Historically low interest rates have caused investors to seek higher yielding opportunities. Stocks with high yields provide current income and a cushion against capital depreciation. Dividend stocks tend to have strong financial position but it is always critical to check the liquidity and solvency ratios before considering an investment. I have been utilizing a dividend capturing technique for the past few years in an attempt to generate income as well as identify undervalued dividend stocks. For details of the strategy and my screener details, please consult my methodology on the topic (last modified 1/6/2013). In brief, the screen focuses on relative stable equities with a concentration on liquid companies at affordable valuations. This is summarized below:
- Dividend Yield ≥ 4.0%
- Ex-Dividend Date = Next Week
- Market Capitalization ≥ $1B
- Institutional Ownership ≥ 15%
- Ideally Modest YTD S&P 500 Underperformance
- Minimal European Exposure
- Real Estate Focus
After applying this screen I arrived at the equities discussed below. Although I envision these as short-term trading ideas, you still need to exercise caution. The information presented below should simply be a starting point for further research in consultation with your professional financial advisor before making an investment decisions. My goal is to present new companies to you and provide a brief overview of their recent developments; this should not be considered a substitute for your own due diligence.
From mreit.com: an "mREIT is a Mortgage REIT ... which is an entity that specializes in investing solely in mortgage products (e.g. purchasing and selling mortgage-backed securities). Like other REITs (Real Estate Investment Trusts), an mREIT can only deal with mortgages and 90% of earnings must be paid out to its investors annually." The three mREITs analyzed this week focus on healthcare and commercial real estate. Since these companies are required to distribute such a high percent of earnings to investors, the yields are much higher than you find with more traditional companies; however, the stock prices and dividends can both be quite volatile. Rather than targeting a relatively stable dividend, the periodic payout can fluctuate. Additionally, this makes some traditional metrics, such as payout ratios, less meaningful.
Real estate oriented investments are still one of the most potent segments of the market but naturally entail significant risk. These companies generate income primarily from the net spread between the interest income earned on these securities/investments and the cost of borrowing as well as hedging activities. This has been an extremely lucrative business as borrowing rates have remained very low while the interest earned on the bonds has declined at a slower rate. There are concerns that returns will narrow as more investors refinance their loans which would put pressure on the investment spread; however, I do not anticipate any drastic changes in the near future. Naturally yields will start to decline but these securities will continue to offer yields in excess of the S&P 500.
I will employ a systematic approach and provide an overview of the company and its strategy, discuss any recent firm-specific news, consider financial performance and related metrics, and finally consider the recent dividend history. With a screen your objective is to find things wrong with companies and look for a reason to not invest. Once you have narrowed down the potential population, then you can conduct further research.
Senior Housing Properties Trust (SNH): 6.44% Yield; Ex-Dividend 1/17
Overview And Strategy - $4.3B healthcare mREIT that owns 384 properties across 40 states. The majority of properties are senior living communities and properties leased to medical related businesses. SNH was created by CommonWealth REIT and spun-off in 1999 (see below).
Firm Specific News -
- Negative Analyst Coverage: Jeffries downgrades from "Buy" to "Hold" but maintains $24 price target.
- Negative Analyst Coverage: TheStreet downgrades from "Buy" to "Hold" citing deteriorating financial earnings performance.
- Deals With Above Average Yields: SNH President disclosed in quarterly call that new deals have yields in excess of seven percent.
- Book Value: $15.12
- Price/Book: 1.61
- Leverage (Debt/Equity): 0.70
- Performance Year: 16.27%
Dividend History ($0.39 per Share Quarterly) - The dividend has exhibited approximately three percent growth in the past few years, essentially in-line with inflation.
CommonWealth REIT (CWH): 6.37% Yield; Ex-Dividend 1/17
Overview And Strategy - $1.32B commercial mREIT that owns 526 properties across 34 states. Largest markets are Chicago, Philadelphia, and Oahu (HI).
Firm Specific News -
- Class Action Lawsuit Filed Against CWH: Numerous law firms have alleged that CWH violated securities laws surrounding its recent dividend decrease disclosure.
- Book Value: $39.24B
- Price/Book: 0.40
- Leverage (Debt/Equity): 1.26
- Performance Year: (6.71%)
Dividend History ($0.25 per Share Quarterly) - The dividend was slashed from $.50 to $.25 in late 2012 when the payout ratio hit an unsustainable 119%. The company cited "weak office fundamentals" as a reason for the dividend decrease.
LTC Properties Inc. (LTC): Ex-Dividend 5.11% Yield; Ex-Dividend 1/18
Overview And Strategy - $1.1B healthcare mREIT with 178 facilities with a focus on long-term care and assisted living facilities.
Firm Specific News -
- New Investing Activities: $3.1M of land purchases and $26.2M in development commitments
- Book Value: $15.23
- Price/Book: 2.39
- Leverage (Debt/Equity): 0.48
- Performance Year: 21.10%
Dividend History ($0.155 per Share Monthly) - The dividend was 3.5% in January 2012 and was increased another 6.9% percent in July 2012. The yield has exhibited slow but reliable growth throughout its history.
The information presented has been summarized below. I make no warranties regarding the information in the chart as industry classifications are frequently imperfect. Yellow and red represent "avoid" and "consider" classifications, respectively. This week I recommend avoiding all three mREITs. Senior Housing and LTC Properties both have lofty price/book ratios and Senior Housing has faced analyst downgrades. LTC's 5% dividend is not high enough to compensate for the 2.4 price/book ratio. LTC has appreciated substantially in the past year and I would consider owning the stock if it pulls back. I would avoid CommonWealth due to the alleged securities violation litigation and dividend decrease.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Please refer to profile page for disclaimers.