DMLP - It's Raining Dividends With These 2 Amazing Picks

2023-12-08 08:30:00 ET

Summary

• The markets may be noisy, but global dividends continue to quietly hit record payouts.
• This simply validates the Income Method. Cash flow never lies and our income stream never dries.
• We discuss two picks with up to 11% yields for your stress-free retirement.

Co-authored with “Hidden Opportunities.”

In the dynamic world of financial markets, each day brings a new chapter filled with twists and turns. From the ebb and flow of earnings reports to the suspense of inflation data and the Federal Reserve’s monetary policy, every market move tells a story. Whether it's the unfolding narrative in the Middle East or the intricacies of U.S.-China relations, every topic becomes newsworthy and open to interpretation by the myriad of financial analysts.

There are no guarantees in the markets. We make investments with the hope for upside, but Mr. Market’s reactions are not predictable or rational, and he doesn’t owe you anything. Even if current news topics die out, there will be a hundred more, fueling Mr. Market’s irrationality and your emotional distress.

Despite job market tightening, elevated borrowing costs, and declining share prices in FY 2023, the fact remains that dividends paid by U.S. corporations grew 4.5% YoY. In its latest quarterly report on the world’s 1,200 biggest public corporations by market value, Janus Henderson (a U.K.-based fund manager) said 98% of U.S. companies surveyed grew or held their payments steady, compared to 89% worldwide.

"Most regions and sectors are delivering dividends in line with our expectations. We believe the banking sector in particular will continue to deliver solid growth for the rest of the year, making record payments to shareholders." - Janus Henderson Report.

In fact, the sector everyone fears - Banks - contributed most to the dividend growth in Q3. This was followed by utility firms, one of the most hated sectors of FY 2023 despite excellent pricing power, steady demand, and strong operating fundamentals. We said the same about hydrocarbon energy in 2020-21 when Main Street was busy crying over declining stock prices, 5-year low levels, and other disconnected concerns. Source .

Overall, U.S. dividends are still on track to reach a new record high for the full year in 2023, and we are swimming in all that cash flow. Here are two excellent dividend growth picks to propel your passive income.

Pick #1: NNN - Yield 5.4%

NNN REIT, Inc. ( NNN ) owns 3,511 commercial properties in 49 states, with a gross leasable area of approximately 35.8 million square feet. NNN is one of only three publicly-traded real estate investment trusts, or REITs, to have increased annual dividends for 34 or more consecutive years. Source .

The REIT reported its third-quarter earnings on November 1, 2023, and lived up to its reputation as one of the highest quality and well-managed Net Lease REITs.

NNN maintained high occupancy levels of 99.2% and raised its FY 2023 core FFO (Funds From Operations) guidance to $3.19 - $3.23/share (compared with the prior view of $3.17 - $3.22/share). This brings the FY 2023 AFFO estimate to $3.22 to $3.26/share, placing its YTD dividend at a sector-leading 68% payout ratio. The REIT ended Q3 with a net debt-to-EBITDA of 5.4x, with interest coverage and fixed charge coverage of 4.6x, indicating ample liquidity to handle near-term expenses and acquisitions.

NNN reported a sector-leading 12.6-year weighted average debt maturity (at a weighted average interest rate of 3.9%) with no upcoming maturities until mid-2024. This lets the REIT ride the current rate cycle without significant headwinds. NNN ended Q3 with $98.3 million of cash and no amount drawn on the $1.1 billion credit facility. After all expenses and dividend payments, NNN was left with $141 million of free cash flow at the end of Q3 ($180 guidance for FY 2023), which is adequate to fund the REIT’s typical acquisitions without resorting to shareholder dilution at unfavorable prices.

We have seen a massive surge in REIT M&A activity since Q2, with a positive impact on several of our portfolio holdings, including the most recent announcement of the Spirit Realty Capital ( SRC ) – Realty Income ( O ) merger. Several larger, high-quality REITs are absorbing smaller players at cheap valuations, and NNN showed that it is no exception.

During the nine months of FY 2023, NNN invested ~550 million to acquire 125 properties at a cash cap rate of 7.2% (1% higher than the comparable period in 2022). In parallel, YTD, NNN raised $90 million from selling 26 assets at a 5.8% cap rate.

