Our Best-of-the-Best Dividend Portfolio Update

by: Stanley Barton

Now that we investors are embarking on a new year, it is a good time to review the performance of stocks that we featured in an article on Seeking Alpha last year. We updated our dividend stock selections in an article last July, and we consolidated the best of those into one portfolio going forward. This article is to update our followers on the status of those "best-of-the-best" dividend stocks.

Telular Corp. Wireless Tech. $9.37 $10.63 13% 4.40%
Homeowners Choice Insurance $18.09 $24.74 37% 3.80%
Cimatron CAD Manufacturing $4.08 $7.05 73% 8.70%
Ares Capital Business Develop. Finance $16.15 $17.92 11% 8.48%
Blackrock Health Science Trust Healthcare $27.99 $30.24 11% 7.95%
GAMCO Natural Resource Fund Precious Metals & Petroleum $14.80 $14.78 0% 11.40%
RAIT Financial Reit Real Estate $4.79 $6.96 45% 5.90%
Legacy Reserves LP Oil & Gas $25.60 $25.39 -1% 8.90%

During the past six months, the average capital gain in the portfolio was 23% versus a 10% increase in the S&P 500 in the same period. Based on the dividends declared since the last update, the current average yield of the portfolio is 7.45%.


Telular Corp. (NASDAQ:WRLS) has been a steady performer for us since its selection in the first article in our "Shadow Stock" series. These are stocks that mimic in some way blue chips in their sector, but offer some superior investment angle, such as a higher yield. The 13% increase in stock value builds on a 16% increase we reported in the July update. What we continue to like about WRLS is that it has growing recurring revenue in the form of wireless security subscriptions. This allows for consistent cash flow and improving margins, after absorbing the up-front sales costs. Growth is projected at about 20%. In our last update, we were concerned that the new truck/trailer monitoring business could be a drag. The latest quarterly report did not indicate that, and the new unit could add profits, as well as diversification. The 4.4% yield is good for a growth stock.

Homeowners Choice (NYSE:HCI) was featured in the same issue as WRLS and has doubled in price since the original selection. The property and casualty insurer got past the Florida hurricane season without major issues, so we still like the single-digit PE, 3.8% yield and projected 30% revenue growth. HCI now trades on the NYSE. The company recently announced the offer of $35MM in senior notes, although HCI has cash in the bank, exceptional cash flow and negligible debt. The company indicated this was for "working capital" and is not dilutive. HCI has in the past executed profitable acquisitions.

Cimatron (NASDAQ:CIMT) is an Israel-based supplier of software systems for computer-aided manufacturing. It has increased 73% in value since our last update, much of that in recent days. More than a million shares traded on January 22, a day after CIMT demonstrated its new GibbsCAM software at an industry conference. Like WRLS, CIMT licenses to customers its software and collects recurring revenue. Growth has been good, and the dividend has exceeded 10%, although we list the yield as less, after deducting the foreign tax bite. Some can use the foreign tax to offset U.S. taxes. CIMT had modest revenue growth and good income growth in the latest quarter. The value metrics are OK but not as compelling after the big rise, and we would not buy into this spike at this time. We would not eliminate the possibility that this is being eyed as a takeover candidate: cash in the bank, little debt and proven technology.

Ares Capital (NASDAQ:ARCC) is a business development corporation, and it pays a solid 8% dividend. It has appreciated in line with the S&P 500, despite a dilutive offer of convertible notes. With consistent single-digit growth, the PE of about 12 is modest, and the management has a good record of profitably putting money to work.

Blackrock Health Sciences Trust (NYSE:BME) is a closed-end fund that invests in the stocks of companies operating in the healthcare sector, which includes businesses involved in researching, developing, producing, distributing or delivering medical, dental, optical, pharmaceutical or biotechnology products. Unlike some closed-end funds, BME's payout is all from earnings and profits, as opposed to "return of capital." This year's yield includes a special dividend that it declared in December, as in years past. Some may argue that the BME capital appreciation is not as generous as many healthcare stocks over the period. We should remember that this is a dividend portfolio seeking diversification. BME has an exceptional yield while offering exposure to a hot market segment.

GAMCO Natural Resource Fund (NYSE:GNT) is included to provide some exposure to precious metals, while offering a good monthly income. Unlike BME, the payout from GNT includes about 44% return of capital, so the yield from profits is about 6.5%. GNT invests in stocks of companies in the precious metal, base metal and energy industries. These have underperformed the market and the appreciation of this fund has been flat in the past six months. Although many pundits predict that 2013 will not be a banner year for precious metals, some of the best value metrics and fundamentals can be found in stocks in the mining industry, and a diversified portfolio should be positioned for a powerful potential rise in this segment. This waiting game is easier when pulling in a 6.5% net yield.

Rait Financial REIT (NYSE:RAS) is a diversified realty trust that has been an exceptional performer since our last update with a 45% rise. The real estate segment is on fire with the housing rebound, and analysts expect 30% EPS growth for RAS in 2013, providing a PE of less than 6. This is a turnaround company, so the market's reservations created the opportunity to add to our portfolio a 6% dividend payer in this attractive segment. The last quarter EPS of $.30 beat analysts estimates of $.25, and we like the diversification in its real estate assets and operations.

Legacy Reserves LP (NASDAQ:LGCY) engages in the acquisition and development of oil and natural gas properties primarily located in the Permian Basin, Mid-Continent, and Rocky Mountain regions of the United States. We liked LGCY because it had a high proportion of oil in its product mix and it operates producing properties, not just pipelines. LGCY surprised us since the last update by issuing stock and notes to fund an acquisition binge. The stock has recovered from the dilution but remains mostly flat, although the yield is an attractive 8.9%. The diversified portfolio needs exposure to oil, and the question to consider is weather the acquired reserves were added at a premium or if the future value of these will prolong and improve the profitability of LGCY. We have a somewhat contrarian view of the oil market, and we think that these are wise additions, given the upside for oil in 2013 and beyond.


Although our Best-of-the-Best Dividend Portfolio has performed twice as well as the general market in the past six months, it was compiled to capture a high income yield, with the safety of diversification. As such, we consider that all these stocks should be considered as a group. Our view of the general market for 2013 is modestly bullish, but stocks may move sideways or down. In those conditions, high-yielding stocks perform well because the reliable income becomes a larger percentage of return in sideways markets and a perceived safety net in falling markets.

We believe that diversification is a good sleep elixir, but for those who are looking to drop some of the lesser performers in this group, we offer a few substitutes. If you disagree that the price of oil will not rise in 2013, a substitute for Legacy may be another of our favorites, Compressco Partners, LP (GSJK). It provides equipment for fracking and other ongoing production processes, and it recently upped its dividend to 9.1%. The real estate group looks to be one of the stronger segments for 2013, so some may prefer to overweight that sector. Especially if Rait Financial REIT is a little risky for you, in our article on small retail REITs we selected Whitestone REIT (NYSEMKT:WSR), which is expecting 30% revenue growth and pays a monthly distribution of 8.1% annually.

Disclosure: I am long WRLS, HCI, CIMT, RAS, WSR, LGCY, GSJK, BME, ARCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We do not know the circumstances, risk tolerance or investment objectives of our readers. There is no guarantee that any investment mentioned in this article will be profitable or appropriate for readers.