Two weeks ago, when commenting on both the newest Powerball millionaire ($590 million, still unclaimed as of this writing) and David Karp’s sale of Tumblr to Yahoo! Inc. (NASDAQ:YHOO), Jim Cramer noted that when one has that kind of money, investment goals can be substantially different than those for ordinary people.
People who are that rich don’t need to invest for growth – merely for preservation. They don’t need to take any sort of risk at all; they only have to make sure that their money is not eroded away by inflation.
And Cramer’s recommendations for protecting your assets from inflation? High-end real estate, art, and gold, preferably in the form of bars.
He says he would not consider any fixed-income vehicles at this point in time, noting that their yields are “dangerously” low, and declaring that any entrance into long-term fixed-income vehicles now would be “a huge mistake.”
So what does that leave for the rest of us? We can’t afford to invest in art or high-end real estate, and we might not be interested in investing exclusively in gold. Where else should we look?
Cramer says take some risk with stocks. “I would buy higher yielding master limited partnerships and higher yielding real estate investment trusts and some of the better stocks of companies that are serial raisers of dividends,” he said.
So, since I am interested in exactly these sorts of things, I am today examining his recommendations, based on my own system, and determining whether or not I believe they are worth buying at this point.
In my examination, I review companies based on seven different criteria: yield, number of years paying and raising dividends, five-year Dividend Growth Rate (DGR), five-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE, and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the current valuation of the company.
I constructed a rating system that awards points for each of the previously named criteria. A “perfect” score would be 28 points, with four points awarded in all seven categories. I used this system to select 10 companies for what I call my Perfect Dividend Portfolio.
Kinder Morgan Energy Partners LP (NYSE:KMP), a popular MLP
The first company is Kinder Morgan Energy Partners LP (NYSE:KMP), an oil and gas pipeline Master Limited Partnership. Kinder Morgan is one of the most popular MLPs and I have examined it many times.
An MLP is great in an income portfolio because it pays out a large part of its income as distributions to its partners, i.e. shareholders. These distributions are then subject to a very favorable tax treatment, which makes investments in these types of partnerships extremely attractive.
Kinder Morgan Energy Partners LP (NYSE:KMP) is currently trading at approximately $85 and yields 6.20%. It has paid and raised dividends consistently for 16 years, its five-year DGR is 7.1%, and the total twelve-month return is 14.1%.
Other metrics that I use when calculating a rating for a dividend company include analysts’ five-year annual earnings growth estimate (7.1%) and the company’s PE (34.9).