary of $1 per year and does not receive a bonus, stock options or restricted stock grants. As a shareholder/unitholder, Kinder’s financial rewards are directly aligned with the company’s investors – if the company does well, he does well.
We also eliminate unnecessary overhead expenses such as corporate aircraft, sponsorships, sports tickets and executive perks. In addition, we cap senior executives’ base salaries far below industry standards. Their financial incentives, such as bonuses, are tied directly to the performance of the company and their own personal performances.
Kinder Morgan has been conducting its business transparently long before it became a corporate buzz word. To our knowledge, we are the only S&P 500 company that publishes its annual budget on its web site, which enables investors and others to follow our progress throughout the year. We also post our environmental, health and safety (EHS) performance on our web site. KMP continues to outperform the industry averages in most EHS categories.
Kinder Morgan does not have a Political Action Committee (PAC), nor do we make any political contributions. Any political contributions made by executives or employees are made individually as private citizens with their own personal money. KMR is a limited partner in and manages and controls the business and affairs of KMP. KMR has no properties and its success is dependent upon its operation and management of KMP and KMP's resulting performance.
KMI owns the general partner and limited partner units in KMP. KMI also owns 20 percent of and operates Natural Gas Pipeline Company of America (NGPL), which serves the high-demand Chicago market.
Kinder Morgan has approximately 8,000 employees.” www.kne.com
Holy cow is this company for real! Lets see if they put their money where their mouth is. The stock is trading at $72.47 and has been upward trending since 2009. 52 week low was at around $63. They have also increased the quarterly dividend from $1.07 to $1.13 in the past year. KMR has a solid history of dividend increases. Not only that but their net profit margin is 15.38%.
Current dividend yield is 6.24%. I don’t see any downside to owning this stock. Pipelines wear out and need upgrading and replacement over the years but they are actively accomplishing this too. Put this in my “THUMBS UP” category.
Disclaimer I plan to purchase KMR down the road.
MLP ETFs: A Fixed-Income Alternative
Are you looking for a stable and relatively high yield fixed-income asset? Then you may want to take a gander at master limited partnerships (MLPs) exchange traded funds (ETFs), which have only recently come to market.
If you’re unfamiliar with this sector, here’s the short of it: MLPs are a great way to play the energy industry with the added benefit of regular dividend payouts and investment appreciation.
Wells Fargo Senior Energy MLP Analyst Michael Blum believes that MLPs still have plenty of potential, with strong business fundamentals, distribution growth and attractive yields, writes Brian Sylvestor for Investor Ideas.
Those are the basics. Now here’s what you really need to know about this sector that’s more than likely new to you:
If you’re unfamiliar with this sector, here’s the short of it: MLPs are a great way to play the energy industry with the added benefit of regular dividend payouts and investment appreciation.
Wells Fargo Senior Energy MLP Analyst Michael Blum believes that MLPs still have plenty of potential, with strong business fundamentals, distribution growth and attractive yields, writes Brian Sylvestor for Investor Ideas.
Those are the basics. Now here’s what you really need to know about this sector that’s more than likely new to you:
- There are different kinds of MLPs. Exploration and production (E&P) MLPs plays produce oil and natural while gather and processing (G&P) MLPs deal in extracted natural gas liquids (NGLs). G&P MLPs benefit from rising oil prices and low natural gas prices.
- Around 80% of distributions received from MLPs will be tax deferred until the asset is sold. MLPs are also equities, which means there is an upside in the price. Additionally, MLP distributions may change. Blum forecasts a 5% medium distribution growth for the MLP sector over the next couple of years.
- MLPs are slightly sensitive to interest rate changes – a spike in interest rates will cause MLPs to underperform, so watch for any hints of Federal Reserve action on that front. MLPs are also correlated to commodity prices, with a higher correlation toward rising crude oil – certainly an advantageous situation these days.
- Short-term bursts won’t affect MLPs too much because they operate based on volume of oil or natural gas shipped, which provide investors with predictable and stable cash flows, reports Jim Fink for Investing Daily.
- MLPs pay taxes at the partner, or unitholder, level and most of their income flow to their partners in the business, says Christine Benz for Morningstar. By gaining this tax status, MLPs must provide 90% of their income from “qualified sources,” or producing, processing, and transporting energy.
- Since MLP payouts aren’t dividends, investors report income on a K-1 form, as you would with futures-based ETFs.
- Alerian MLP ETF (NYSEArca: AMLP): AMLP launched last September, and it’s the first MLP ETF. Until this fund came along, MLP access could only be had in ETNs. It delivers a nice yield (currently close to 6%), though its performance has been flat since launch. This fund is diversified across three primary MLPs: petroleum transportation, natural gas pipelines and gathering and processing.
- Credit Suisse Cushing 30 MLP Index (NYSEArca: MLPN): MLPN owns 30 companies involved in the energy infrastructure market. Each holding in the fund starts off with a 3.33% weighting after rebalancing quarterly, making it a more equally-weighted fund instead of the more common route of cap-weighting.
- UBS E-TRACS Alerian Natural Gas MLP ETN (NYSEArca: MLPG): MLPG also appeared on the market in March 2010. It has a current yield of 6.23%. Its top 10 components range between 9.7% of the total portfolio (in the case of Enterprise Products Partners) down to 4.4% (in the case of MarkWest Energy Partners).
- JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ): AMJ has a current yield of 5.04%. It’s a tad more concentrated than other MLP funds, however; the top two constituents account for more than 25% of the fund. If concentration is a concern for you, then you might be better off with an equally-weighted fund, or one that simply has its holdings spread out a little more.
Five High Yield Dividend Growth Stocks Raising Distributions
Dividend investors typically face a tradeoff between dividend yield and dividend growth. Companies with high yields often keep distributions unchanged or do not increase them at a rate that would compensate for the eroding power of inflation. Because of the higher yields, retirees tend to prefer the higher yield today. The companies with low yields on the other hand typically can afford to grow distributions much faster than the rate of inflation. Younger investors typically invest in these dividend growth stocks, in order to generate a sufficient yield on cost down the road.
The dividend growth companies that raised distributions last week were no exception:
Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. This master limited partnership announced a 1.30% increase in its quarterly distributions to 59 cents/unit. This was also a 5.40% increase over the Q1 2010 distribution. This dividend achiever has raised distributions every year since going public in 1998. Yield: 5.50
Plains All American Pipeline, L.P. (PAA), through its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquefied petroleum gas and other natural gas-related petroleum products (LPG) in the United States and Canada. This master limited partnership announced a 0.80% increase in its quarterly distributions to 95.75 cents/unit. This was also a 3.20% increase over the Q1 2010 distribution. This dividend achiever has raised distributions every year since going public in 1999. Yield: 5.90%
Genesis Energy, L.P. (GEL), together with its subsidiaries, operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States. The company operates through four divisions: Pipeline Transportation, Refinery Services, Industrial Gases, and Supply and Logistics. This master limited partnership announced a 3.20% increase in its quarterly distributions to 40 cents/unit. This was also a 11.10% increase over the Q1 2010 distribution. In addition to that Genesis Energy announced the elimination of its incentive distribution rights to the general partner. This MLP has raised distributions for seven years in a row. Yield: 5.90%
Shaw Communications Inc. (SJR), a diversified communications company, provides broadband cable television, Internet, digital phone, telecommunications, and satellite direct-to-home (DTH) services primarily in Canada and the United States. The company increased monthly dividends by 5% to 7.67 canadian cents/share. Shaw Communications is a member of the international dividend achievers index, and has increased dividends for 9 years in a row. Yield: 4.40%
Alliant Energy Corporation (LNT) operates in electric and gas utility businesses in the United States. The company announced a 13% raise in its quarterly dividends to 42.50 cents/share. This was the ninth consecutive dividend increase for Alliant Energy. Yield: 4.50%
CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. It operates in two segments, Pharmacy Services and Retail Pharmacy. The company announced a 43% raise in its quarterly dividends to 12.50 cents/share. This was the eight consecutive dividend increase for CVS Caremark. Yield: 1.40%
Most of the companies which raised distributions last week, and have raised distributions for over 5 years, were high dividend stocks such as master limited partnerships, utilities and telecoms. While their current yields are high, their dividend growth rates have been low. CVS on the other hand has a low current yield, however the dividend has been rising quickly. Just like anything in life, a balanced approach to include high yield stocks with low dividend growth, low yield stocks with high dividend growth and stocks with moderate yields and growth would ensure that investors receive a diversified income stream which provides sufficient current dividend income today, while also providing a decent dividend growth over time.
Full Disclosure: None
The dividend growth companies that raised distributions last week were no exception:
Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. This master limited partnership announced a 1.30% increase in its quarterly distributions to 59 cents/unit. This was also a 5.40% increase over the Q1 2010 distribution. This dividend achiever has raised distributions every year since going public in 1998. Yield: 5.50
Plains All American Pipeline, L.P. (PAA), through its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquefied petroleum gas and other natural gas-related petroleum products (LPG) in the United States and Canada. This master limited partnership announced a 0.80% increase in its quarterly distributions to 95.75 cents/unit. This was also a 3.20% increase over the Q1 2010 distribution. This dividend achiever has raised distributions every year since going public in 1999. Yield: 5.90%
Genesis Energy, L.P. (GEL), together with its subsidiaries, operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States. The company operates through four divisions: Pipeline Transportation, Refinery Services, Industrial Gases, and Supply and Logistics. This master limited partnership announced a 3.20% increase in its quarterly distributions to 40 cents/unit. This was also a 11.10% increase over the Q1 2010 distribution. In addition to that Genesis Energy announced the elimination of its incentive distribution rights to the general partner. This MLP has raised distributions for seven years in a row. Yield: 5.90%
Shaw Communications Inc. (SJR), a diversified communications company, provides broadband cable television, Internet, digital phone, telecommunications, and satellite direct-to-home (DTH) services primarily in Canada and the United States. The company increased monthly dividends by 5% to 7.67 canadian cents/share. Shaw Communications is a member of the international dividend achievers index, and has increased dividends for 9 years in a row. Yield: 4.40%
Alliant Energy Corporation (LNT) operates in electric and gas utility businesses in the United States. The company announced a 13% raise in its quarterly dividends to 42.50 cents/share. This was the ninth consecutive dividend increase for Alliant Energy. Yield: 4.50%
CVS Caremark Corporation (CVS) operates as a pharmacy services company in the United States. It operates in two segments, Pharmacy Services and Retail Pharmacy. The company announced a 43% raise in its quarterly dividends to 12.50 cents/share. This was the eight consecutive dividend increase for CVS Caremark. Yield: 1.40%
Most of the companies which raised distributions last week, and have raised distributions for over 5 years, were high dividend stocks such as master limited partnerships, utilities and telecoms. While their current yields are high, their dividend growth rates have been low. CVS on the other hand has a low current yield, however the dividend has been rising quickly. Just like anything in life, a balanced approach to include high yield stocks with low dividend growth, low yield stocks with high dividend growth and stocks with moderate yields and growth would ensure that investors receive a diversified income stream which provides sufficient current dividend income today, while also providing a decent dividend growth over time.
Full Disclosure: None
Are ETNs Finally Coming Of Age?
The success of a number of exchange-traded notes this year, including two that canvass the market of VIX volatility futures and others offering investors exposure to master limited partnerships, is raising the question of whether ETNs are about to truly take off and become part of every investor’s portfolio.
ETNs, unlike ETFs, offer investors direct exposure to an underlying index, minus expenses. They don’t own underlying baskets of securities like ETFs do, which not only eliminates tracking error but also gives ETNs access to parts of the investment universe that are hard to cover.
The catch -- and it’s been a big one since the market crash of 2008, 2009 -- is that ETNs are unsecured credit obligations backed only by the faith and good credit of their issuers. If an issuer goes under, investors essentially forfeit their entire investment. That chance seemed very remote when ETNs first launched in 2006, and perhaps it’s fading today. Some issuers say investors are getting over fears and are now curious about ETN attributes, including tax advantages.
“I am very confident that we’re going through what I’m calling ‘The Big Thaw’ when it comes to exchange-traded notes, and I think it started with the VIX products that iPath brought,” Bryon Lake, senior product strategy manager at Wheaton, Ill.-based Invesco PowerShares, said in a telephone interview. “We’re getting more questions and more feedback from investors that are looking for and comfortable with the exchange-traded note.”
ETNs represent about $14.5 billion out of the $1 trillion invested in exchange-traded vehicles, according to data compiled by IndexUniverse.com. And, inflows are building momentum:$1.21 billion in 2008; $4.18 billion in 2009 and almost $6 billion in 2010. Moreover, while ETN assets are less than 1.5 percent of total assets in exchange-traded products, the number of ETNs on the market is 131, or almost 12 percent of the 1,101 ETPs now listed in the U.S.
