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Stocks that Follow this Simple Practice Beat the Market 6-to-1

Thursday, March 14, 2013 - 1:00pm

Worth an estimated $1.5 billion, J.R. Shaw is one of the wealthiest men in Canada.

An entrepreneur by nature, he founded his company in 1966 at the age of 32. Over the ensuing 28 years, he turned this modest venture into Shaw Communications (NYSE: SJR), Canada's second-largest cable and satellite television company, with 3 million subscribers and a current market capitalization of nearly $11 billion.

Over the years, J.R. and his two sons have made a lot of good business decisions.

One of Shaw's best decisions, a move that has made shareholders billions of dollars, had absolutely nothing to do with the cable TV business.

You see, Shaw Communications is a rare company. Out of the nearly 77,000 actively-traded securities in StreetAuthority's database, just 70 firms -- less than 0.1% -- currently share this proven wealth-building characteristic.

It all started in January 2005, when Shaw Communications declared its first dividend distribution of the year.

That alone was nothing unusual -- after all, Shaw's focus has long been on generating free cash flow and targeting high-quality, high margin customers. And Shaw had always been keen to share the wealth with shareholders through a regular dividend payout and an above-average yield.

What was truly unusual about that January 2005 dividend declaration was that Shaw began to offer shareholders a regular monthly paycheck -- the company converted from paying dividends on a quarterly basis to paying out 12 times per year.

Of course, it didn't hurt that the Shaw family owned a significant stake in their own company and had a history of adding to their positions over time, aligning management's interests with those of shareholders.

Since making that announcement just over eight years ago, Shaw Communication's Class B shares have jumped over 211% compared to just over 82% for the Toronto Stock Exchange Index, the benchmark of performance for the Canadian market.

For years, I was skeptical about the benefits of monthly dividends. After all, changing the frequency of the payout has no impact on a company's total annual yield -- they're not paying out more money, just handing out the same cash in a dozen paychecks rather than four.

But Shaw isn't the only monthly dividend payer that's dramatically outperformed the market. Having watched this pattern work again and again, I'm now a believer.

Think about it. If you don't pay your mortgage every month, you'll probably get a testy telephone call from your bank along with a hefty late fee. And, if you don't pay your telephone or cable bill each month, you'll soon find you can't make an outgoing call or watch TV.

Wouldn't it be nice if a company you owned shares of treated you the same way? When a company commits to a monthly dividend, it's a good sign they have shareholders' best interests in mind.

After all, a monthly dividend comes in handy when it's time to pay living expenses. Additionally, this small cadre of stocks offering monthly dividends tends to outperform.

But, don't take my word for it... let's put some concrete numbers behind that claim.

I recently screened StreetAuthority's database of stocks, looking for companies offering yields above 3% that haven't cut their payout in the past year and pay monthly dividends. I performed this screen for each quarter between December 31, 2002 and December 31, 2012, I performed this screen, adding new companies to the list and tossing out any names that no longer met my criteria. The results speak for themselves.

The index of firms meeting my screen criteria rebalanced each month returned 595.1% over this 10-year period, compared to just 97.3% for the S&P 500. The Dividend Aristocrats, an index of dividend-paying stocks with a track record of increasing their payout every year for 25 years, returned 157.7%.

That's conclusive outperformance.

One of my favorite monthly dividend plays right now is Enbridge Income Fund (OTC: EBGUF).

Enbridge Income Fund operates three business lines: Crude oil transportation and storage, natural gas transmission and green energy.

The natural gas transmission and green energy segments both generate steady, reliable cash flows that should not be impacted by volatility in commodity prices or economic conditions. That's because Enbridge's Alliance natural gas pipeline is 98.5% reserved under long-term contracts with major oil and gas producers -- these companies pay to reserve capacity on the pipeline whether they use it or not, better known as take-or-pay contracts.

Enbridge's green energy segment consists of a series of wind and solar power plants in Canada. This is also a low-risk asset because power produced is sold under 15- and 20-year agreements at fixed prices.

But, the most exciting growth avenue for Enbridge is its oil transport and storage segment.

The Bakken Shale is one of North America's largest and fastest-growing oilfields. By the middle of this decade the Bakken play will likely produce 1.5 to 2 million barrels of oil per day, up from about 850,000 barrels today.

Earlier this year Enbridge Income Fund and its counterpart in the U.S., a master limited partnership called Enbridge Energy Partners (NYSE: EEP), announced the completion of the Bakken Expansion Project that increased capacity to move oil out of the Bakken and onto Enbridge Energy's mainline in the U.S.

Much of that increased capacity is already under long-term take-or-pay contracts with major producers.

Action to Take --> With a yield of 5.2% and the potential for upside to that payout, Enbridge Income Fund looks like a buy under $28.

Elliott Gue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.