The Best REIT And Private Equity Dividends This Week

by: Paul Zimbardo

Financial services has been one of the best performing sectors in the past year as banks have gone to great lengths to improve their financial positions and reduce risk after the financial crisis. When most people hear about investing in financial services they instinctively think about the mega-cap banks but there are many other types of financial services. These large banks can be quite risky as the latest Federal Reserve stress test recently proved. If a bank fails to meet predetermined Fed requirements then the company cannot distribute a dividend. I ask, why take the risk.

Not only are there regional banks but there are insurance companies, private equity firms, and real estate investment trusts (REITs) available for investment. These smaller entities are less complex and are far easier for investors to understand than the likes of Citigroup (NYSE:C) or Bank of America (NYSE:BAC). These entities are unique in that they can offer high dividend payments as well as growth prospects. Below I will discuss six such financial service firms and provide some background for future research. The yields are much higher than average this week with the lowest offering above five percent. The downside to the high yields is that most of the opportunities this week are small caps with one exception. These six equities are going ex-dividend at the beginning of the week so time is of the essence.

For details of the strategy and my screener details, please consult my methodology on the topic (last modified 1/21/2013). 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
  • P/E Ratio: 0-20
  • Institutional Ownership ≥ 15%
  • Ideally Modest YTD S&P 500 Underperformance
  • Minimal European Exposure
  • Financial Services Firm

After applying this screen, I arrived at the financial service equities discussed below. Depending on your belief in the investment hypothesis, you may decide to hold long enough for the dividend or to hold for the long-term. The information presented below should simply be a starting point for further equity research in consultation with your professional financial advisor before making an investment decision. 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.

American Capital Agency Corp (AGNC): 15.06% Yield; Ex-Dividend 3/18

Overview And Strategy - $13.1B mREIT that invests in agency residential mortgage backed securities ("MBS").

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $32.15
  • Price/Book: 1.03
  • Leverage (Debt/Equity): 7.04
  • Performance YTD: 14.61%
  • Revenue Growth/(Contraction) (QoQ): 61.5%

Dividend History ($1.25 per Share Quarterly) - AGNC reduced the dividend payment in the first quarter of 2012 from $1.40 to $1.25 where it has remained for the past five quarters. Since the third quarter of 2011 it appears that management has favored a strategy of consistent dividend payments rather than allowing them to fluctuate in the first year following the initial public offering. AGNC has been resilient and is the one of the rare mREITs not to reduce its dividend payment recently.

(Source: American Capital Agency Corp 2012 10K)

American Capital Agency Corp. continues to be one of the best mREITs available and the stock has climbed 12% the past quarter and is approaching its 52-week high set in the Fall. The stock was a bargain in the high $20s but I would still be a buyer at book value.

American Capital Mortgage Investment Corp. (NASDAQ:MTGE): 13.73% Yield; Ex-Dividend 3/18

Overview And Strategy - $1.5 mREIT that invests in agency (90%) and non-agency (10%) residential MBS.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $25.73
  • Price/Book: 1.02
  • Leverage (Debt/Equity): 6.7
  • Performance YTD: 11.62%
  • Revenue Growth/(Contraction) (QoQ): 305.1%

Dividend History ($0.90 per Share Quarterly) - MTGE has only operated for seven quarters but has held the payout steady for the past five quarters.

American Capital Mortgage Investment Corp. commenced operations in 2011 and is managed by the same investment manager as AGNC discussed above. MTGE has some non-agency exposure but trades at the same premium to book as AGNC which holds only agency securities. I prefer AGNC because it holds safer investments and offers a higher yield but MTGE is a solid choice if you are seeking non-agency MBS exposure.

CYS Investments Inc. (NYSE:CYS): 10.51% Yield; Ex-Dividend 3/21

Overview And Strategy - $2.1 mREIT that invests in agency residential MBS.