"It's clear that 2010 was the year of the ETN," said Keith Styrcula, chairman and founder of the Structured Products Association, a New York-based trade group with its finger on the pulse of developments in the world of ETNs. "With the proliferation of new issues and new issuers, the ETN came into its own as a liquid, tax-efficient investment vehicle," Styrcula added.
VIX, MLPs, Commodities and Beyond
Much of the recent growth in ETN assets has centered on a few products, notably the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca:VXX - News) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca:VXZ - News). The two products now have $1.69 billion and $696 million in assets, respectively. The notes are designed to provide proxy exposure to the CBOE Volatility Index, or VIX, by reflecting the returns of short- and intermediate-term futures on the VIX index. Investors have been attracted to them as a potential hedge against unexpected market turbulence.
“ETNs allow you to track the more esoteric asset classes that would be tougher to do with an ETF, like the VIX, said Rick Romey, president of of ETF Portfolio Solutions, a Kansas-based Registered Investment Advisor. Romey added that his firm has not yet embraced ETNs, in part because of credit-related concerns.
The other big relative newcomer is the JPMorgan Alerian MLP Index ETN (NYSEArca:AMJ - News), a first-to-market exchange-traded note launched originally by Bear Stearns. After treading water for a few years, AMJ has caught on, pulling in more than $1 billion in new cash flow in the past year. It now has $2.26 billion in assets. Investors are attracted to AMJ for its yield, currently around 5 percent. ETNs are a slick vehicle for providing exposure to MLPs, which are nearly impossible to package into a tax-efficient mutual fund or ETF structure.
The third leg of ETN assets is in commodities, an area that includes the oldest and biggest ETN of all, the $2.82 billion iPath Dow Jones-UBS Commodity Total Return ETN (NYSEArca:DJP - News). DJP launched in 2006.
iPath has a broad family of futures-based commodity-related ETNs, which the company says gives investors the ability to play the emerging markets-related commodities boom of the past 10 years in a variety of ways.
“At different times, different commodities become interesting to people,” Tim Edwards, a New York-based iPath product development vice president, told IndexUniverse.com. “Right now, copper is one of them.”
The iPath Dow Jones-UBS Copper Sub Total Return ETN (NYSEArca:JJC - News) has returned about 25 percent this year and 43 percent in the past six months; it is currently the only ETP providing exposure specifically to copper. Two ETFs, the First Trust ISE Global Copper Index Fund (NYSEArca: CU) and the Global X Copper Miners ETF (NYSEArca:COPX - News) own companies that mine copper, though the companies held by the ETFs aren't necessarily exclusively focused on the mining of copper.
The iPath family of ETN also includes securities that allow investors to get exposure to currencies and to position their portfolios for changing interest rates.
Different Tax Treatment
Invesco PowerShares has built on the success of its commodities ETF franchise (including the $5 billion PowerShares DB Commodity Tracking ETF (NYSEArca:DBC - News)) and now offers investors the option of gaining similar exposure in an ETN wrapper. DBC’s ETN counterpart, the PowerShares DB Commodity Long ETN (NYSEArca:DPU - News), had gathered $6.7 million as of Dec. 29.
Apart from the broad-based DPU, the company has replicated ETF strategies using ETNs in four other commodity markets:oil, base metals, agriculture and gold. PowerShares has extended the market on the ETN side with short ETNs and ETNs offering double-exposure long and short.
“The ETN structure provides us some flexibility in order to access markets that may be more difficult to access through the ETF vehicle,” Bryon Lake, the PowerShares executive said. “For example, our double-long and double-short gold ETNs -- (NYSEArca:DGP - News) and (NYSEArca:DZZ - News) -- have seen significant uptick in activity and assets due to all the attention gold has been getting for the last year or so,” Lake said.
There are also potential tax advantages to owning ETNs, which, for commodity ETNs under prevailing IRS interpretations, are taxed like zero-coupon bonds. That means investors don’t owe tax on the note until they sell, the note gets called (if it’s callable), or the note matures. Commodity ETF investors have their positions marked-to-market each year, creating an annual tax bill. ETN investors also have to fill out 1099 tax forms, as opposed to the K1 forms reserved for investors in futures. That’s true even for ETN investors with futures-based holdings.
“We hear from some investors that they would prefer to not get K1s,” said Lake. “And they can generally get the same exposure through ETN vehicles that may offer them a different tax treatment.”
Lingering Doubts
Currently, the biggest issuers of ETNs are firms that thrived during the near-collapse of the financial system in September 2008. Indeed, companies such as iPath ETN issuer Barclays; J.P. Morgan, the company behind the MLP exchange-traded note “AMJ;” and Deutsche Bank, the sponsor of the ETNs marketed by PowerShares, all took advantage of the turmoil their rivals barely survived.
“The market crash got rid of a lot of players in the marketplace. So those who were left standing like Barclays who had the creditworthiness, could then grab a bigger market share,” said Richard Keary, president of Global ETF Advisors LLC, a New York-based firm that helps companies bring exchange-traded products to market.
Recently, however, that has changed. Citigroup recently launched the volatility-related C-Tracks Exchange-Traded Notes Based on the Performance of the Citi Volatility Index (NYSEArca:CVOL - News). The note has attracted $13.8 million in assets since its rollout in mid-November. A slew of other firms are also jumping into the ETN arena, among them Credit Suisse, UBS, the Royal Bank of Scotland as well as a firm called VelocityShares that was formed in part by an executive who helped launch iPath's ETNs
What could that mean? Are investors so complacent that firms, such as CitiGroup or RBS, formerly on life-support can now issue debt products and attract attention? Or have Citi and RBS turned the corner and now is seen as trustworthy? Or, mostly likely, do investors see these as trading products designed for one- or two-day moves, and not as long-haul investments where the credit risk most matters.
Maybe that’s the secret of the ETN rebirth:the notes have focused on providing trading tools rather than long-term investments, reducing the likelihood that investors will be caught in a failed situation.
The uncertainty brings the discussion full circle back to the credit risk implicit in any ETN. After all, three ETN backed by Lehman Brothers closed in September 2008 after the firm declared bankruptcy, and any investor who held to the bitter end lost out.
“I know it’s a long shot,” said Rick Romey, the Kansas-based financial advisor. “The odds of a company going out of business and the ETN holders being left holding the bag is very small probability. But in the last couple of years, we’ve seen a lot of long shots come to fruition and hurt a lot of people.”
Time will tell.
Disclosure I am long AMJ approx 2 weeks ago.
ETNs, unlike ETFs, offer investors direct exposure to an underlying index, minus expenses. They don’t own underlying baskets of securities like ETFs do, which not only eliminates tracking error but also gives ETNs access to parts of the investment universe that are hard to cover.
The catch -- and it’s been a big one since the market crash of 2008, 2009 -- is that ETNs are unsecured credit obligations backed only by the faith and good credit of their issuers. If an issuer goes under, investors essentially forfeit their entire investment. That chance seemed very remote when ETNs first launched in 2006, and perhaps it’s fading today. Some issuers say investors are getting over fears and are now curious about ETN attributes, including tax advantages.
“I am very confident that we’re going through what I’m calling ‘The Big Thaw’ when it comes to exchange-traded notes, and I think it started with the VIX products that iPath brought,” Bryon Lake, senior product strategy manager at Wheaton, Ill.-based Invesco PowerShares, said in a telephone interview. “We’re getting more questions and more feedback from investors that are looking for and comfortable with the exchange-traded note.”
ETNs represent about $14.5 billion out of the $1 trillion invested in exchange-traded vehicles, according to data compiled by IndexUniverse.com. And, inflows are building momentum:$1.21 billion in 2008; $4.18 billion in 2009 and almost $6 billion in 2010. Moreover, while ETN assets are less than 1.5 percent of total assets in exchange-traded products, the number of ETNs on the market is 131, or almost 12 percent of the 1,101 ETPs now listed in the U.S.
"It's clear that 2010 was the year of the ETN," said Keith Styrcula, chairman and founder of the Structured Products Association, a New York-based trade group with its finger on the pulse of developments in the world of ETNs. "With the proliferation of new issues and new issuers, the ETN came into its own as a liquid, tax-efficient investment vehicle," Styrcula added.
| Top Gainers ($, Millions) | 2010's Most Popular ETNs as of Dec. 29 | ||||||
| Ticker | Name | Issuer | Flows | AUM ($, M) | Turnover | ||
| VXX | iPath S&P 500 VIX Short-Term Futures ETN | Barclays Capital | 2,591.07 | 1,692.04 | 119,135.19 | ||
| AMJ | JPMorgan Alerian MLP ETN | JPMorgan Chase | 1,229.85 | 2,255.00 | 6,148.97 | ||
| VXZ | iPath S&P 500 VIX Mid-Term Futures ETN | Barclays Capital | 700.23 | 695.89 | 7,977.51 | ||
| DJP | iPath Dow Jones-UBS Commodity Total Return ETN | Barclays Capital | 322.65 | 2,822.92 | 3,995.61 | ||
| MLPI | UBS E-TRACS Alerian MLP Infrastructure ETN | UBS | 180.51 | 194.27 | 243.62 | ||
| RJI | ELEMENTS Rogers International Commodity - Total Return ETN | ELEMENTS | 141.84 | 662.92 | 872.68 | ||
| MLPN | Credit Suisse Cushing 30 MLP | Credit Suisse | 94.13 | 121.30 | 377.98 | ||
| RJA | ELEMENTS Rogers International Commodity - Agriculture Total Return ETN | ELEMENTS | 90.57 | 517.06 | 890.05 | ||
| UCI | UBS E-TRACS CMCI Total Return ETN | UBS | 81.81 | 129.99 | 54.94 | ||
| JJG | iPath Dow Jones UBS Grains Sub Total Return ETN | Barclays Capital | 80.59 | 188.89 | 973.92 |
VIX, MLPs, Commodities and Beyond
Much of the recent growth in ETN assets has centered on a few products, notably the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca:VXX - News) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca:VXZ - News). The two products now have $1.69 billion and $696 million in assets, respectively. The notes are designed to provide proxy exposure to the CBOE Volatility Index, or VIX, by reflecting the returns of short- and intermediate-term futures on the VIX index. Investors have been attracted to them as a potential hedge against unexpected market turbulence.
“ETNs allow you to track the more esoteric asset classes that would be tougher to do with an ETF, like the VIX, said Rick Romey, president of of ETF Portfolio Solutions, a Kansas-based Registered Investment Advisor. Romey added that his firm has not yet embraced ETNs, in part because of credit-related concerns.
The other big relative newcomer is the JPMorgan Alerian MLP Index ETN (NYSEArca:AMJ - News), a first-to-market exchange-traded note launched originally by Bear Stearns. After treading water for a few years, AMJ has caught on, pulling in more than $1 billion in new cash flow in the past year. It now has $2.26 billion in assets. Investors are attracted to AMJ for its yield, currently around 5 percent. ETNs are a slick vehicle for providing exposure to MLPs, which are nearly impossible to package into a tax-efficient mutual fund or ETF structure.
The third leg of ETN assets is in commodities, an area that includes the oldest and biggest ETN of all, the $2.82 billion iPath Dow Jones-UBS Commodity Total Return ETN (NYSEArca:DJP - News). DJP launched in 2006.
iPath has a broad family of futures-based commodity-related ETNs, which the company says gives investors the ability to play the emerging markets-related commodities boom of the past 10 years in a variety of ways.
“At different times, different commodities become interesting to people,” Tim Edwards, a New York-based iPath product development vice president, told IndexUniverse.com. “Right now, copper is one of them.”
The iPath Dow Jones-UBS Copper Sub Total Return ETN (NYSEArca:JJC - News) has returned about 25 percent this year and 43 percent in the past six months; it is currently the only ETP providing exposure specifically to copper. Two ETFs, the First Trust ISE Global Copper Index Fund (NYSEArca: CU) and the Global X Copper Miners ETF (NYSEArca:COPX - News) own companies that mine copper, though the companies held by the ETFs aren't necessarily exclusively focused on the mining of copper.
The iPath family of ETN also includes securities that allow investors to get exposure to currencies and to position their portfolios for changing interest rates.
Different Tax Treatment
Invesco PowerShares has built on the success of its commodities ETF franchise (including the $5 billion PowerShares DB Commodity Tracking ETF (NYSEArca:DBC - News)) and now offers investors the option of gaining similar exposure in an ETN wrapper. DBC’s ETN counterpart, the PowerShares DB Commodity Long ETN (NYSEArca:DPU - News), had gathered $6.7 million as of Dec. 29.
Apart from the broad-based DPU, the company has replicated ETF strategies using ETNs in four other commodity markets:oil, base metals, agriculture and gold. PowerShares has extended the market on the ETN side with short ETNs and ETNs offering double-exposure long and short.
