Total Return Leaders: Persistently Positive

Investment strategies that focus on investing in dividend-paying stocks have a long-term record of outperforming the S&P 500 index with less volatility, fund managers and other investment professionals say.

In addition, dividends have been a significant contributor to the long-term total return of the S&P 500. Such advantages are likely to persist over time and, hence, are putting total-return investing back in the spotlight for large numbers of investors and financial advisors.

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Research Total Return Leaders

Based on compounded annual price appreciation and dividends for the 10-year period ending Nov. 12, 2009, for stocks (including ADRs) trading at or above $2 a share as of Nov. 12, 1999:

Company (Total Return)

Alliance Resource Partners (+29.03%)
National Retail Properties (+15.61%)
ONEOK Partners (+17.27%)
Plains All American Pipeline (+18.27%)

Source: Capital IQ, a Standard & Poor’s business.

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Many financial advisors, investors and investment managers believe that dividends are not mere payouts of a portion of profits. Dividends signify that management is interested in its shareholders, or unitholders, and are a potent indicator of the underlying sustainability of earnings and cash flows.

For total-return investors, dividends and the growth of dividends provide positive compounding benefits. They also supply important income and income growth potential for income investors.

“Dividend income is an important component of the total-return story,” explains Kevin Habicht, chief financial officer of National Retail Properties. “As many investors seek stability and move closer to retirement, they are looking for some cash income, and that means consistent dividend income is being looked at more favorably than in the past.”

Producing growing dividends and outstanding total returns year after year is no easy feat, however, especially when economic and financial conditions are as volatile as they’ve been recently.

To grasp how such performance is best executed, Research spoke in depth with Habicht and Brian Cantrell, chief financial officer of Tulsa, Okla.-based Alliance Resource Partners. Their analysis and outlook indicates just how much effort is involved and how, when done correctly, such discipline becomes second nature.

Tale of Two Companies

Alliance Resource Partners is a master limited partnership, or MLP, that produces and markets coal to utilities and major industrial users nationwide. In the third quarter ended September 30, 2009, the company had revenues of about $300 million and net income of $36 million.

“Our success is a reflection of our continuous focus on solid business fundamentals,” Cantrell explains. “We honor our commitments, value our relationships, work to keep our balance sheet strong, and manage for long-term growth in cash flow in line with our primary corporate goal being to create sustainable increases in returns for our unitholders — in other words, basic blocking and tackling in the execution of solid business fundamentals.”

Such execution is vital, since Alliance Resource Partners’ customers turn to the company for the delivery of critical products. “Most of our contracts are long term in nature, and our production is sold to large power generators, the vast majority being electric utility companies,” says Cantrell. “Our customers value the diversity and reliability of Alliance’s operations.”

Alliance Resource Partners’ 10-year total-return performance, according to Capital IQ, a Standard & Poor’s business, tops that of companies such as Apple and Altria Group. It is also better than that of Yanzhou Coal Mining Company of China, for instance, and Arch Coal.

National Retail Properties, an Orlando, Fla.-based real estate investment trust, invests primarily in high-quality properties subject to long-term net leases. In the quarter ended September 30, 2009, it had revenues of $57 million and net earnings of roughly $21 million. It invested about $10 million in new properties during the three-month period.

The company’s 10-year total-return performance puts it ahead of other industry players like Essex Property Trust and Boston Properties.

“We benchmark ourselves, typically on a quarterly basis and in a number of ways, including total shareholder return,” Habicht explains. “We benchmark ourselves against a number of indexes, including the NAREIT Index, the MSCI U.S. REIT Index, the S&P 500 and the S&P 600, of which we are a member. We look at one-, three-, five, 10- and 15-year time periods and have outperformed all these indexes — in each of those time periods.”

How does it consistently produce such a performance? Like other companies with strong total returns, National Retail Properties closely adheres to the business processes and strategies that it’s put in place.

“We believe this is a testament to our business model, the strength of well-located, long-term net-leased properties, a strong balance sheet and our 20-consecutive-year track record of increased dividends, all of which have allowed us to outperform the REIT industry and general equity total return averages for the one, three-, five, 10- and 15-year time periods.”