NNN maintains a high-quality property portfolio with long-term lease agreements with credit-worthy tenants. The REIT reported a weighted average remaining lease term of 10.2 years, with minimal lease expirations in 2024. Source .

NNN has maintained a 4.9% average annual Core FFO/share growth rate since 2016 and has never reported occupancy below 96.4% since 2003. The REIT continues its solid execution and is well positioned to continue rewarding shareholders with growing dividends for the foreseeable future.

Pick #2: DMLP - Yield 11.4%

As with the broader energy industry (and firms investing in royalty interests), Dorchester Minerals, L.P. ( DMLP ) has been aggressive with acquisitions. The partnership made three notable transactions during Q3, acquiring 2,184 net royalty acres across 19 counties in Louisiana, New Mexico, and Texas in exchange for 1.2 million common units (valued at $35.8 million).

As always, DMLP ’s acquisitions are dilutive to unit holders but accretive to the earnings and distributions. These transactions over time have ensured the partnership’s reserve levels remain steady, making it a perpetual source of royalty income for unit holders. Source .

Note: DMLP is a Master Limited Partnership, or MLP, that issues a Schedule K-1 to unit holders.

Investors must note that DMLP’s distributions are variable and are highly correlated with the volume and price of crude oil and natural gas in the form of royalty property sales and NPI (Net Profit Interest). As such, it is not meaningful to compare the Q4 2023 distribution with that of the previous quarter or Q4 2022.

For Q3, DMLP reported an average WTI Crude price of $68.66/bbl and an average Natural Gas price of $1.92/mcf (down from Q3 2022 prices of $80.9/bbl and $6.42/mcf, respectively). While commodity prices were lower YoY, they still remain at relatively elevated levels. DMLP reported a 24% YoY increase in royalty gas sales, a 48% YoY increase in royalty oil sales, a 42% increase in NPI gas sales, and a 69% YoY increase in NPI oil sales, indicative of higher production from its reserves due to a combination of higher domestic energy production and accretive reserve acquisition.

DMLP ended the quarter with $43.4 million in cash and cash equivalents on its balance sheet and declared a $0.845120/share quarterly distribution for Q4, paid November 9, 2023. The partnership’s TTM distribution calculates to a hefty 11.3% annualized yield. Investors must remember that DMLP is prohibited from incurring indebtedness over $50,000 in the aggregate at any given time, making it immune to the interest rate policy.

Leading global oil producers Saudi Arabia and Russia have both committed to cutting production and drawing down global inventories. These leading producers benefit from higher prices and see no reason to create a surplus.

"The ‘swing producer’ of OPEC is committed to higher oil prices to balance its fiscal budget and fund its diversification efforts ('NEOM') via their Vision 2030 fund." – Gargi Chaudhuri, head of iShares Investment Strategy Americas.

Moreover, U.S. oil and gas companies are now hesitant to be as aggressive with ramping up production as in the past. The global energy industry has realized the perils of surpluses and the lack of government or private sector support during times of distress (oil shock during the global pandemic) due to the broader Climate Change policy. As such, supply will be tightly controlled, and we expect energy prices to remain elevated for the foreseeable future. With DMLP in your portfolio, higher energy prices are a tailwind for your income.

Conclusion

In the ever-fluctuating world of financial markets, dividends provide a stabilizing force and much-needed immunity from the market's roller coaster ride.

Our portfolio is experiencing a downpour of dividends, and we've strategically positioned our buckets to catch every drop. NNN and DMLP stand out as excellent dividend stewards, meeting the growing income needs of those looking toward a secure retirement.

In our pursuits of financial well-being, our Investing Group has crafted a well-diversified "model portfolio," comprising over 45 securities with a targeted overall yield exceeding 9%. We remain focused on capturing reliable income through market storms, with a wide range of income-generating instruments, from BDCs (Business Development Companies) and CEFs (Closed End Funds) to ETFs (Exchange Traded Funds), Preferred Stock, and Baby Bonds. This strategic diversity extends across dividend-focused REITs, financial institutions, energy, utility companies, and various other industries, ensuring our portfolio remains a robust source of passive income, resilient in the face of market uncertainties.

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