“The ETN structure provides us some flexibility in order to access markets that may be more difficult to access through the ETF vehicle,” Bryon Lake, the PowerShares executive said. “For example, our double-long and double-short gold ETNs -- (NYSEArca:DGP - News) and (NYSEArca:DZZ - News) -- have seen significant uptick in activity and assets due to all the attention gold has been getting for the last year or so,” Lake said.
There are also potential tax advantages to owning ETNs, which, for commodity ETNs under prevailing IRS interpretations, are taxed like zero-coupon bonds. That means investors don’t owe tax on the note until they sell, the note gets called (if it’s callable), or the note matures. Commodity ETF investors have their positions marked-to-market each year, creating an annual tax bill. ETN investors also have to fill out 1099 tax forms, as opposed to the K1 forms reserved for investors in futures. That’s true even for ETN investors with futures-based holdings.
“We hear from some investors that they would prefer to not get K1s,” said Lake. “And they can generally get the same exposure through ETN vehicles that may offer them a different tax treatment.”
Lingering Doubts
Currently, the biggest issuers of ETNs are firms that thrived during the near-collapse of the financial system in September 2008. Indeed, companies such as iPath ETN issuer Barclays; J.P. Morgan, the company behind the MLP exchange-traded note “AMJ;” and Deutsche Bank, the sponsor of the ETNs marketed by PowerShares, all took advantage of the turmoil their rivals barely survived.
“The market crash got rid of a lot of players in the marketplace. So those who were left standing like Barclays who had the creditworthiness, could then grab a bigger market share,” said Richard Keary, president of Global ETF Advisors LLC, a New York-based firm that helps companies bring exchange-traded products to market.
Recently, however, that has changed. Citigroup recently launched the volatility-related C-Tracks Exchange-Traded Notes Based on the Performance of the Citi Volatility Index (NYSEArca:CVOL - News). The note has attracted $13.8 million in assets since its rollout in mid-November. A slew of other firms are also jumping into the ETN arena, among them Credit Suisse, UBS, the Royal Bank of Scotland as well as a firm called VelocityShares that was formed in part by an executive who helped launch iPath's ETNs
What could that mean? Are investors so complacent that firms, such as CitiGroup or RBS, formerly on life-support can now issue debt products and attract attention? Or have Citi and RBS turned the corner and now is seen as trustworthy? Or, mostly likely, do investors see these as trading products designed for one- or two-day moves, and not as long-haul investments where the credit risk most matters.
Maybe that’s the secret of the ETN rebirth:the notes have focused on providing trading tools rather than long-term investments, reducing the likelihood that investors will be caught in a failed situation.
The uncertainty brings the discussion full circle back to the credit risk implicit in any ETN. After all, three ETN backed by Lehman Brothers closed in September 2008 after the firm declared bankruptcy, and any investor who held to the bitter end lost out.
“I know it’s a long shot,” said Rick Romey, the Kansas-based financial advisor. “The odds of a company going out of business and the ETN holders being left holding the bag is very small probability. But in the last couple of years, we’ve seen a lot of long shots come to fruition and hurt a lot of people.”
Time will tell.
Disclosure I am long AMJ approx 2 weeks ago.
Saturday, February 19, 2011
Questar approved a 9% increase in the quarterly common-stock dividend to $0.1525 (STR)
The dividend is payable on March 21 to shareholders of record on March 4. The ex-dividend date is March 2.
The dividend yield moves from 3.11% to 3.39%.
Questar Corporation, a natural gas-focused energy company, through its subsidiaries, engages in the gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution businesses. It acquires, explores for, develops, and produces natural gas, oil, and natural gas liquids in the Rocky Mountain region of Wyoming, Utah, Colorado, and North Dakota, as well as the Midcontinent region of Oklahoma, Texas, and Louisiana; and manages, develops, and produces reserves for gas utility and sells crude-oil production from certain oil-producing properties. The company also provides midstream field services, including natural gas-gathering and processing for affiliates and third parties; markets equity and third-party natural gas, oil, and natural gas liquids to refiners, remarketers, and other companies; provides risk-management services; and owns and operates an underground gas-storage reservoir.
In addition, it offers interstate natural gas transportation and underground storage services; gas-processing services for third parties; interstate natural gas transportation and storage, and other energy services; and retail natural gas distribution services. As of December 31, 2009, it had estimated proved reserves of 2,746.9 Bcfe; served 898,558 sales and transportation customers; owned 2,568 miles of interstate pipeline with total firm capacity commitments of 4,243 Mdth per day; and owned and operated the 488-mile Southern Trails Pipeline from the Blanco hub in the San Juan Basin to the California state line. Questar Corporation was founded in 1922 and is headquartered in Salt Lake City, Utah.
Disclosure I am Long STR shares.
Friday, February 18, 2011
Commodity ETFs and Contango
Commodity exchange traded funds (ETFs) have become one of the most popular fund types with investors. They don’t all work the same, however, and before you dive in, you need to understand this market in a bit of detail to avoid getting surprised, or worse, burned.
Michael Iachini for Charles Schwab reports that in order to understand how commodity ETFs work, you’ll need to know what it’s tracking and how it’s tracking it.
As ETF providers become more aware of these issues, however, they’re structuring their strategies around mitigating the impact of contango. Backwardation is the opposite phenomenon, Joyce Hanson for Advisor One reports.
There are two key types of commodity ETFs that give exposure to prices:
Michael Iachini for Charles Schwab reports that in order to understand how commodity ETFs work, you’ll need to know what it’s tracking and how it’s tracking it.
- Spot Price: The spot price of a commodity is the price that it is trading at right now. If you wanted to buy a barrel of oil or a bushel of corn to take home today, you would pay the spot price.
- Futures Price: The futures price is the price you would pay today for the right to receive the commodity at some point in the future (for example, three months from today). With a futures contract, you’re locking in a price today rather than waiting to see what the spot price will be at some point in the future and then making the purchase at that price. It’s most advantageous, of course, to see the futures price go up after you’ve locked in a lower price.
As ETF providers become more aware of these issues, however, they’re structuring their strategies around mitigating the impact of contango. Backwardation is the opposite phenomenon, Joyce Hanson for Advisor One reports.
There are two key types of commodity ETFs that give exposure to prices:
- Physical ETFs: If your ETF holds the physical commodity, the value of your ETF shares will move with the spot price of the commodity, though the price could also be affected by security issues and the cost of storing the commodity itself. ETFS Physical Swiss Gold (NYSEArca: SGOL) is one of the growing number of such funds; each share is backed by a fractional ownership in gold bars, which are stored in secure vaults around the world.
- Futures Contracts: Other ETFs hold baskets of futures contracts and never take possession of the physical commodity. This is the most common commodity ETF structure, whether it’s for oil, agricultural commodities, broad baskets of commodities or even some precious metal ETFs. Storing oil or wheat is more difficult than storing bullion, which is why these ETFs don’t just hold the physical goods. United States Oil (NYSEArca: USO), which owns oil futures contracts, is one example of such a fund. In fact, most commodity ETFs own futures – they’re less frequently physically-backed.
Dividend Yield, Growth, Safety and a Low Valuation................Need I say More
Chevron Corp. (CVX) is the second largest integrated energy company in the United States, and the world's fourth-largest oil company based on proven reserves. Yet in spite of its immense size, I believe this top quality company has plenty of opportunity to grow worldwide.
Chevron's balance sheet is strong and their cash balances exceeded their debt by over $5.6 billion at the end of 2010. Additionally, we are confident that their strong cash flow generation will allow them to continue to repurchase shares, aggressively invest in their future and continue to grow their dividend as they have for the past 23 years.
I believe that Chevron’s stock is undervalued with a PE ratio of just over ten times earnings, a debt to equity ratio of 10% and the dividend yield of 3%. Over the last decade, since the recession of 2001, Chevron has grown earnings per share by 8.8% per annum.
In contrast, the S&P 500, representing the average company, has only grown earnings at 4.9% per annum. Nevertheless, the current PE ratio of the S&P 500 is 15.6, which is approximately 50% higher than Chevron's PE of 10. Chevron has almost twice the growth rate, almost twice the dividend yield, a debt to equity ratio of 10 versus the S&P 500's 49, and yet ludicrously trades at a discount valuation to the index.
Disclosure I am Long CVX shares.
Chevron's balance sheet is strong and their cash balances exceeded their debt by over $5.6 billion at the end of 2010. Additionally, we are confident that their strong cash flow generation will allow them to continue to repurchase shares, aggressively invest in their future and continue to grow their dividend as they have for the past 23 years.
I believe that Chevron’s stock is undervalued with a PE ratio of just over ten times earnings, a debt to equity ratio of 10% and the dividend yield of 3%. Over the last decade, since the recession of 2001, Chevron has grown earnings per share by 8.8% per annum.
In contrast, the S&P 500, representing the average company, has only grown earnings at 4.9% per annum. Nevertheless, the current PE ratio of the S&P 500 is 15.6, which is approximately 50% higher than Chevron's PE of 10. Chevron has almost twice the growth rate, almost twice the dividend yield, a debt to equity ratio of 10 versus the S&P 500's 49, and yet ludicrously trades at a discount valuation to the index.
Disclosure I am Long CVX shares.
Monday, February 14, 2011
Commodity ETFs Get No Love From Investors (GLD, IAU, SGOL, SLV, SIVR, PPLT, PALL, BAL, USO, USCI, CORN, WOOD, COPX)
It doesn’t seem like that long ago that exchange-traded commodity products were the darlings of the ETF world. Praised for democratizing an entire asset class (and one capable of delivering non-correlated returns to investors at that), commodity ETFs saw billions of dollars of cash inflows in 2009. Investors rushed to get their hands on everything from copper to tin, and they embraced the transparency and liquidity that the exchange-traded structure had to offer.
Last year was a banner year for commodities, with inflationary pressures, surging demand from emerging markets, and a host of supply issues conspiring to push prices of various resources sharply higher. Corn prices surged, gold repeatedly set new record highs, and a host of other agricultural products–including sugar and soybeans–climbed sharply higher. While 2010 was a stellar year all around for investors–most major asset classes posted nice gains–commodities were clearly the star. Lists of the year’s best performing ETFs included numerous commodity products, and gains of 50% were relatively common.
Considering the white hot performances turned in, 2010 should have been another great year for commodity ETFs–especially given investors’ tendency to chase returns. And a cursory look does indeed show continued strong interest in commodity ETFs; according to data from the National Stock Exchange, long unleveraged commodity products took in close to $11 billion in inflows. But there is more (or actually, less) to that number than meets the eye. Almost all of cash inflows into commodity ETPs in 2010 were attributable to physically-backed precious metals funds:
According to the ETF Screener, there are 74 non-leveraged, non-inverse commodity ETPs. Stripping out the seven physically-backed precious metals products SPDR Gold Shares (NYSE:GLD), iShares Gold Trust (NYSE:IAU), ETFS Physical Swiss Gold Shares (NYSE:SGOL), iShares Silver Trust (NYSE:SLV), ETFS Physical Silver Shares (NYSE:SIVR), ETFS Physical Platinum Shares (NYSE:PPLT), and ETFS Physical Palladium Shares (NYSE:PALL), this group took in only about $250 million last year. January inflows showed a decent bounce back, but the lack of interest still seems a bit strange. Precious metals have obviously been on quite a hot streak, so it shouldn’t be a total surprise that assets have been flowing into these funds at a torrid pace. But gold and silver aren’t the only commodities that have posted eye-popping gains over the last year–yet they account for the lions share of inflows. The iPath Cotton ETN (NYSE:BAL) jumped more than 95% in 2010, yet took in just $17 million of new assets.
War On Contango
It seems likely that the lack of interest in certain commodity ETFs has something to do with the manner in which exposure is achieved–and perhaps not necessarily the underlying resource. The seven precious metals products highlighted above are all physically-backed, meaning that the underlying assets are physical commodities. The majority of commodity ETFs don’t invest directly in natural resources, but rather in futures contracts written on those commodities. And as investors have learned, the returns generated by a futures-based fund can be impacted not only by changes in the spot price of the underlying asset, but by the slope of the futures curve. While futures-based funds often exhibit near-perfect correlation to the spot commodity prices, there can be a significant difference between the return delivered by a futures strategy relative to a hypothetical return on spot prices. For example, the United States Oil Fund (NYSE:USO), which invests in futures contracts on light, sweet crude oil, has lagged behind a hypothetical return on spot crude oil over the last several years:
The potentially adverse impact of contango in the returns of commodity ETFs has been well documented, and it appears that the nuances of futures-based investment strategies have had a material impact on investors interest in commodity products. Exposure to spot commodity prices remains desirable, but that simply isn’t possible for many resources. The high value-to-weight ratio of gold and silver makes construction of a physically-backed fund relatively straightforward. Funds that hold barrels full of crude oil or bushels of wheat would be impossible for logistical reasons, while the costs incurred in offering physically-backed exposure to other commodities would be a deterrent as well.
