This week we feature Tim Plaehn, dividend and income investing expert and editor of The Dividend Hunter, a new income service for investors looking to capture yield and gains from the hottest dividend stocks. Prior to joining Investors Alley Tim was an F-16 pilot, stock broker, certified financial planner, and contributor to USA Today, The Houston Chronicle, Seeking Alpha, and many others.
When you look at shipping stocks as dividend income investments, a good starting point includes a historical review. For about a 2 1/2 year period of time, from early 2006 until the fall of 2008, shipping stocks – especially the dry bulk shippers – were the darlings of Wall Street and investors were racking up both large dividends and rapid share price increases.
For shippers, every factor lined up including a combination of surging commodity prices, easy financing for new ship purchases, and a growing Chinese economy that would take every dry bulk ship load coming its way. What could go wrong with buying a cargo ship for $100 million, financing 95% of the purchase price and putting the vessel to work earning $100,000 per day?
What happened is that everything went wrong at about the same time. The popping of the commodity price bubble quickly put an end to high spot-charter rates for dry-bulk ships. The falling charter rates then made it difficult for the shipping companies to cover operating costs and the interest payments on their loans. At the same time, the value of cargo ships started to fall, putting the shipping companies out of compliance with their loan covenants.
At this point the dry bulk shippers were unable to restructure loans or finance the new ships that were on order. On the oil tanker side of shipping, the global economic slowdown combined with too many new tankers coming out of the shipyards, pushed charter rates below break-even for the majority of the tanker companies.
To illustrate the hard times that fell on the shipping sector, look at what happened to a few of the most popular stocks of the era. In the fall of 2007, investor favorite DryShips, Inc. (DRYS) was trading above $120 per share. At the bottom of the subsequent bear market in March 2009, DRYS was at about $3.50 and five years later, the share price is still just $3.65.
In the day, I was personally a fan of Genco Shipping & Trading Ltd. (GNK), which started paying a quarterly $0.66 dividend in May 2007 and a year later was paying $1.00 per quarter and the share price peaked above $80. The dividends lasted for just two more quarters and GNK is now worth $1.65 per share.
Frontline, Ltd. (FRO) was the largest tanker company in the world with a strong history of dividends going back to 2003. At the 2008 peak, FRO was over $70 per share and paying variable dividends of up to $3.00 each quarter. Frontline hasn’t paid a dividend since the second quarter of 2011 and now trades at $4.14 per share.
Shipping Stock Survivors for High-Yield Dividends
From a universe of about 50 shipping companies going great guns in the pre-crash era, only a few have survived as thriving, strong, dividend paying companies. While each of these companies has its own opportunities and challenges, the fact that they outlasted 90% of their competitors shows that these are businesses built to handle the feast and famine swings of the volatile shipping sector.
In the oil tanker sub-sector, Nordic American Tankers (NAT) is similar to Frontline, except without the debt leverage. NAT runs on a cash basis, buying tankers for cash, and with a 100% payout of net profits as dividends. During the recent – and still running – 4 to 5 year period of very low spot charter rates, NAT has paid a low but continuous dividend and has also doubled the size of the company’s tanker fleet.
When spot charter rates for tankers do start to increase, the quarterly dividends from NAT could double, triple, or even quadruple. The conditions that would lead to higher charter rates are strong economic growth and the fear of higher oil prices. News coming out of the tanker markets indicates that the dividends for Q1 and Q2 may be much higher than NAT has been able to pay over the last couple of years.
Since, going public in July 2008, dry bulk shipper Navios Maritime Partners LP (NMM) has never reduced its dividend and has increased the distribution rate in most years. The NMM secret has been the company’s opportunities to cherry pick the best ships and charter contracts from the parent company Navios Maritime Holdings, Inc. (NM). After restructuring some loans and charter rate guarantees last year, the NMM 10% yield should remain safe for at least several more years.
The Teekay group of companies covers much of the shipping sector with focused, dividend-paying subsidiary companies for the different types of ships. Out of the four Teekay companies, two have histories of steady and growing dividend payments. Through the ownership of shuttle and conventional tankers, and floating offshore storage and production units Teekay Offshore Partners LP (TOO) supports deep sea drilling operations in the North Sea and off the coast of Brazil. Teekay LNG Partners, LP (TNG) owns liquid natural gas and other fuels transport ships that are chartered out on long term – up to 25 years – contracts. TOO and TNG have been publicly traded for 7 and almost 9 years, respectively and neither has ever cut its dividend. Both yield about 6.5% at the most recent dividend rate. The 1099 distributions from TOO vs. a K-1 report from KNG, makes Teekay Offshore Partners the slightly more attractive choice of the two. Also, the TOO dividends have been classified as non-tax reportable return-of-capital, increasing your after tax yield.