Don’t chase dividend stocks to avoid bonds; buy them because you believe in the underlying businesses. Companies like Royal Dutch Shell plc (ADR) (NYSE:RDS.B), Alliance Resource Partners, L.P. (NASDAQ:ARLP), and Omega Healthcare Investors Inc (NYSE:OHI) are good examples of what to buy.
A Big Mistake
Jeffrey E. Gundlach, Chief Investment Officer of bond-focused DoubleLine, recently told CNBC that it was “a big mistake” to ditch bonds just to buy real estate investment trusts, limited partnerships, and high yielding stocks. “For people who are afraid bond yields will rise, these peripheral bond surrogates end up being the worst possible investments if your premise turns out to be right that interest rates are going to rise.”
Chasing yield is usually a mistake and Gundlach is correct that rising rates are likely to be bad for yield-focused stocks. However, that doesn’t mean investors shouldn’t be looking at such companies. In fact, there are some very good opportunities to buy unloved, high yielding, stocks with good businesses–and, more importantly, the potential for dividend increases over time. Treasuries can’t offer that.
On Sale: Big Oil
Royal Dutch Shell plc (ADR) (NYSE:RDS.B) is one of the largest integrated oil and natural gas companies in the world. It runs with big dogs like Exxon Mobil Corporation (NYSE:XOM) and BP plc (ADR) (NYSE:BP). However, with a recent yield of around 5.3%, it yields nearly twice as much as Exxon Mobil Corporation (NYSE:XOM) and about the same as oil-spill tarnished BP plc (ADR) (NYSE:BP).
Royal Dutch Shell plc (ADR) (NYSE:RDS.B) has notable operations in financially weak Europe, made a poorly timed decision to invest in U.S. natural gas, and has had trouble finding new oil reserves. None of these issues is unique to the company, and it is strong enough to weather all of them. Moreover, as natural gas prices rise, Royal Dutch Shell plc (ADR) (NYSE:RDS.B)’s gas push, a move Exxon Mobil Corporation (NYSE:XOM) also made, could quickly turn into a big asset.
The company operates in a commodity business, so the top and bottom lines are inherently volatile. That said, the company has a long history of increasing its dividend. While Royal Dutch Shell plc (ADR) (NYSE:RDS.B)’s profit margins are below those of Exxon Mobil Corporation (NYSE:XOM), they aren’t so low that it should yield nearly twice as much. Royal Dutch Shell plc (ADR) (NYSE:RDS.B) is a solid high-yield option with long-term appeal no matter what happens to interest rates.
Success Where Others Are Failing
Alliance Resource Partners, L.P. (NASDAQ:ARLP) is a coal-focused limited partnership. Coal is probably the single most unloved fuel source, even when compared to nuclear power. Increasingly stringent regulations on U.S. power plants and still low natural gas prices are likely to result in fewer coal fired electric power plants and continued pressure on coal miners over the near term.
Alliance Resource Partners, L.P. (NASDAQ:ARLP)’s coal is competitive with natural gas priced as low as $3. That strength has allowed the company to boost output while others have been forced to cut back. In fact, Alliance Resource Partners, L.P. (NASDAQ:ARLP) has been posting record results and expects 2013 to continue that trend. Alliance Resource Partners, L.P. (NASDAQ:ARLP) is succeeding where others are failing.