But that doesn’t mean that there aren’t ways to address the issue of contango in commodity products. It is perhaps no coincidence that two of the most successful commodity products to hit the market recently were designed to tackle the contango issue. The United States Commodity Index Fund (NYSE:USCI) screens 27 potential component commodity futures based on observable price signals, including a filter to select those least likely to be impacted adversely by contango. USCI raked in more than $90 million last year (it debuted in August) and had blown away other broad-based commodity funds from a performance perspective
Another popular commodity ETF has been the Teucrium Corn Fund (NYSE:CORN), a resource-specific product designed to reduce the effects of contango and backwardation. Unlike many commodity ETFs, CORN spreads exposure across multiple maturities, allocating 35% to the second-to-expire CBOT Corn Futures Contract, 30% to the third-to-expire CBOT Corn Futures Contract, and 35% to the CBOT Corn Futures Contract expiring in the December following the expiration month of the third- to-expire contract. That results in a smaller “roll yield” that can potentially deliver returns that correspond more closely to a hypothetical investment in spot corn prices. CORN took in $35 million last year, and that success has prompted Teucrium to roll out a natural gas ETF (NAGS) that approaches exposure in a similar manner. The company also has plans for a crude oil ETF (CRUD) that should begin trading within the next month.
Multiple issuers have filed for approval of physically-backed copper ETFs, and ETF Securities has already introduced three physical metal funds (copper, tin, and nickel) on the London Stock Exchange.
Betting On Commodities–Through Stocks
Another explanation for the tepid interest in commodity ETFs may be the surge in popularity of funds focusing on commodity intensive equities. Because the profitability of companies engaged in the extraction and sale of natural resources depends on the prevailing market price, mining stocks and other companies engaged in various aspects of commodity production can provide a contango-free option for establishing exposure to natural resource prices. The 25 products in the Commodity Producers Equities ETFdb Category took in $2.5 billion in aggregate last year. While funds focusing on gold and silver miners were among the most popular, broad-based funds such as HAP and other sector-specific options such as iShares S&P Global Timber & Forestry Idx (NYSE:WOOD) (timber) and Global X Copper Miners ETF (NYSE:COPX) (copper miners) also attracted significant dollar amounts
.
Innovation Continues
Since the first generation of commodity products burst on to the scene, investors have seemingly become more critical of the manner in which exposure to natural resources in offered. Contango has become a four-letter word to those who have been burned by an upward sloping futures curve, and interest in products that offer exposure through futures contracts has waned considerably. As recent product launches and the growing pipeline show, issuers are constructing the “next generation” of commodity ETFs to avoid the issues that have plagued the current lineup. Here’s to continued innovation in the commodity ETF space, leading to better options for accessing a very attractive asset class.
Disclosure I am IAU and SLV shares. As Well as the CFD closed end fund.
Last year was a banner year for commodities, with inflationary pressures, surging demand from emerging markets, and a host of supply issues conspiring to push prices of various resources sharply higher. Corn prices surged, gold repeatedly set new record highs, and a host of other agricultural products–including sugar and soybeans–climbed sharply higher. While 2010 was a stellar year all around for investors–most major asset classes posted nice gains–commodities were clearly the star. Lists of the year’s best performing ETFs included numerous commodity products, and gains of 50% were relatively common.
Considering the white hot performances turned in, 2010 should have been another great year for commodity ETFs–especially given investors’ tendency to chase returns. And a cursory look does indeed show continued strong interest in commodity ETFs; according to data from the National Stock Exchange, long unleveraged commodity products took in close to $11 billion in inflows. But there is more (or actually, less) to that number than meets the eye. Almost all of cash inflows into commodity ETPs in 2010 were attributable to physically-backed precious metals funds:
| Category | Inflows | |||
|---|---|---|---|---|
| Physical Gold ETFs | $8,064 | |||
| Physical Silver ETFs | $1,389 | |||
| Physical Platinum ETF | $689 | |||
| Physical Palladium ETF | $599 | |||
| All Other Commodity ETPs | $251 | |||
| Total 2010 Inflows | $10,992 | |||
| Source: NSX.com |
According to the ETF Screener, there are 74 non-leveraged, non-inverse commodity ETPs. Stripping out the seven physically-backed precious metals products SPDR Gold Shares (NYSE:GLD), iShares Gold Trust (NYSE:IAU), ETFS Physical Swiss Gold Shares (NYSE:SGOL), iShares Silver Trust (NYSE:SLV), ETFS Physical Silver Shares (NYSE:SIVR), ETFS Physical Platinum Shares (NYSE:PPLT), and ETFS Physical Palladium Shares (NYSE:PALL), this group took in only about $250 million last year. January inflows showed a decent bounce back, but the lack of interest still seems a bit strange. Precious metals have obviously been on quite a hot streak, so it shouldn’t be a total surprise that assets have been flowing into these funds at a torrid pace. But gold and silver aren’t the only commodities that have posted eye-popping gains over the last year–yet they account for the lions share of inflows. The iPath Cotton ETN (NYSE:BAL) jumped more than 95% in 2010, yet took in just $17 million of new assets.
War On Contango
It seems likely that the lack of interest in certain commodity ETFs has something to do with the manner in which exposure is achieved–and perhaps not necessarily the underlying resource. The seven precious metals products highlighted above are all physically-backed, meaning that the underlying assets are physical commodities. The majority of commodity ETFs don’t invest directly in natural resources, but rather in futures contracts written on those commodities. And as investors have learned, the returns generated by a futures-based fund can be impacted not only by changes in the spot price of the underlying asset, but by the slope of the futures curve. While futures-based funds often exhibit near-perfect correlation to the spot commodity prices, there can be a significant difference between the return delivered by a futures strategy relative to a hypothetical return on spot prices. For example, the United States Oil Fund (NYSE:USO), which invests in futures contracts on light, sweet crude oil, has lagged behind a hypothetical return on spot crude oil over the last several years:
The potentially adverse impact of contango in the returns of commodity ETFs has been well documented, and it appears that the nuances of futures-based investment strategies have had a material impact on investors interest in commodity products. Exposure to spot commodity prices remains desirable, but that simply isn’t possible for many resources. The high value-to-weight ratio of gold and silver makes construction of a physically-backed fund relatively straightforward. Funds that hold barrels full of crude oil or bushels of wheat would be impossible for logistical reasons, while the costs incurred in offering physically-backed exposure to other commodities would be a deterrent as well.
But that doesn’t mean that there aren’t ways to address the issue of contango in commodity products. It is perhaps no coincidence that two of the most successful commodity products to hit the market recently were designed to tackle the contango issue. The United States Commodity Index Fund (NYSE:USCI) screens 27 potential component commodity futures based on observable price signals, including a filter to select those least likely to be impacted adversely by contango. USCI raked in more than $90 million last year (it debuted in August) and had blown away other broad-based commodity funds from a performance perspective
Another popular commodity ETF has been the Teucrium Corn Fund (NYSE:CORN), a resource-specific product designed to reduce the effects of contango and backwardation. Unlike many commodity ETFs, CORN spreads exposure across multiple maturities, allocating 35% to the second-to-expire CBOT Corn Futures Contract, 30% to the third-to-expire CBOT Corn Futures Contract, and 35% to the CBOT Corn Futures Contract expiring in the December following the expiration month of the third- to-expire contract. That results in a smaller “roll yield” that can potentially deliver returns that correspond more closely to a hypothetical investment in spot corn prices. CORN took in $35 million last year, and that success has prompted Teucrium to roll out a natural gas ETF (NAGS) that approaches exposure in a similar manner. The company also has plans for a crude oil ETF (CRUD) that should begin trading within the next month.
Multiple issuers have filed for approval of physically-backed copper ETFs, and ETF Securities has already introduced three physical metal funds (copper, tin, and nickel) on the London Stock Exchange.
Betting On Commodities–Through Stocks
Another explanation for the tepid interest in commodity ETFs may be the surge in popularity of funds focusing on commodity intensive equities. Because the profitability of companies engaged in the extraction and sale of natural resources depends on the prevailing market price, mining stocks and other companies engaged in various aspects of commodity production can provide a contango-free option for establishing exposure to natural resource prices. The 25 products in the Commodity Producers Equities ETFdb Category took in $2.5 billion in aggregate last year. While funds focusing on gold and silver miners were among the most popular, broad-based funds such as HAP and other sector-specific options such as iShares S&P Global Timber & Forestry Idx (NYSE:WOOD) (timber) and Global X Copper Miners ETF (NYSE:COPX) (copper miners) also attracted significant dollar amounts
.
Innovation Continues
Since the first generation of commodity products burst on to the scene, investors have seemingly become more critical of the manner in which exposure to natural resources in offered. Contango has become a four-letter word to those who have been burned by an upward sloping futures curve, and interest in products that offer exposure through futures contracts has waned considerably. As recent product launches and the growing pipeline show, issuers are constructing the “next generation” of commodity ETFs to avoid the issues that have plagued the current lineup. Here’s to continued innovation in the commodity ETF space, leading to better options for accessing a very attractive asset class.
Disclosure I am IAU and SLV shares. As Well as the CFD closed end fund.
Chevron Corporation (NYSE: CVX) today declared a Dividend of $.7200 cents per share
Chevron Corporation (NYSE: CVX) today declared a Dividend of $.7200 cents per share payable March 10, 2011, to shareholders of record February 16, 2011.
Chevron Corporation (NYSE: CVX) has paid dividends since 1912 and has a current dividend yield of 2.9%.
Chevron Corporation’s current dividend information as per the date of this press release is:
Dividend Declaration Date: Jan-26-2011
Dividend Ex Date: Feb-14-2011
Dividend Record Date: Feb-16-2011
Dividend Payment Date: Mar-10-2011
Dividend Amount: 0.72
Disclosure I am LONG CVX shares.
Chevron Corporation (NYSE: CVX) has paid dividends since 1912 and has a current dividend yield of 2.9%.
Chevron Corporation’s current dividend information as per the date of this press release is:
Dividend Declaration Date: Jan-26-2011
Dividend Ex Date: Feb-14-2011
Dividend Record Date: Feb-16-2011
Dividend Payment Date: Mar-10-2011
Dividend Amount: 0.72
Disclosure I am LONG CVX shares.
Saturday, January 15, 2011
Seadrill SDRL buys two rigs for total $1.2 bln, shares up
Wow most excellent news after I bought SDRL last month.
* Says investment fully financed
* Deal could strengthen dividend policy
* CEO says sees market improving in 2011
Norway's Seadrill Ltd (SDRL) is to acquire two ultra-deepwater semi-submersible drilling rigs, expecting to reap benefits from an improving drilling market this year and sending its shares higher.
Seadrill, one of the world's largest deep-water drillers, said on Monday the total project price for the two rigs is estimated to be about $1.2 billion and said it had secured new bank debt to finance the investment.
Shares in Seadrill rose 1.6 percent to 200.3 crowns by GMT 0910, outperforming a 0.8 percent rise in the Oslo stock exchange benchmark index .OSEBX. The stock has risen sharply in recent months and hit a record 208.70 crowns last month.
Seadrill Chairman John Fredriksen said in a statement the cash break-even cost per day for each rig was expected to be around $385,000.
"The board anticipates that the purchase of the two rigs including the agreed financing will strengthen Seadrill's dividend capacity going forward," Fredriksen said.
Seadrill currently has 52 drill rigs in its fleet, including 14 for use in ultra-deep water, according to its website.
The two new rigs, which are under construction at the Jurong Shipyard in Singapore, are expected to be delivered in the first quarter and fourth quarter of 2011, respectively.
The first rig to be completed has a five year contract in place, subject to further discussions among the involved parties, Seadrill said. The second unit has no employment in place.
Atle Hauge, analyst at brokerage Carnegie, said Seadrill's purchase of the two rigs showed it was more willing to take on risk than other rig companies. "Seadrill is in the category which is seen as high quality, with good experience in deepwater," he said. "Considering these are probably pretty high-end rigs, I believe this risk is acceptable."
Seadrill Chief Executive Alf C Thorkildsen told Reuters Seadrill expects the market to be strong enough to exceed the break-even level for the rigs.
"We show that a break-even level of costs, including interest expenses, is at $385,000 and we think that the market is better than that," Thorkildsen said.
"We believe that the market will be better in 2011. I think it will rise from 2010 in 2011," he said, adding that the market for all three of Seadrill's segments looked set to improve.
Oil services firms have been cautious in predicting market conditions in 2011. Haugen said 2011 has been seen as a big test for deepwater drilling as new rigs come into service.
