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Jeff Saut: S&P "Melt-Up" Leaves Dividend Strategy in the Dust


What dividends lack in sex appeal they make up for with reliability.


Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

"Dividends might not be the sexiest investment strategy, but it is the most reliable!"
--Jeffrey Saut

Observers of my firm's work know that we have always emphasized the importance of dividends with regards to their impact on total portfolio returns.

Manifestly, since 1926 dividends have accounted for more than 40% of the S&P 500's annual return. Further dividend-paying stocks, if those dividends are secure, tend to become more valuable as their share price declines because the dividend yield increases. Therefore, when we can find a "yield play" to take advantage of an intriguing investment, it always piques our interest. Most recent case in point, Whiting Petroleum (WLL) where my firm recommended Whiting's (then 6.7%-yielding) convertible preferred "A" shares some five weeks ago. Those convertible shares now yield 5%. In keeping with this dividend theme, today we share some more yield-oriented ideas from Raymond James' favorably rated universe of securities. To wit, as written by our convertible desk analyst, Brian Heck:

1) "My favorite short-term, yield-to-put favorite is still NII Holdings' (NIHD) 2.75% bonds. At $97.00, they have a 5.79% yield to the 08/15/10 put. The company has ~$1.25 billion in cash on the balance sheet and no debt maturities before the put. They are unrated and should only be considered for clients where this is suitable. This is purely a fixed income play and likely to be unaffected by any moves in the common. Another good name for investors looking for a higher-rated security, would be the A1/AA Medtronic's (MDT) 1.625%. At $97.875 they have a 2.227% yield-to-maturity with a ~55% conversion premium. Although it's a pretty modest YTM, you do maintain upside exposure to the common shares.

2) Some of my favorite hybrid / total return picks would be Micron's (MU) 1.875%, Lifepoint's (LPNT) 3.50%, Old Republic's (ORI) 8.00%, and ON Semiconductor's (ONNN) 2.625%. All four of these bonds mature in less than five years, or are puttable in the case of ONNN. With the exception of ORI, they all have 250-400 bp yield advantage over the common (~275 for ONNN, ~400 for Lifepoint Hospitals (LPNT), ~265 for MU). Conversion premiums are all under 75% (~40% for ONNN, ~25% for ORI, ~60% for LPNT, ~65% for MU). These names should all demonstrate adequate equity-sensitivity, but should also hold up well should equity markets falter.

3) One other, more equity-sensitive, name that I like is Jet Blue's (JBLU) 6.75%. The JBLU 6.75%s should be seriously considered for any investor eyeing JBLU common stock. Please don't summarily dismiss the bonds because they trade at $120-125 (with stock in $5.11 area). These are NOT to be confused with normal straight debt instruments. This bond is an excellent EQUITY ALTERNATIVE offering a ~5.25+% current yield and only a ~20% conversion premium. They have a very high equity-sensitivity, due to the small conversion premium, and offer greater downside protection should the stock decline. As always, the terms and details of these investment instruments should be checked before purchase."

Another "yield-oriented" idea was brought to my attention late last week by Raymond James Asset Management Services over a breakfast conversation with George Raffa. The discussion went something like this. "Hey Jeff, you have always advocated dividends as part of the total return in portfolios. Recently, we have added a product to our Freedom Account platform that 'plays' to that theme." Over the next 30 minutes I came to embrace AMS' new product. Indeed, said product is an amalgamation of three separate money managers that are employing an equity income strategy that produces an aggregate yield of roughly 6%. Their respective portfolios look like the "who's who" of the Fortune 500. As the nearby charts show, the three equal-weighted aggregated portfolios trade at the "low end" of their five-year historic valuation metrics. For the record, the three money managers are Federated, ING and River Road, or if you prefer, Eagle Asset Management can be substituted for Federated.

Hypothetical Case Study: UMA Equity Income (FED, ING & River Road) $300k Investment

Source: Raymond James Asset Management
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