Former hedge fund manager Jim Cramer now takes his skills to the masses as a CNBC host and television personality whose stock picks have tended to outperform the S&P 500. Because of his background and popularity he can be a good investor to follow and certainly a source of potential investment ideas that can be researched in depth. We have looked through the stocks that Cramer’s charitable trust reported owning recently and looked up each position to find the three stocks in the portfolio with the highest dividend yield. All three of these stocks yield over 4% given the current dividend and stock price, making them- at least for now- on par with or even superior to a number of fixed-income opportunities. However, when interest rates eventually rise, investors who are currently in these stocks on an income basis may shift to other asset classes. This makes it important to learn more about the companies behind the dividend yield to try to make sure that the high yield has not artificially inflated the stock price too far above fundamental value.
The highest dividend yield of the stocks owned by Cramer’s trust belonged to Energy Transfer Partners LP (NYSE:ETP), at 8.2%. Energy Transfer Partners primarily gathers, processes, and transports natural gas through a network of pipelines and facilities, with one segment of its business providing transportation and processing services for natural gas liquids. Its market capitalization of about $11 billion is not only about 12 times the annualized dividend payout but also about 9 times trailing earnings. The company therefore also has value characteristics as well as returning a generous portion of its earnings to shareholders fairly quickly. The past few quarters worth of results have been volatile, and the stock is about flat over the last year compared to an S&P index that has risen 21%; even given the dividend yield, the market has left Energy Transfer Partners in the dust.
Vale SA (NYSE:VALE) was another high-yield pick in the trust’s portfolio, carrying a dividend yield of 7.1%. The Brazilian company focuses on the production of iron ore and other metals and also has fertilizer and transportation businesses. It therefore carries exposure to the Brazilian economy as well as the rest of Latin America. Vale’s stock price has fallen 37% over the last year, which has helped push the dividend yield up and also has helped generate low trailing and forward earnings multiples of 6 and 5, respectively. For purposes of comparison, Australian BHP Billiton Limited (NYSE:BHP) trades at 12 times trailing earnings and 11 times 2013 estimates, and pays a dividend yield of 3.6%. It in turn is tied to another large developing economy- China. However, both of these mining companies saw sharply negative growth last quarter compared to a year ago: revenue decreased, and earnings fell by at least 40%. Cliff Asness’s AQR Capital Management was an owner of Vale at the end of June, while Vinik Asset Management reported an investment in BHP Billiton (see more stock picks from Cliff Asness and Jeffrey Vinik).
Cramer’s trust also owns shares of Bristol Myers Squibb Co. (NYSE:BMY), whose dividend yield is 4.1%. The $56 billion market cap biopharmaceutical company has a broad portfolio of pharmaceutical products and is a defensive stock with a beta of only 0.2. Bristol Myers Squibb is another company which didn’t do well last quarter, as its revenue fell 18% and its earnings fell 29% compared to the same period in the previous year. Sell-side analysts expect more trouble next year, and the stock trades at 18 times forward earnings compared to a trailing P/E of 16. AstraZeneca plc (NYSE:AZN), which pays a slightly lower yield at 3.9%, is a good peer for Bristol Myers Squibb. AstraZeneca also saw its business decline in its most recent quarter but is lower priced at a trailing P/E of only 7, and might make for a better value play at a fairly close dividend yield.
Out of these three picks from Cramer, we think that Energy Transfer Partners and Vale are priced low enough compared to the core business that the high dividend yields are still worth chasing. We’re not as sure about Bristol-Myers Squibb, as at least one comparable company offers a similar yield at a lower multiple of its earnings; however, because of the nature of the drug development business, it is possible that the company’s pipeline is strong enough to justify this disparity.