"I believe rates will stay flat in today's market -- I don't believe they will go down," Haugen said. "That is because we see activity increasing and see a solid rise both in 2011 and 2012."
Disclosure I am long SDRL shares, and I no longer own DO shares.
* Says investment fully financed
* Deal could strengthen dividend policy
* CEO says sees market improving in 2011
Norway's Seadrill Ltd (SDRL) is to acquire two ultra-deepwater semi-submersible drilling rigs, expecting to reap benefits from an improving drilling market this year and sending its shares higher.
Seadrill, one of the world's largest deep-water drillers, said on Monday the total project price for the two rigs is estimated to be about $1.2 billion and said it had secured new bank debt to finance the investment.
Shares in Seadrill rose 1.6 percent to 200.3 crowns by GMT 0910, outperforming a 0.8 percent rise in the Oslo stock exchange benchmark index .OSEBX. The stock has risen sharply in recent months and hit a record 208.70 crowns last month.
Seadrill Chairman John Fredriksen said in a statement the cash break-even cost per day for each rig was expected to be around $385,000.
"The board anticipates that the purchase of the two rigs including the agreed financing will strengthen Seadrill's dividend capacity going forward," Fredriksen said.
Seadrill currently has 52 drill rigs in its fleet, including 14 for use in ultra-deep water, according to its website.
The two new rigs, which are under construction at the Jurong Shipyard in Singapore, are expected to be delivered in the first quarter and fourth quarter of 2011, respectively.
The first rig to be completed has a five year contract in place, subject to further discussions among the involved parties, Seadrill said. The second unit has no employment in place.
Atle Hauge, analyst at brokerage Carnegie, said Seadrill's purchase of the two rigs showed it was more willing to take on risk than other rig companies. "Seadrill is in the category which is seen as high quality, with good experience in deepwater," he said. "Considering these are probably pretty high-end rigs, I believe this risk is acceptable."
Seadrill Chief Executive Alf C Thorkildsen told Reuters Seadrill expects the market to be strong enough to exceed the break-even level for the rigs.
"We show that a break-even level of costs, including interest expenses, is at $385,000 and we think that the market is better than that," Thorkildsen said.
"We believe that the market will be better in 2011. I think it will rise from 2010 in 2011," he said, adding that the market for all three of Seadrill's segments looked set to improve.
Oil services firms have been cautious in predicting market conditions in 2011. Haugen said 2011 has been seen as a big test for deepwater drilling as new rigs come into service.
"I believe rates will stay flat in today's market -- I don't believe they will go down," Haugen said. "That is because we see activity increasing and see a solid rise both in 2011 and 2012."
Disclosure I am long SDRL shares, and I no longer own DO shares.
Chevron to Drill Deeper to Expand Brazil Project
Chevron Corp.(CVX), the second-largest U.S. oil company, plans to expand its $3 billion Frade project off Brazil’s coast as it bets on finding more crude by drilling deeper wells.
Chevron may start work to tap deep-water reservoirs beneath a layer of salt in late 2011 or early 2012, said Ali Moshiri, head of exploration and production for Africa and Latin America. The San Ramon, California-based company, which currently produces oil from shallower deposits above the salt layer at the Frade field in the Campos Basin, may add a second output platform if it strikes large reserves lower down, he said.
“Frade has been a good surprise so far regarding production,” Moshiri said yesterday in a telephone interview from Houston. “Our desire is for it to be large enough for a stand-alone development.”
Chevron is seeking to replicate the success of Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, which has found oil deposits buried beneath existing offshore fields. Two of Brazil’s 10 most productive wells were discovered in Petrobras’s Jubarte field, also in the Campos Basin, after the company drilled beneath the salt layer.
Output at Frade will reach 90,000 barrels a day this year, up from 80,000 barrels now, Moshiri said. Chevron operates Frade with a 51.74 percent stake. Petrobras and a joint venture of Inpex Corp., Sojitz Corp. and Japan Oil, Gas and Metals National Corp. also hold stakes.
Chevron also owns a 20 percent stake in the Olivia and Atlanta oil fields, where partner Royal Dutch Shell Plc is seeking to sell its 40 percent operating stake. Chevron would "consider" selling its stake in the fields in the Santos Basin, which aren’t yet producing, should it get an offer, Moshiri said.
“We always consider any type of transaction and if an offer comes our way, we’ll be glad to consider it, but at the moment our focus is on Frade and Papa Terra,” he said. “If we find something bigger and farm out the smaller one, that’s a process we do.”
Chevron is a minority partner with Petrobras at the $5.2 billion Papa Terra project in Campos, where production is set to start in 2013 and eventually reach 140,000 barrels a day.
Chevron may participate in two exploration bidding rounds that Brazil is planning for this year, Moshiri said. Brazil plans to auction onshore and offshore areas in the north of the country in the first half and deep-water blocks later in the year, Energy Minister Edison Lobao said Jan. 7.
“If opportunities are there we will participate,” Moshiri said. “Brazil is a core country for us.”
Companies including BP Plc, Sinochem Group and A.P. Moeller-Maersk A/S bought stakes in Brazilian oil projects last year as a delay in bidding rounds increased demand for exploration acreage.
Brazil tightened the state’s grip on the domestic oil industry after the discovery of the Lula field, formerly known as Tupi, and Libra, which hold 6.5 billion barrels of oil and as much as 15 billion barrels, respectively.
In December, Brazil’s Congress approved legislation to make Petrobras the operator of all new projects in the pre-salt and other areas deemed “strategic.” The companies that offer the biggest share of oil output to the government will win the contracts under the so-called production sharing model.
Disclosure I am long CVX shares.
Chevron may start work to tap deep-water reservoirs beneath a layer of salt in late 2011 or early 2012, said Ali Moshiri, head of exploration and production for Africa and Latin America. The San Ramon, California-based company, which currently produces oil from shallower deposits above the salt layer at the Frade field in the Campos Basin, may add a second output platform if it strikes large reserves lower down, he said.
“Frade has been a good surprise so far regarding production,” Moshiri said yesterday in a telephone interview from Houston. “Our desire is for it to be large enough for a stand-alone development.”
Chevron is seeking to replicate the success of Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, which has found oil deposits buried beneath existing offshore fields. Two of Brazil’s 10 most productive wells were discovered in Petrobras’s Jubarte field, also in the Campos Basin, after the company drilled beneath the salt layer.
Output at Frade will reach 90,000 barrels a day this year, up from 80,000 barrels now, Moshiri said. Chevron operates Frade with a 51.74 percent stake. Petrobras and a joint venture of Inpex Corp., Sojitz Corp. and Japan Oil, Gas and Metals National Corp. also hold stakes.
Chevron also owns a 20 percent stake in the Olivia and Atlanta oil fields, where partner Royal Dutch Shell Plc is seeking to sell its 40 percent operating stake. Chevron would "consider" selling its stake in the fields in the Santos Basin, which aren’t yet producing, should it get an offer, Moshiri said.
“We always consider any type of transaction and if an offer comes our way, we’ll be glad to consider it, but at the moment our focus is on Frade and Papa Terra,” he said. “If we find something bigger and farm out the smaller one, that’s a process we do.”
Chevron is a minority partner with Petrobras at the $5.2 billion Papa Terra project in Campos, where production is set to start in 2013 and eventually reach 140,000 barrels a day.
Chevron may participate in two exploration bidding rounds that Brazil is planning for this year, Moshiri said. Brazil plans to auction onshore and offshore areas in the north of the country in the first half and deep-water blocks later in the year, Energy Minister Edison Lobao said Jan. 7.
“If opportunities are there we will participate,” Moshiri said. “Brazil is a core country for us.”
Companies including BP Plc, Sinochem Group and A.P. Moeller-Maersk A/S bought stakes in Brazilian oil projects last year as a delay in bidding rounds increased demand for exploration acreage.
Brazil tightened the state’s grip on the domestic oil industry after the discovery of the Lula field, formerly known as Tupi, and Libra, which hold 6.5 billion barrels of oil and as much as 15 billion barrels, respectively.
In December, Brazil’s Congress approved legislation to make Petrobras the operator of all new projects in the pre-salt and other areas deemed “strategic.” The companies that offer the biggest share of oil output to the government will win the contracts under the so-called production sharing model.
Disclosure I am long CVX shares.
3 Shipping Stocks That Are Cruising
Shipping rates for supertankers are on the rise, largely due to increased fuel demand from China. That increase is causing analysts to predict a rise in the daily shipping rate to $100,000 by December of this year. It's good for the shippers - and maybe for China, too - but it might be a tad inflationary for the average consumer at the gas pump going forward.
For investors, it clearly means opportunity. The shipping business is on the mend, and below we list three stocks whose fortunes are proving that fact. Note, too, that it's more than just price appreciation that makes these companies attractive. They also boast some spectacular fundamentals.
Knightsbridge Tankers Limited (Nasdaq:VLCCF) has a market cap of over $320 million and trades with an annual dividend yield of 8.5%. Better than this, however, is the stock's performance; year-to-date, Knightsbridge shares have climbed more than 40%. That beats the iShares Dow Jones Transportation Average ETF (NYSE:IYT) by a long shot. The transports are up less than 5% since the year began, and the broad market, as measured by the SPDR S&P 500 ETF (NYSE:SPY), is down nearly 2%.
Knightsbridge operates a fleet of dry bulk and crude oil carriers and is headquartered in Bermuda. The stock's P/E ratio is 12.2 and price-to-book is just 1.27. L4
In June, VLCCF added another capesize vessel, the Golden Future, to its fleet at a cost of $72 million.
Strong Five-Year Growth Trend
Seaspan Corporation's (NYSE:SSW) sales figures have grown at a rate of 51% for the last five years and EPS growth comes in at 56% for that period. Yet the stock still offers an ample 4.8% dividend yield and trades with a P/E of 18.5. Moreover, the shares are on offer at just a fraction of the company's breakup value. Price-to-book is a meager 0.69.
Seaspan owns and operates a fleet of 42 containerships and has contracts to purchase another 21 and lease five more. The company is domiciled in Hong Kong. Year-to-date the shares are up 14.5% and for the full year an impressive 70%.
Comparatively, Teekay Corporation (NYSE:TK) stock has risen by over 13% since the year began and by 47% for the full year. The stock pays a 4.9% dividend and trades with a P/E of 15.1.
The Final Straw
Hop on the next ocean going transport to wealth and riches. The above three issues offer great recent momentum and a nice yield kicker, to boot. (Despite some disappointing trucking trends, there is still a lot of opportunity in the industry.)
Disclosure I am long VLCCF, and SPY shares.
For investors, it clearly means opportunity. The shipping business is on the mend, and below we list three stocks whose fortunes are proving that fact. Note, too, that it's more than just price appreciation that makes these companies attractive. They also boast some spectacular fundamentals.
Knightsbridge Tankers Limited (Nasdaq:VLCCF) has a market cap of over $320 million and trades with an annual dividend yield of 8.5%. Better than this, however, is the stock's performance; year-to-date, Knightsbridge shares have climbed more than 40%. That beats the iShares Dow Jones Transportation Average ETF (NYSE:IYT) by a long shot. The transports are up less than 5% since the year began, and the broad market, as measured by the SPDR S&P 500 ETF (NYSE:SPY), is down nearly 2%.
Knightsbridge operates a fleet of dry bulk and crude oil carriers and is headquartered in Bermuda. The stock's P/E ratio is 12.2 and price-to-book is just 1.27. L4
In June, VLCCF added another capesize vessel, the Golden Future, to its fleet at a cost of $72 million.
Strong Five-Year Growth Trend
Seaspan Corporation's (NYSE:SSW) sales figures have grown at a rate of 51% for the last five years and EPS growth comes in at 56% for that period. Yet the stock still offers an ample 4.8% dividend yield and trades with a P/E of 18.5. Moreover, the shares are on offer at just a fraction of the company's breakup value. Price-to-book is a meager 0.69.
Seaspan owns and operates a fleet of 42 containerships and has contracts to purchase another 21 and lease five more. The company is domiciled in Hong Kong. Year-to-date the shares are up 14.5% and for the full year an impressive 70%.
Comparatively, Teekay Corporation (NYSE:TK) stock has risen by over 13% since the year began and by 47% for the full year. The stock pays a 4.9% dividend and trades with a P/E of 15.1.
The Final Straw
Hop on the next ocean going transport to wealth and riches. The above three issues offer great recent momentum and a nice yield kicker, to boot. (Despite some disappointing trucking trends, there is still a lot of opportunity in the industry.)
Disclosure I am long VLCCF, and SPY shares.
Friday, November 12, 2010
5 Commodity ETFs That Are Beating Gold
We have all heard about how gold is hitting record highs, but other commodities, along with their exchange traded funds (ETFs), are posting higher gains so far this year.
