Income investing does not necessarily have to equal low returns. Through the portfolio below, investors can gain a strong amount of income without much risk of a dividend cut.
1) Cypress Sharpridge (CYS) and and Chimera Investment Group (CIM) are mortgage REITs that are able to pay out high returns by the difference in their borrowing rates and the return on their mortgage backed securities. CYS invests in agency backed RMBS, where Chimera is a little more risky with non-agency backed MBS. These REITs will continue to deliver high returns until the Fed raises rates which will cut the spread on returns. Overall, hold onto these until rumors of rate hikes.
2) The MV Oil Trust (MVO) and the Prudhoe Bay Trust (BPT) are American oil trusts that pay out high dividends and have tax advantages for their holders. BPT profits from mineral harvesting in the Alaskan Prudhoe Bay oil fields while the MV Oil trusts has interest in oil and natural gas fields in Colorado and Kansas. Both trusts have ROICs over 80% and have no debt on their balance sheets.
3) The Aberdeen Chile and Australia funds are two close ended funds that profit from the economic growth of two of the world's largest commodity producing countries. They payout their high dividends through a controlled payout of profits from the fund, but nevertheless the high yields are sustainable. The one concern I have is that both funds' largest sectors are financials.
4)Verizon (VZ) is one of America's leading telecom companies both for landlines and mobile phones. The cell phone business does not have much growth, but it is still highly profitable-- allowing Verizon to pay a dividend yield above 5%. In addition, with Verizon's access to the iPhone, competitor AT&T (T) has lost most of its economic moat.
5)French Telecom (FTE) is France's largest telecom provider and the third largest in Europe. Unlike Verizon, French Telecom has some exposure in emerging and frontier economies (albeit limited) such as Morocco. The current issues with the PIGS have depressed European stocks to the point that French Telecom now yields over 9%.
6) Collectors Universe (CLCT) is the leading company in certifying collectible items such as gold coins and baseball cards. They pay a high 8.32% dividend yield and are financially strong with an ROIC of 59%, no debt and a PEG ratio under 1. I would recommend waiting until the stock falls below 14.75 because it is overbought based on technicals. For details on fundamentals read my previous commentary on the stock as the underlying business has not changed significantly over the past three months.
7) Terra Nitrogen (TNH) produces ammonia, which is a critical ingredient for fertilizers. Nitrogen is critical to plant growth and there are no proven alternatives to replace its use on crops. Despite the stock's recent rally, the dividend yield is still strong at over 6% and the company still maintains its competitive advantages and 44.7% profit margins. One thing that could derail TNH is a sharp rise in the price of natural gas, a key input in the production of ammonia.
Overall, for dividend investors who can afford a moderate amount of risk, this portfolio provides an effective way to gain near 10% annually on dividend checks alone. With an average beta of 0.79, the risk level of this portfolio has less estimated risk than the market as a whole.
Disclosure: I am long CYS, CH, IAF.