Frontline the Frontrunner

The first (and last) thing I ever learned about Frontline, Ltd is that it pays a huge dividend.

I had first seen the oil tanker company mentioned in an article concerning companies that have historically paid disproportionate dividends. The premise of the article was that high-performance companies with high dividend ratios can set you up with a nice retirement assuming you are investing a considerable amount. If the company’s generosity pays off and its share price rises, the investment essentially becomes a “high-yield” fixed income security with an ever increasing principal payment due at its ”maturity date”– which you get to decide! Not to mention the fact that qualified dividends  (though Frontline– being an international company– unfortunately wouldn’t qualify) are taxed at a lower rate than interest payments.

Above are our two current positions for FRO (these figures do not take dividends into account.)

Though our initial position represents a measly 4.68% of our invested funds, seven-month 30.2% unrealized gains are impossible to ignore. How’s that for inflation protection on a fixed income security!

To dump your money into every Tom, Dick, and Harry that offers a 10+% dividend yield would be foolish, but if it looks like the company can afford to pay the dividend for the foreseeable future it would be foolish not to jump on the train.

With the way that Frontline has been blowing the S&P out, unfortunately its dividend yields (only for potential new lots, of course) will diminish. For this reason, I am glad that even in my absence we decided to the opportunity to invest a full month’s share in FRO for August 2008 while we can still take advantage of above-average income yields. Needless to say, in the future we should keep our eyes peeled for similar opportunities in other sectors.