Year-to-date, gold is up 21.91% while coffee is up 48.29%, silver is up 42.14% and corn is up 28.93%, according to Bespoke Invest. Oil slightly increased 4.08%, but natural gas plummeted 39.75%. Most commodities are trading at their upper ranges, with precious metals, coffee and copper nearing overbought territory, says Bespoke Invest.
* SPDR Gold Shares Fund (NYSEArca: GLD)
* iPath Dow Jones AIG Coffee TR Sub-Index ETN (NYSEArca: JO)
* iShares Silver Trust (NYSEArca: SLV)
* Teucrium Corn (NYSEArca: CORN)
* United States Oil Fund (NYSEArca: USO)
Corn and soybean harvest yields are even lower than most projections, according to PorkMag. The stock-to-use ratio for corn is at 6.7%, the lowest since 1995. Darrell Mark, University of Nebraska Extension livestock economist, says the market is very sensitive to “scares,” and corn prices can top up to $8 if enough pessimistic news comes in.
“In the October WASDE report, USDA actually increased feed demand, maintained ethanol demand, and slightly lowered export demand compared to last month,” Mark notes. However, the higher price for corn has reduced corn demand for livestock feed.
* PowerShares DB Agriculture (DBA)
The rally in coffee prices has kept the commodity at a 13-year high, writes Larry Baer for Benzinga. Brazil, the largest producer of coffee, and Costa Rica both reported that output may be lower-than-expected. Additionally, Vietnam’s crop may be smaller and harvested late. If the dollar continues to drop, it may add a bullish pump to coffee, that sends shivers down my spine. Gotta Have That Coffee!!
Disclosure I am long GLD and SLV shares.
Year-to-date, gold is up 21.91% while coffee is up 48.29%, silver is up 42.14% and corn is up 28.93%, according to Bespoke Invest. Oil slightly increased 4.08%, but natural gas plummeted 39.75%. Most commodities are trading at their upper ranges, with precious metals, coffee and copper nearing overbought territory, says Bespoke Invest.
* SPDR Gold Shares Fund (NYSEArca: GLD)
* iPath Dow Jones AIG Coffee TR Sub-Index ETN (NYSEArca: JO)
* iShares Silver Trust (NYSEArca: SLV)
* Teucrium Corn (NYSEArca: CORN)
* United States Oil Fund (NYSEArca: USO)
Corn and soybean harvest yields are even lower than most projections, according to PorkMag. The stock-to-use ratio for corn is at 6.7%, the lowest since 1995. Darrell Mark, University of Nebraska Extension livestock economist, says the market is very sensitive to “scares,” and corn prices can top up to $8 if enough pessimistic news comes in.
“In the October WASDE report, USDA actually increased feed demand, maintained ethanol demand, and slightly lowered export demand compared to last month,” Mark notes. However, the higher price for corn has reduced corn demand for livestock feed.
* PowerShares DB Agriculture (DBA)
The rally in coffee prices has kept the commodity at a 13-year high, writes Larry Baer for Benzinga. Brazil, the largest producer of coffee, and Costa Rica both reported that output may be lower-than-expected. Additionally, Vietnam’s crop may be smaller and harvested late. If the dollar continues to drop, it may add a bullish pump to coffee, that sends shivers down my spine. Gotta Have That Coffee!!
Disclosure I am long GLD and SLV shares.
The Benefits of Owning Commodity ETFs
At one time, long before exchange traded funds (ETFs) came into the picture, commodities were for institutions and others with the time and monetary resources to play the futures markets. Today, you (yes, you) can have commodities in your portfolio, too.
These days, commodities have a home in any well-diversified portfolio, Mitch Tuchman for U.S. News & World Report says. They offer several benefits:
* Commodities can be an important hedge against inflation. Because commodities prices usually rise when inflation is accelerating, they offer protection from the effects. Few assets benefit from rising inflation – particularly unexpected inflation.
* Commodities have offered superior returns in the past, but they carry a higher risk than most other equity investments. However, by adding commodities to a portfolio of assets that are less volatile, you can actually decrease the overall portfolio risk, because commodities have a low correlation to other asset classes.
* Commodities that are permanently limited in supply can reduce volatility in aggressive portfolios. Gold and energy are two examples.
* The long-term outlook for commodities is generally viewed as strong. The world’s population is growing and emerging markets are seeing the rise of their middle classes, who want more food, consume more energy and nicer clothes. The combination of finite supply and rising demand has the potential to keep commodities on a growth path for some time.
If you want to play commodities with ETFs, there are two primary ways:
* Buy an ETF that holds the stock of producers and tracks an index. Examples of these types of ETFs could be Market Vectors Global Agribusiness (NYSEArca: MOO) or SPDR S&P Oil & Gas Equipment & Services (NYSEArca: XES). The benefit of these funds is that you get exposure to the producers of commodities without the day-to-day price swings that might affect other funds. However, they don’t track the spot price, which can be a drawback if that’s something you’re seeking.
* You can look at funds that give closer exposure to the commodity itself, either physically or via futures. Physically-backed funds for now are restricted to precious metals, such as ETFS Physical Platinum (NYSEArca: PPLT) or iShares Silver Trust (NYSEArca: SLV). Futures-based ETFs include things like PowerShares DB Gold (NYSEArca: DGL) and United States Oil (NYSEArca: USO).
And, of course, there is always leverage, in the form of ETFs like ProShares UltraShort Gold (NYSEArca: GLL) and Direxion Daily Energy Bull 3x Shares (NYSEArca: ERX).
If you feel like you’ve missed the commodities run-up, it’s not too late. Most commodity ETFs are well above their long-term trend lines, and you can’t fight the trend. If you do decide to add commodities to your portfolio, just don’t get caught without an exit strategy.
Disclosure I am long SLV shares.
These days, commodities have a home in any well-diversified portfolio, Mitch Tuchman for U.S. News & World Report says. They offer several benefits:
* Commodities can be an important hedge against inflation. Because commodities prices usually rise when inflation is accelerating, they offer protection from the effects. Few assets benefit from rising inflation – particularly unexpected inflation.
* Commodities have offered superior returns in the past, but they carry a higher risk than most other equity investments. However, by adding commodities to a portfolio of assets that are less volatile, you can actually decrease the overall portfolio risk, because commodities have a low correlation to other asset classes.
* Commodities that are permanently limited in supply can reduce volatility in aggressive portfolios. Gold and energy are two examples.
* The long-term outlook for commodities is generally viewed as strong. The world’s population is growing and emerging markets are seeing the rise of their middle classes, who want more food, consume more energy and nicer clothes. The combination of finite supply and rising demand has the potential to keep commodities on a growth path for some time.
If you want to play commodities with ETFs, there are two primary ways:
* Buy an ETF that holds the stock of producers and tracks an index. Examples of these types of ETFs could be Market Vectors Global Agribusiness (NYSEArca: MOO) or SPDR S&P Oil & Gas Equipment & Services (NYSEArca: XES). The benefit of these funds is that you get exposure to the producers of commodities without the day-to-day price swings that might affect other funds. However, they don’t track the spot price, which can be a drawback if that’s something you’re seeking.
* You can look at funds that give closer exposure to the commodity itself, either physically or via futures. Physically-backed funds for now are restricted to precious metals, such as ETFS Physical Platinum (NYSEArca: PPLT) or iShares Silver Trust (NYSEArca: SLV). Futures-based ETFs include things like PowerShares DB Gold (NYSEArca: DGL) and United States Oil (NYSEArca: USO).
And, of course, there is always leverage, in the form of ETFs like ProShares UltraShort Gold (NYSEArca: GLL) and Direxion Daily Energy Bull 3x Shares (NYSEArca: ERX).
If you feel like you’ve missed the commodities run-up, it’s not too late. Most commodity ETFs are well above their long-term trend lines, and you can’t fight the trend. If you do decide to add commodities to your portfolio, just don’t get caught without an exit strategy.
Disclosure I am long SLV shares.
Thursday, November 11, 2010
Global X Launches Norway ETF NORW
Global X, the boutique fund sponsor known for its emerging markets and metals strategies, launched a new fund today focused exclusively on the economy of Norway, an ETF industry first. The Global X FTSE Norway ETF (NYSEArca: NORW) seeks to replicate the performance of the FTSE Norway 30 Index, which comprises the largest publicly traded companies of Norway and is designed to reflect the broad-based equity market performance of that country. FTSE is an index provider jointly owned by the Financial Times and the London Stock Exchange.
Norway, along with Canada, is one of a handful of net energy exporters among the world’s industrialized nations, and Global X’s new Norway fund reflects this.
As of last month, the FTSE Norway 30 Index’s top holding was the state-run Norwegian energy company Statoil ASA, which would have accounted for 18.93 percent of assets invested in the index. Oil & gas was the top sector, at 41.42 percent.
Global X, which launched gold miners and uranium funds earlier this month, has been busy this year building its ETF lineup. When asked if there was an overarching strategic plan behind Global X’s recent launches, Bruno del Ama, the company’s chief executive officer, said that the long-term prospects of a new fund, along with customer need, largely dictate the launch schedule.
“We identify opportunities that we think will do well over the long term, at least 25 years. Then we look for really stable opportunities or thematic opportunities we think will do well and offer an ETF that makes sense. Finally, we obviously want products that will attract sufficient interest from investors.”
Del Ama added that his firm’s clients view Norway to some extent as other hard-asset-producing countries with stable currencies, like Canada, Australia and New Zealand.
The Timing Is Right
Given the problems in eurozone countries like Greece, Spain and Ireland, now may be an ideal time for a Norway fund. Unlike many of its European neighbors, Norway has not adopted the euro and instead uses the krone.
“It’s definitely part of the appeal of the fund,” said del Ama. “One of the problems for an economy like Germany is that it’s part of the euro and is part of the bailout effort for Greece. Norway doesn’t have that problem.
The new Norway fund is the first of a suite of ETFs for which Global X filed last year to hit the market. That group of filings includes Denmark, Finland and United Arab Emirates funds based on FTSE indexes as well as an “Emerging Africa” and a Pakistan ETF.
The new fund carries an expense ratio of 0.50 percent.
Disclosure None
Norway, along with Canada, is one of a handful of net energy exporters among the world’s industrialized nations, and Global X’s new Norway fund reflects this.
As of last month, the FTSE Norway 30 Index’s top holding was the state-run Norwegian energy company Statoil ASA, which would have accounted for 18.93 percent of assets invested in the index. Oil & gas was the top sector, at 41.42 percent.
Global X, which launched gold miners and uranium funds earlier this month, has been busy this year building its ETF lineup. When asked if there was an overarching strategic plan behind Global X’s recent launches, Bruno del Ama, the company’s chief executive officer, said that the long-term prospects of a new fund, along with customer need, largely dictate the launch schedule.
“We identify opportunities that we think will do well over the long term, at least 25 years. Then we look for really stable opportunities or thematic opportunities we think will do well and offer an ETF that makes sense. Finally, we obviously want products that will attract sufficient interest from investors.”
Del Ama added that his firm’s clients view Norway to some extent as other hard-asset-producing countries with stable currencies, like Canada, Australia and New Zealand.
The Timing Is Right
Given the problems in eurozone countries like Greece, Spain and Ireland, now may be an ideal time for a Norway fund. Unlike many of its European neighbors, Norway has not adopted the euro and instead uses the krone.
“It’s definitely part of the appeal of the fund,” said del Ama. “One of the problems for an economy like Germany is that it’s part of the euro and is part of the bailout effort for Greece. Norway doesn’t have that problem.
The new Norway fund is the first of a suite of ETFs for which Global X filed last year to hit the market. That group of filings includes Denmark, Finland and United Arab Emirates funds based on FTSE indexes as well as an “Emerging Africa” and a Pakistan ETF.
The new fund carries an expense ratio of 0.50 percent.
Disclosure None
Tuesday, July 6, 2010
Top-Yielding Monthly Dividend Stocks
Many market-players seek shelter from volatility in dividend-paying stocks, which offer investors a stream of steady income that can ease the pain of wild gyrations in the markets. And stocks that pay monthly dividends provide regular, consistent income to investors with usually less volatility than quarterly-paying dividend stocks.
The key to owning stocks that pay monthly dividends rather than quarterly or annual dividend stocks is that your invested capital comes back to you and your money compounds much more quickly.
Lots of investors are looking for monthly dividend payments to supplement their income during retirement. Other preretirement investors love to buy stocks that pay them cash on a monthly basis to help offset their high-risk investments. No matter what type of investor you are, dividend-paying stocks can go a long way toward creating wealth.
Dividend-paying stocks can also help an investor sleep better at night, because they're usually deemed to be safer investments than stocks that don't pay dividends, The number of stocks that now pay a monthly dividend tops over 250, including real estate investment trusts, oil income trusts, closed-end funds and other investment vehicles that own a portfolio of income-producing assets and distribute cash generated by these assets every month to investors.
