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As everyone knows, I focus on a dividend-income strategy with dividend-paying winners, dividend paying "opportunity" stocks, and a dash of potential capital appreciation at the same time. While the main focus is income, especially for investors seeking a more secure retirement income stream, I will not be boxed into a corner, which in my view, most dividend growth investors appear to do.

These are the main reasons we sold our entire positions in the mREIT sector. Even with truly attractive dividend yields of 11, 12 or 13% in stocks like Annaly Capital (NYSE:NLY), Chimera (NYSE:CIM) or American Capital (NASDAQ:AGNC), the entire sector is under a frontal assault by the Federal Reserve, as well as Capitol Hill. (Review this report)

Yes, I want regular income and yes, I want the best of the best mega-cap dividend growth stocks in my portfolio all of the time. Anyone who has been following our "Team Alpha" portfolio knows the core group of stocks that will more than likely be in the portfolio forever. That does not mean we will not take profits, or refuse to sell underperformers just because of their dividend, or not seek out other opportunities that can give our portfolio even more "zip."

Our Team Alpha portfolio now consists of McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Linn Co, LLC (NASDAQ:LNCO), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), General Dynamics (NYSE:GD), iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF).

Believe it or not, the yields of those mREITs can be replaced (and were) with other stocks that could offer a more secure dividend (not as high of a yield perhaps), as well as some capital appreciation just because they are in different business sectors.

That is exactly what we did by adding BKCC and KFN, to our core portfolio holdings.

2 Solid Stocks With Terrific Dividends

BlackRock Kelso Capital: Price: $9.94/share, Dividend Yield: 11.00%, ESS Rating: Neutral

KKR Financial Holdings: Price: $10.51/share, Dividend Yield: 8.01%, ESS Rating: Bullish

BKCC and KFN are BDCs (business development companies)*, which are mandated by the IRS to pay upward of 90%-95% of all income earned to investors as regular dividends. The business model is simply to lend money to businesses that might otherwise not be able to obtain a loan from a bank.

In return, the BDC receives a higher rate of interest on the loans, and/or an equity stake in the business they lend money to.

As the banks have continued to virtually refuse to lend money, these businesses, like BKCC and KFN, have been actively pursuing these lending opportunities. They earn higher interest rates as well as the potential for capital appreciation if any equity stake they might have within the companies they already lend to, begins to take off. This business can offer investors the potential for the best of both worlds; income and capital appreciation.

That does not mean these companies are without risks of course (another recession would impact both companies), but the management teams behind these companies are in the business of knowing who and what to invest in. I believe these stocks are sort of a side door entry into the BlackRock and Kohlberg, Kravis, Roberts management teams. Those teams know what they are doing when it comes to investing in other companies.

Some Basic Fundamentals

BKCC:

  • 22.50% YOY Revenue Growth last quarter.
  • 10.50% YOY Earnings Growth last quarter.
  • Operating margins are currently at over 65%.
  • 50% of all outstanding shares are held by institutions.
  • A 5 year average dividend yield of roughly 14%.
  • The share price is currently at book value with a tiny premium.

KFN:

  • 141.50% YOY Revenue Growth last quarter.
  • 181.20% YOY Earnings Growth last quarter.
  • Operating margins are currently at over 71%.
  • 57% of all outstanding shares are held by institutions.
  • A 5-year average dividend yield of over 26%.
  • A 43% payout ratio.
  • The share price is currently at book value with a tiny premium.

These fundamentals on their own should be enough for any investor to do some further research I would think.

Let's look at a few charts:

As you can see, the share price of each stock has moved up rather steadily since 2009, and I believe that both stocks could approach pre-2009 levels (nearly $15/share each) just by virtue of the fact that they are filling needs and voids during a healing economy.

The dividends have been paid regularly but did take a hit during the financial crisis. Both have made a comeback, in line with their share prices, and offer attractive yields right now in a better business sector than the mREITs are in.

My Opinion

These stocks are not "forever" stocks. I do believe they offer a significant value for the Team Alpha portfolio as we head into 2013 and beyond.

We did take some heat when we sold our mREIT stocks (almost at the top) and bought these two stocks a few months ago, but I feel strongly that we will reap the rewards of our decision.

Make certain that you do your own research prior to buying and selling any security. Do not base your decisions on this article, or any other article for that matter.

For further research please read these articles:

For Dividends, It Might Be Time To Explore Business...

2 Dividend Powerhouses That Can Replace mREIT Yields

KKR Financial Holdings: A Natural Replacement For W...

*[Author's Note: KFN has been incorrectly categorized as a BDC. Although there are some business similarities, the company is an LLC that is treated as a partnership for tax purpose. KFN is not subject to the requirements that BDCs are as it relates to spectrum of asset classes or distribution mandates, among others.]

Source: 2 Great Dividend Stocks To Replace The Risky mREIT Sector Stocks