Firm Specific News -

Financial Performance And Metrics -

  • Book Value: $13.73
  • Price/Book: 0.88
  • Leverage (Debt/Equity): 7.7
  • Performance YTD: 2.54%
  • Revenue Growth/(Contraction) (QoQ): 29.1%

Dividend History ($0.32 per Share Quarterly) - CYS's dividend has been declining sharply in recent quarters and has dropped from $.60 to $.32 in the most recent quarter. The overall 2012 payout was boosted by a special $.52 dividend ahead of the fiscal cliff but this overall downtrend is alarming.

CYS is an average quality mREIT but it is attractively priced at a twelve percent discount to book. The decline in dividend payments require monitoring but CYS is solid dividend capture candidate due to its tight trading range and low beta (0.24).

Solar Capital Ltd. (NASDAQ:SLRC): 9.68% Yield; Ex-Dividend 3/19

Overview And Strategy - $1.1B private equity firm that invests in senior secured loans and equity of target portfolio companies.

Firm Specific News -

  • Cramer on March 8th: "This stock has been a winner and I'm going to tell you to buy it."
  • $147M Equity Issuance To Pay-down Credit Revolver and Pursue New Investments

Financial Performance And Metrics -

  • Price/Earnings (Forward): 9.67
  • Book Value: $22.69
  • Price/Book: 1.09
  • Leverage (Debt/Equity): 0.56
  • Performance YTD: 3.09%
  • Revenue Growth/(Contraction) (QoQ): 15.2%

Dividend History ($0.60 per Share Quarterly) - The dividend payment has remained flat since mid-2010 so do not count on future increases.

Solar Capital Ltd. typically makes $20M-$100M investments in a diverse set of levered companies and profits from the spread. The portfolio of investments is currently underwater ($1.432B cost vs. $1.395B fair value), which is not a good sign for prospective investors. The private equity space can be very rewarding for investors but I would pass on Solar Capital Ltd. in favor of a larger private equity firm with a longer record of accomplishment.

Apollo Investment (NASDAQ:AINV): 9.05% Yield; Ex-Dividend 3/19

Overview And Strategy - $1.8B management investment company that invests in subordinated and senior secured debt.

Firm Specific News -

Financial Performance And Metrics -

  • Price/Earnings (Forward): 10.15
  • Book Value: $8.14
  • Price/Book: 1.07
  • Leverage (Debt/Equity): 0.63
  • Performance YTD: 4.43%
  • Revenue Growth/(Contraction) (QoQ): (83.1%)

Dividend History ($0.20 per Share Quarterly) - The dividend payment was reduced 29% in late 2011 and has held constant at $.20 per share since then.

Total investment income for the nine month ended 12/31/12 declined nine percent over the comparable period. It is hard for me to recommend a private equity with declining revenue as it could be sign of a larger underlying problem. This is especially true with so many other quality candidates available with less risk and higher yields.

Main Street Capital (NYSE:MAIN): 5.41% Yield; Ex-Dividend 3/19

Overview And Strategy - $1.2B business development company that specializes in equity, equity related, and debt investments in companies with revenue between $10M and $100M.

Firm Specific News -

Financial Performance And Metrics -

  • Price/Earnings (Forward): 15.55
  • Book Value: $17.49
  • Price/Book: 1.95
  • Leverage (Debt/Equity): 0.54
  • Performance YTD: 44.16%
  • Revenue Growth/(Contraction) (QoQ): 34.3%

Dividend History ($0.155 per Share Monthly) - The dividend payment was recently increased by three percent but has exhibited only slight growth throughout the years.

I covered Main Street in detail in January and concluded that it was worth considering for dividend capturing. As with the three private equity-type firms this week, either I would consider a higher quality private equity, such as Prospect Capital Corp (NASDAQ:PSEC), or one of the REITs discussed above.

The information presented has been summarized below. I make no warranties regarding the information in the chart as industry classifications are frequently imperfect. Orange and green represent "avoid" and "consider" classifications, respectively.

Disclosure: I am long AGNC, CYS, PSEC. 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: Please refer to profile page for disclaimers.

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