Let's take a look at four monthly dividend-paying securities that look promising.
If you're bullish on the future for oil and natural gas, you might want to take a look at the Enerplus Resources Fund(ERF). This stock is an energy trust that controls operating subsidiaries to acquire, exploit and operate crude oil and natural gas assets. The company currently controls properties in red hot Marcellus Shale region in the northeastern U.S. Many industry insiders think the Marcellus Shale could be one of the most promising natural gas resources in the Appalachian Basin.
Enerplus Resources has the fifth-highest dividend yield of oil and gas production stocks, at 9.4%. The stock has near-term support around $20 a share and resistance at around $24.
If you think the real estate market is near a bottom, you should take a look at closed-end management investment company LMP Real Estate Income Fund(RIT), which invests in securities related to the real estate industry, tied to sectors such as office, health care, apartments, shopping centers and regional malls. Its current dividend yield is 8.7% This stock is trading near the 200-day moving average of $8.20 a share, which could offer a great entry point if you like the prospects of real estate here. If the 200-day doesn't hold, look for the next area of support to come in at around $7.75. The stock also has some overhead resistance at around $9 to $9.50.
Another name investors should take a look at is the MFS Multimarket Income Trust(MMT), a closed-end fund that maintains a portfolio of investments in high-yield and investment-grade corporate bonds, emerging market debt securities, U.S. government securities and international investment-grade debt securities. Considering how foreign debt markets have been rattled of late, this trust could offer a great opportunity to get in at depressed prices. The MFS Multimarket Income Trust has direct exposure to some of the PIIG nations, such as Ireland, Italy and Spain. The current dividend yield of the MFS Multimarket Income Trust is 8.2%. The stock is trading near the 50-day moving average of $6.46, and overhead resistance can be found at $6.60 to $6.70.
One last monthly-paying security to consider is the Calamos Convertible Opportunity & Income Fund(CHI), which is a diversified, closed-end management investment company. The fund seeks total returns through a combination of capital appreciation and current income by investing in a diversified portfolio of convertible securities and below-investment-grade high-yield fixed-income securities.
Calamos Convertible Opportunity & Income has offered a steady distribution since inception; it has a strong historical performance and is run by an experienced management team. Some of the securities it currently holds are common stock in Freeport McMoRan(FCX), corporate bonds in Vail Resorts(MTN) and convertible preferred stock in Bank of America(BAC). Corporate bonds make up 56% of the funds asset allocation, and energy is the heaviest-weighted sector. Its current dividend yield is 9.4%.
Disclosure NONE
The key to owning stocks that pay monthly dividends rather than quarterly or annual dividend stocks is that your invested capital comes back to you and your money compounds much more quickly.
Lots of investors are looking for monthly dividend payments to supplement their income during retirement. Other preretirement investors love to buy stocks that pay them cash on a monthly basis to help offset their high-risk investments. No matter what type of investor you are, dividend-paying stocks can go a long way toward creating wealth.
Dividend-paying stocks can also help an investor sleep better at night, because they're usually deemed to be safer investments than stocks that don't pay dividends, The number of stocks that now pay a monthly dividend tops over 250, including real estate investment trusts, oil income trusts, closed-end funds and other investment vehicles that own a portfolio of income-producing assets and distribute cash generated by these assets every month to investors.
Let's take a look at four monthly dividend-paying securities that look promising.
If you're bullish on the future for oil and natural gas, you might want to take a look at the Enerplus Resources Fund(ERF). This stock is an energy trust that controls operating subsidiaries to acquire, exploit and operate crude oil and natural gas assets. The company currently controls properties in red hot Marcellus Shale region in the northeastern U.S. Many industry insiders think the Marcellus Shale could be one of the most promising natural gas resources in the Appalachian Basin.
Enerplus Resources has the fifth-highest dividend yield of oil and gas production stocks, at 9.4%. The stock has near-term support around $20 a share and resistance at around $24.
If you think the real estate market is near a bottom, you should take a look at closed-end management investment company LMP Real Estate Income Fund(RIT), which invests in securities related to the real estate industry, tied to sectors such as office, health care, apartments, shopping centers and regional malls. Its current dividend yield is 8.7% This stock is trading near the 200-day moving average of $8.20 a share, which could offer a great entry point if you like the prospects of real estate here. If the 200-day doesn't hold, look for the next area of support to come in at around $7.75. The stock also has some overhead resistance at around $9 to $9.50.
Another name investors should take a look at is the MFS Multimarket Income Trust(MMT), a closed-end fund that maintains a portfolio of investments in high-yield and investment-grade corporate bonds, emerging market debt securities, U.S. government securities and international investment-grade debt securities. Considering how foreign debt markets have been rattled of late, this trust could offer a great opportunity to get in at depressed prices. The MFS Multimarket Income Trust has direct exposure to some of the PIIG nations, such as Ireland, Italy and Spain. The current dividend yield of the MFS Multimarket Income Trust is 8.2%. The stock is trading near the 50-day moving average of $6.46, and overhead resistance can be found at $6.60 to $6.70.
One last monthly-paying security to consider is the Calamos Convertible Opportunity & Income Fund(CHI), which is a diversified, closed-end management investment company. The fund seeks total returns through a combination of capital appreciation and current income by investing in a diversified portfolio of convertible securities and below-investment-grade high-yield fixed-income securities.
Calamos Convertible Opportunity & Income has offered a steady distribution since inception; it has a strong historical performance and is run by an experienced management team. Some of the securities it currently holds are common stock in Freeport McMoRan(FCX), corporate bonds in Vail Resorts(MTN) and convertible preferred stock in Bank of America(BAC). Corporate bonds make up 56% of the funds asset allocation, and energy is the heaviest-weighted sector. Its current dividend yield is 9.4%.
Disclosure NONE
Dow's Losing Streak Hits Seven
The Dow Jones Industrial Average ticked off a string of ignominious markers on Friday. Among them: the longest losing streak since the dark days of the financial crisis.
Worries about the economy fed into the currency markets, where the dollar slipped against the euro. The euro ended Friday afternoon at $1.2550, up from $1.2386 a week earlier.
The Dow slipped 46.05 points, or 0.5%, to 9686.48, its seventh straight decline and longest losing streak since the eight-day fall ended Oct. 10, 2008.
The benchmark tumbled 4.5% for the week, its worst weekly percentage drop since the week of the May 6 "flash crash."
The weekly percentage drop also represented the worst performance for any week leading up to the July 4th weekend since 1896. The S&P 500 and the Nasdaq put in similarly bleak performances.
The declines came on relatively muted volume ahead of the July 4 holiday weekend. Just over 4 billion shares had traded hands in New York Stock Exchange Composite volume, well shy of the 2010 daily average of 5.4 billion shares.
All in all, it was not a great week for stocks. Worries have been mainly driven be renewed anxiety about the U.S. economy. Those fears were kept alive Friday by a report showing the first drop in U.S. nonfarm payrolls so far this year.
"The only thing that would have been surprising is if it had been a good number," said strategist Stephen Wood of Russell Investments in New York.
Consumer-discretionary companies led the market's decline as investors worried about how the drop in payrolls might hurt already weak consumer and business spending.
Worries about the economy fed into the currency markets, where the dollar slipped against the euro. The euro ended Friday afternoon at $1.2550, up from $1.2386 a week earlier.
Treasurys fell, but gained on the week as concerns percolated about a second half slowdown in the U.S. Crude-oil futures fell for a fifth consecutive day, capping their steepest weekly decline since early May.
The Second Quarter's Best and Worst Commodities
Quick! Name the best-performing single-commodity exchange-traded product (ETP) of the second quarter.
No, it's not a gold trust; the SPDR Gold Trust (NYSE Arca: GLD) came in third. It's actually the exchange-traded note tracking coffee's price, the iPath DJ-UBS Coffee Subindex Total Return ETN (NYSE Arca: JO).
Surprised?
Well, the second quarter was full of surprises for commodity investors. Unfortunately, most of them were unpleasant.
Of 17 single-commodity or narrowly focused products, only four turned a profit. The winners netted an average 12.1 percent gain, while the average loser gave up 9.9 percent.
We sought out the most liquid single-commodity ETPs to see how well they tracked the spot market over the last three months. When we couldn't find single-commodity ETPs to represent a sector of the futures market, we used the narrowest instruments; that is, two or three commodities wide.
Overall, ETPs—based upon their last sale prices—did a fair job of tracking spot market commodities. The average apparent return for the 17 ETPs was -4.7 percent, while the contemporaneous mean return for the underlying spot commodities was -2.7 percent.
But let's run the numbers asset by asset.
Precious Metals
In a normal futures market, carrying charges—financing costs, storage charges and insurance fees—build up along the futures term structure to make contracts for deferred delivery more expensive than futures for near-term delivery. This condition, often referred to as contango, is expected when there's ample supply of a storable commodity.
An inverted market, on the other hand, exists when deferred deliveries are priced below nearby ones. A dearth of storable supply is usually the culprit.
Normal markets are costly for holders of ETPs based upon long-only futures indexes. In order to maintain exposure to the commodity, futures positions must be rolled forward as contracts approach expiry. In a normal market, that means higher-priced contracts will be purchased with the proceeds from lower-priced futures sales. This incremental loss—or negative roll yield—eats into returns.
That said, the slight disparity in the palladium trust's return vs. spot is a liquidity artifact. The last sale prices reported on the tape don't necessarily reflect the current markets for ETPs. The less actively an ETP trades, the greater the discrepancy between the last sale price and the current bid/offer spread.
This should be kept in mind when considering the apparent returns of light-volume exchange-traded notes.
Base Metals
Energy
Softs
Grains
The Final Tally
In the first quarter, 75 percent of single-commodity and narrowly focused ETPs were winners. The platinum and palladium products were the top performers, along with the livestock ETN. But in the second quarter, the situation reversed: Losers outnumbered winners by better than 3-to-1. Coffee led the way in the second quarter, followed by natural gas.
The worst performers in the year's second stanza were the industrial metals—lead, copper and nickel. In the first quarter, sugar, natural gas and grains brought up the rear.
While there's been jockeying for best and worst honors, gold and silver take the prize for consistency in the first half.
Disclosure I am Long GLD n SLV shares
No, it's not a gold trust; the SPDR Gold Trust (NYSE Arca: GLD) came in third. It's actually the exchange-traded note tracking coffee's price, the iPath DJ-UBS Coffee Subindex Total Return ETN (NYSE Arca: JO).
Surprised?
Well, the second quarter was full of surprises for commodity investors. Unfortunately, most of them were unpleasant.
Of 17 single-commodity or narrowly focused products, only four turned a profit. The winners netted an average 12.1 percent gain, while the average loser gave up 9.9 percent.
We sought out the most liquid single-commodity ETPs to see how well they tracked the spot market over the last three months. When we couldn't find single-commodity ETPs to represent a sector of the futures market, we used the narrowest instruments; that is, two or three commodities wide.
Overall, ETPs—based upon their last sale prices—did a fair job of tracking spot market commodities. The average apparent return for the 17 ETPs was -4.7 percent, while the contemporaneous mean return for the underlying spot commodities was -2.7 percent.
But let's run the numbers asset by asset.
Precious Metals
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CMX Gold | 11.7% | Normal | TST | 11.7% | 8.1% | |
| CMX Silver | 6.2% | Normal | TST | 6.2% | 5.5% | |
| NYMX Platinum | -8.0% | Normal | ETN | -7.2% | -4.6% | |
| NYMX Palladium | -8.0% | Normal | TST | -7.5% | -6.8% |
Key: TST = Grantor Trust; ETN = Exchange-Traded Note
Gold and silver grantor trusts topped the precious metals group in the second quarter, partly because the trusts hold metal and aren't based upon a futures index. Of course, the underlying commodities increased over the period, but the product didn't get in the way of the gain's realization.In a normal futures market, carrying charges—financing costs, storage charges and insurance fees—build up along the futures term structure to make contracts for deferred delivery more expensive than futures for near-term delivery. This condition, often referred to as contango, is expected when there's ample supply of a storable commodity.
An inverted market, on the other hand, exists when deferred deliveries are priced below nearby ones. A dearth of storable supply is usually the culprit.
Normal markets are costly for holders of ETPs based upon long-only futures indexes. In order to maintain exposure to the commodity, futures positions must be rolled forward as contracts approach expiry. In a normal market, that means higher-priced contracts will be purchased with the proceeds from lower-priced futures sales. This incremental loss—or negative roll yield—eats into returns.
That said, the slight disparity in the palladium trust's return vs. spot is a liquidity artifact. The last sale prices reported on the tape don't necessarily reflect the current markets for ETPs. The less actively an ETP trades, the greater the discrepancy between the last sale price and the current bid/offer spread.
