When I talk about dividend investing, I often think of the word “sense” for more than one reason. As an illustration, let’s take a closer look at the common shipping shares I mentioned in a recent post and see how they look right now. The pricing on the ships has rebounded nicely since bottoming in early 2018, but stock prices still remain below where they were 10 years ago.
The Dow Jones US Shipping Index is down about 80% from the all-time high it hit in December 2007. This index trades like a derivative of the stock prices of the 20 largest companies in the shipping business.
It’s no coincidence that the rate of charter revenue that the shipping companies can earn is also below its highs. As so often happens, first-rate companies no longer command the rich multiples of years ago, and there are still bargains to be had for those looking to earn income from this sector.
The shipping business has experienced dramatic upheaval, not least the culmination of $100 billion in mergers and acquisitions. The sector has come to be understood as following the “three-pronged business model”: fuel-hedging, a dry-docking market that crushes one or two years of results, and an interest expense related to longer-term contracts.
This has meant that shipping lines were compelled to drop their dividend payouts. At the same time, shares of less-than-competitive lines have been throwing off substantial profits and have actually been considered a buy by some industry analysts. In this environment, the cash kings have tended to be the Nordic and Maersk lines and Golden Ocean, while the smaller lines have not been able to maintain their dividend payments.
There are now signs that, with improved metrics for charter rates, capital expenditures for dry docking and exposure to cargoes that have fallen, the smaller shipping lines could be able to maintain and even to increase their dividend payments. That would be a significant reason to keep investing in them. It’s also highly encouraging because a rapidly growing dividend should not only increase the size of the overall distribution, but it’s one that most conservative investors will be able to live with.
The classic shipper is the Liberty shipping line, but you can find the type of yield that can serve as a good “starter ship” with high yielders such as Astorg, Euroseas and Caratech.