"It is better to have a permanent income than to be fascinating." - Oscar Wilde
- After significantly underperforming the market in 2013, dividend paying sectors and stocks are pockets of strength in a more volatile 2014.
- Tradition dividend paying sectors like Consumer Staples and Utilities appear fully valued.
- Income investors should look outside traditional dividend sectors to find good yield opportunities.
- Below are a couple of niche income plays at attractive valuations that just received positive analyst comments from Morgan Stanley.
Income investors are being awarded for their patience in a more volatile 2014 as high yield sectors and stocks are solidly outperforming the market in the New Year. This contrasts with their significant underperformance in 2013's 30% rally.
I believe this strength will continue as my outlook for the overall market in 2014 is tepid and it also appears that interest rates plateaued late in 2013, at least for the near term. This is supportive of yield plays.
I continue to avoid traditional dividend paying areas like Consumer Staples and Utilities as these sectors seem fully valued. Paying 18x FY2014's projected earnings for a slow growing Consumer Staple stock like General Mills (NYSE:GIS) to acquire just over a three percent yield seems fairly desperate to me.
I rather find value in more non-traditional plays that pay much higher yields and are selling at attractive valuations. Here are two income plays that yield slightly more than 6%. Both offer good value and have received positive comments from analysts recently.
Aircraft lessor Fly Leasing (NYSE:FLY) has had some positive catalysts lately. The company announced a solid 13% increase to its quarterly dividend payout in January. With the increase the firm will pay $1 a share in dividends annually. This equates to a 6.7% dividend yield at current price levels.
The credit provider also received positive commentary from an analyst at Morgan Stanley on Wednesday who noted the company's "ample growth opportunities ahead in 2014 and that it will maintain its capital return leadership among the lessors."
The shares sell at just over 6x earnings per share posted in FY2012. In addition, after falling slightly in FY2013; revenue growth should rise in the low teens in FY2014. Only six analysts cover the company. They have an $18 a share price target on FLY, 20% above the current stock price. Fly Leasing also pays a higher dividend yield and has a significantly lower valuation (based on trailing earnings per share) than competitors Aircastle LTD (NYSE:AYR) and AerCap Holdings N.V. (NYSE:AER).
Unique real estate investment trust (REIT) Digital Realty Trust (NYSE:DLR) is up more than 10% since I last profiled it in late November noting insider buying activity. This REIT focuses on developing, owning and management of technology-related real estate. It has one of the largest data center portfolios in the nation.
Like Fly Leasing, the company just announced a dividend hike. The quarterly payout will increase a little more than six percent. This brings its yield up to ~6.3%. Digital Realty Trust has now more than tripled its payouts since it came public late in 2004.
Morgan Stanley is positive on the dividend hike noting the increase "increase reflects ongoing robust fundamentals and sends a positive message for a stock already yielding 6%." Insiders have added more than $400K in new shares since my article ran in November. The shares are priced at a reasonable ~11x forward FFO (Funds from Operations) and revenues should increase at a high single digit clip in FY2014.
Disclosure: I am long DLR. 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.