This should be kept in mind when considering the apparent returns of light-volume exchange-traded notes.
Base Metals
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CMX Copper | -18.0% | Normal | ETN | -19.1% | -11.4% | |
| LME Lead | -18.6% | Normal | ETN | -18.9% | -18.5% | |
| LME Nickel | -19.1% | Normal | ETN | -23.5% | -8.2% |
Key: ETN = Exchange-Traded Note
The market for industrial metals was weak in the second quarter, reflecting the slackened demand for durable goods and housing. The apparent spread between the ETP returns and the spot market is, again, due to timing and contango.Energy
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| NYMX Crude Oil | -9.6% | Normal | ETF | -9.8% | -9.8% | |
| NYMX Gasoline | -10.3% | Inverted/Normal | ETF | -5.8% | -5.8% | |
| NYMX Heating Oil | -2.9% | Normal | ETF | -6.0% | -6.0% | |
| NYMX Natural Gas | 19.8% | Normal | ETF | 12.2% | -8.7% |
Key: ETF = Exchange-Traded Fund
Natural gas turned in the standout performance in the energy category, though deep contango in the futures term structure ate up a lot of the spot market gain. Carrying charges seemed to have also reduced the returns for the heating oil and crude oil exchange-trade funds. The large disparity between the gasoline ETF's return and its spot market is due to gasoline's unstable term structure over the second quarter.Softs
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| ICE Coffee | 21.5% | Normal/Inverted | ETN | -18.5% | 17.1% | |
| ICE Cocoa | -0.4% | Normal | ETN | -1.2% | -4.9% | |
| ICE Cotton | -5.1% | Inverted/Normal | ETN | -3.0% | -0.2% | |
| ICE Sugar | -3.3% | Inverted/Normal | ETN | -7.0% | -23.4% |
Key: ETN = Exchange-Traded Note
Among the softs, coffee was the clear winner. Still, soft ETNs are lightly traded, so the differences between the products' apparent returns and their underlying markets can seem large.Grains
Commodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CBOT Corn, Wheat, Soybeans | 0.7%* | Normal/Inverted | ETN | -0.7% | -6.1% |
Key: ETN = Exchange-Traded Note
*Spot returns are composites weighted by the constituent commodities' ETP allocations
Grains—in particular, corn and wheat—jumped on the last day of the quarter following U.S. Department of Agriculture reports of lighter-than-expected plantings.
LivestockCommodity | Spot Gain/ (Loss) | Futures Term Structure | ETP Ticker | ETP Type | ETP Gain/ Loss | +/- 200-Day Average |
| CME Live Cattle, Lean Hogs | -0.3%* | Normal/Inverted | ETN | -3.4% | -0.8% |
Key: ETN = Exchange-Traded Note
*Spot returns are composites weighted by the constituent commodities' ETP allocations
While grain prices broke to the upside, livestock prices spent most of the quarter backing off from the parabolic run-ups of the previous year.The Final Tally
In the first quarter, 75 percent of single-commodity and narrowly focused ETPs were winners. The platinum and palladium products were the top performers, along with the livestock ETN. But in the second quarter, the situation reversed: Losers outnumbered winners by better than 3-to-1. Coffee led the way in the second quarter, followed by natural gas.
The worst performers in the year's second stanza were the industrial metals—lead, copper and nickel. In the first quarter, sugar, natural gas and grains brought up the rear.
While there's been jockeying for best and worst honors, gold and silver take the prize for consistency in the first half.
Disclosure I am Long GLD n SLV shares
Monday, June 21, 2010
Dividends Like BP’s Look Safe, Until They’re Not
If you own BP shares and rely on the dividends for your retirement income, you now matter less than shrimp boat owners and tourism workers in the Gulf of Mexico, Ron Lieber writes in The New York Times.
That’s the net result of the announcement on Wednesday that BP will suspend its dividend and set aside money for cleanup costs and the compensation of workers who have lost income because of the oil spill.
Whether the federal government was right to pressure BP to make this move (and whether BP should have buckled) is a question for the ages. But if you’re an investor in BP and rely on dividend income to pay your daily expenses, this should serve as another reminder that relying on one stock or even a handful of stocks is incredibly risky.
We’ve seen this movie before. Wachovia disappeared, hobbling many investors who counted on its dividends. Other big banks reduced their payouts drastically in the depths of the financial crisis. General Electric slashed its dividend as well.
This should have been a warning for anyone making big retirement bets on a single stock or a handful of stocks. Things that seem stable can wobble and collapse before our very eyes. And now it’s happening again.
It’s not supposed to work this way, at least in the minds of the many investors of the old school. To them, a stock that pays a dividend is a stock that is safe. “It told them that a company was still around and operating, it was in good health,” said Milo M. Benningfield, a San Francisco financial planner.
Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable. Steven Podnos, a financial planner in Merritt Island, Fla., notes that the iShares Dow Jones Select Dividend Index exchange-traded fund, which contains stocks that offer high annual yields through dividends, underperformed the Standard & Poor’s 500-stock index over the last five years.
Still, plenty of people strap on the blinders and maintain their faith in the stocks they think they know well. A frightening article in the trade newspaper Pensions & Investments on Monday estimated that BP employees and others in the company’s 401(k) plan had lost more than $1 billion from the stock’s decline in the wake of the spill.
How can the loss be so high? Well, 29 percent of the plan’s assets were invested in BP stock as of last September. This, sadly, is yet another violation of the too-many-eggs-in-one-basket rule that company plan sponsors should have had inscribed in stone for employees — even before the Enron collapse and the resulting devastation in employee retirement accounts there.
Employees or retired employees are not alone. Devotees of white-hot companies (Apple comes to mind) simply refuse to believe that anything bad could befall the stock. Retirees reliant on dividend income may be averse to change if a stock has paid out regularly for decades. Others may have inherited a big slug of stock and may simply not know any better. Then there are those who are so tax-averse that they won’t diversify their holdings because they don’t want to give up some of their winnings to capital gains taxes.
If you know people who might fall into these categories, please do them a favor and send them to a financial planner post-haste if you can’t talk some sense into them yourself.
Or you could simply try to scare them. Very few people saw a spill of this magnitude coming, just as only a small number could have predicted a few years back that financial stocks would go from contributing 29 percent of the dividend payments of S.& P. 500 payments in 2007 to just 9 percent in 2009.
Today, consumer staples stocks contribute more than any other sector, according to Howard Silverblatt of S.& P. How might that sector or parts of it deteriorate? A prolonged terrorist campaign against large American retailers could begin, or a blight could emerge that wipes out a large percentage of the nation’s crops.
These things are unlikely but entirely possible, and they wouldn’t be a total surprise. Tempted by utilities? Mr. Benningfield suggested contemplating the remote possibility of solar flares frying the power grid.
As of Wednesday, there is now political risk to consider, too. Now that there is a recent precedent, legislators could again try to bully a company into suspending its dividends.
And if that weren’t worry enough for dividend fans, we must also rely on those same legislators to sort out our tax policy. Currently, no one pays more than a 15 percent federal tax on dividend income. If Congress does not act before the end of the year, however, investors will start paying much higher ordinary income tax rates on dividends come 2011. “Where it will wind up, no one knows,” said Kenneth L. Powell, a tax partner at the accounting firm Berdon L.L.P. in New York. Wealthier investors, meanwhile, may pay even more once a 3.8 percent Medicare tax on unearned income begins in 2013.
Everyone needs income in retirement, and dividends aren’t a bad way to get it as long as they don’t come from a single company. Again and again, we’ve seen out-of-nowhere scandals and crises and accidents bring big companies to their knees. Why, given the overwhelming evidence that these things do happen once in a while, would you not extract your dividend income from a low-cost, broadly diversified mutual fund that specializes in dividends?
The moral of the story, as always, is to diversify within each asset class you own, whether it’s dividend-paying stocks or municipal bonds or the emerging-market countries where you’re rolling the dice for big gains. Then, diversify your retirement income, too. The more sources the better, whether it’s dividend income, interest income, annuity income, rental income or periodic (and tax-savvy) outright sales of stocks or other assets.
Even this sort of diversification might not have protected you from the pain in 2008. But it can shield you from the ruin of betting too heavily on a single security like BP.
Disclosure I am long BP shares.
That’s the net result of the announcement on Wednesday that BP will suspend its dividend and set aside money for cleanup costs and the compensation of workers who have lost income because of the oil spill.
Whether the federal government was right to pressure BP to make this move (and whether BP should have buckled) is a question for the ages. But if you’re an investor in BP and rely on dividend income to pay your daily expenses, this should serve as another reminder that relying on one stock or even a handful of stocks is incredibly risky.
We’ve seen this movie before. Wachovia disappeared, hobbling many investors who counted on its dividends. Other big banks reduced their payouts drastically in the depths of the financial crisis. General Electric slashed its dividend as well.
This should have been a warning for anyone making big retirement bets on a single stock or a handful of stocks. Things that seem stable can wobble and collapse before our very eyes. And now it’s happening again.
It’s not supposed to work this way, at least in the minds of the many investors of the old school. To them, a stock that pays a dividend is a stock that is safe. “It told them that a company was still around and operating, it was in good health,” said Milo M. Benningfield, a San Francisco financial planner.
Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable. Steven Podnos, a financial planner in Merritt Island, Fla., notes that the iShares Dow Jones Select Dividend Index exchange-traded fund, which contains stocks that offer high annual yields through dividends, underperformed the Standard & Poor’s 500-stock index over the last five years.
Still, plenty of people strap on the blinders and maintain their faith in the stocks they think they know well. A frightening article in the trade newspaper Pensions & Investments on Monday estimated that BP employees and others in the company’s 401(k) plan had lost more than $1 billion from the stock’s decline in the wake of the spill.
How can the loss be so high? Well, 29 percent of the plan’s assets were invested in BP stock as of last September. This, sadly, is yet another violation of the too-many-eggs-in-one-basket rule that company plan sponsors should have had inscribed in stone for employees — even before the Enron collapse and the resulting devastation in employee retirement accounts there.
Employees or retired employees are not alone. Devotees of white-hot companies (Apple comes to mind) simply refuse to believe that anything bad could befall the stock. Retirees reliant on dividend income may be averse to change if a stock has paid out regularly for decades. Others may have inherited a big slug of stock and may simply not know any better. Then there are those who are so tax-averse that they won’t diversify their holdings because they don’t want to give up some of their winnings to capital gains taxes.
If you know people who might fall into these categories, please do them a favor and send them to a financial planner post-haste if you can’t talk some sense into them yourself.
Or you could simply try to scare them. Very few people saw a spill of this magnitude coming, just as only a small number could have predicted a few years back that financial stocks would go from contributing 29 percent of the dividend payments of S.& P. 500 payments in 2007 to just 9 percent in 2009.
Today, consumer staples stocks contribute more than any other sector, according to Howard Silverblatt of S.& P. How might that sector or parts of it deteriorate? A prolonged terrorist campaign against large American retailers could begin, or a blight could emerge that wipes out a large percentage of the nation’s crops.
These things are unlikely but entirely possible, and they wouldn’t be a total surprise. Tempted by utilities? Mr. Benningfield suggested contemplating the remote possibility of solar flares frying the power grid.
As of Wednesday, there is now political risk to consider, too. Now that there is a recent precedent, legislators could again try to bully a company into suspending its dividends.
And if that weren’t worry enough for dividend fans, we must also rely on those same legislators to sort out our tax policy. Currently, no one pays more than a 15 percent federal tax on dividend income. If Congress does not act before the end of the year, however, investors will start paying much higher ordinary income tax rates on dividends come 2011. “Where it will wind up, no one knows,” said Kenneth L. Powell, a tax partner at the accounting firm Berdon L.L.P. in New York. Wealthier investors, meanwhile, may pay even more once a 3.8 percent Medicare tax on unearned income begins in 2013.
Everyone needs income in retirement, and dividends aren’t a bad way to get it as long as they don’t come from a single company. Again and again, we’ve seen out-of-nowhere scandals and crises and accidents bring big companies to their knees. Why, given the overwhelming evidence that these things do happen once in a while, would you not extract your dividend income from a low-cost, broadly diversified mutual fund that specializes in dividends?
The moral of the story, as always, is to diversify within each asset class you own, whether it’s dividend-paying stocks or municipal bonds or the emerging-market countries where you’re rolling the dice for big gains. Then, diversify your retirement income, too. The more sources the better, whether it’s dividend income, interest income, annuity income, rental income or periodic (and tax-savvy) outright sales of stocks or other assets.
Even this sort of diversification might not have protected you from the pain in 2008. But it can shield you from the ruin of betting too heavily on a single security like BP.
Disclosure I am long BP shares.
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