By Larry Gellar
In many ways, the idea behind dividend investing is similar to that of holding a bond – except you won’t get your principal back until you sell the equity. These stocks take that concept to a new level, each of them boasting dividend yields of over 15%.
Invesco Mortgage Capital (NYSE:IVR) – First on our list is Invesco, a mortgage REIT which boasts a rather meaty 19.7% dividend yield. Part of the reason this stock’s dividend yield is so high is because the stock price has taken quite a hit lately without a downward adjustment in the dividend. Essentially, Invesco’s problem is that without a resolution to the debt ceiling, the government will obviously not be financing the mortgage debt that Invesco buys. More information on that can be found here, but essentially rates for overnight repurchase agreements are skyrocketing. This makes financing costs for companies like Invesco significantly higher. When problems like these occur, one has to wonder if the struggling company can sustain the high dividend. Invesco should be able to though – the past 3 quarters have all seen positive cash flow. Although the main idea behind buying IVR would be for the dividends, it’s still worth taking a look at some basic valuation measures. Trading at only 4.96 times earnings and 0.93 times 5-year earnings growth, this stock may even have some price appreciation in its future. Although Invesco does have some holdings that are more on the retail side of things, the major news affecting this company’s stock price will be what happens to the debt ceiling.
American Capital Agency (NASDAQ:AGNC) – Like Invesco, American Capital Agency is also a mortgage REIT. With this in mind, the stock has seen quite a bit of volatility lately. In fact, at one point on Friday the stock was down 22%. While the stock closed at only 1.45% down, it’s quite obvious that the panic is on. If a debt deal isn’t reached, AGNC’s financing costs will essentially be a crapshoot. Not only will the government not be financing mortgage debt if its at its debt cap, but a downgrade in the country’s credit rating would also send interest rates up significantly. This is exactly the worst-case scenario that AGNC shareholders fear. AGNC is only trading at 4.27 times earnings for the time being, since the future of this company is rather uncertain at the moment. American Capital Agency has experienced negative cash flows in 2 of the past 4 quarters, so the company wasn’t exactly in perfect financial health prior to the debt crisis. This stock is certainly in danger of being unable to keep up its 19.8% dividend yield. Despite this, AGNC is still a valuable stock to hold in a tough economy. AGNC meets some crucial criteria including a profit margin of greater than 30% and 5-year earnings growth greater than 40%.
Cypress Sharpridge Investments, Inc. (NYSE:CYS) – CYS is more of a diversified REIT than the two stocks listed above, but it has fallen sharply regardless due to uncertainty surrounding the country’s debt. At least one research firm thinks now could be the time to buy though as mentioned in this article. Specifically, KBW notes that government-sponsored enterprise mortgage-backed securities (GSE MBS for short) are not themselves rated by rating agencies like Moody’s. Rather, it is their debt that gets rated and as a result, they cannot actually be downgraded. Also note that these securities are collateralized unlike the $14 trillion in debt that the federal government owes. There are other reasons to like CYS as discussed in this article. Specifically, Ben Bernanke’s recent comments are generally good for stocks like CYS. If the economy continues to sputter, interest rates will stay low, which is very important for companies like Cypress Sharpridge to do well. On the other hand, the recent earnings report for CYS was not particularly good. The company missed estimates, and the past year’s cash flows have been rather negative. 3 of the 4 past quarters have seen a net cash outflow, although the company is starting to recover from its massive $138 million outflow from the quarter ending Sept 30, 2010.
Resource Capital (NYSE:RSO) – Although AGNC was the real victim of the debt ceiling flash crash, panic can surely been in the shareholders of a similar company Resource Capital. Unlike some of the other REITs though, earnings will be announced soon (August 1st) so that could have a substantial impact on the stock’s price. As seen in this article, Resource Capital has actually been raising significantly less capital than the other mortgage REITs, which is interesting because presumably now would be the time to do so when interest rates are low. Regardless, this type of move (or lack thereof) will help Resource Capital if interest rates go up. Importantly, it is pointed out that RSO has some commercial exposure, which could represent increased risk in the long run depending on what happens with the real estate market. Also, while RSO has some risk due to the sector it’s in, being able to rake in some solid dividends should not be ignored. Although a high dividend can sometimes mean a company is making unwise sacrifices, this is obviously not the case with a REIT since by nature they are required to return at least 90% of profits to shareholders.
Life Partners Holdings (NASDAQ:LPHI) – This reseller of life insurance policies has fallen by about 67% since the beginning of 2011, which helps to explain to why the dividend yield is so high (15.60%). Note that this company operates in quite a niche. Essentially, the point is that policyholders can sell their insurance for money now, and the buyer of said insurance gets the premium upon the policyholder’s death (or some other insured event). Ernst & Young refused to continue auditing for the company due to overly aggressive revenue recognition. Another concern for the company is that it’s behind on its 10-K and 10-Q filings. Needless to say, this figures to be a very risky stock going forward. Trading at a slim 3.18 times earnings though, the time to buy could be now. Without an up-to-date cash flow statement, it’s hard to judge this company’s financial health, so this one is certainly caveat emptor. Additionally, the state of Texas has just announced that they’ve been investigating the company since mid-2010. Life Partners has been accused of refusing to comply with a subpoena, which is the type of news that would certainly correlate with other possibly unscrupulous dealings. Shareholders across the country are astounded that they are just hearing this for the first time.
Annaly Capital (NYSE:NLY) – Affected by the same trends as the other mortgage REITs, Annaly has been down sharply of late. Like American Capital Agency, Annaly experienced quite a panic on Friday, temporarily sending shares to below 15. The stock has recovered since that low to close at 16.78, but clearly panic is in the air. These times of panics though may be the best time to buy NLY. Historically speaking, the best opportunities to buy have come during these periods of volatility. Since the bond market did not change significantly, it is unlikely that NLY’s value has changed either, which is why those steep drops make for a good value play. Annaly’s statement of cash flows is also worth taking a look at. In the quarter ending Mar 31, 2011, the company saw $74.386 million come in, which is a far stretch from its net outflow of $577.976 million 9 months earlier. Clearly, there is some element of volatility to the way this company’s cash flows come in, which certainly adds to the risk of the equity. Annaly has a remarkably low beta of 0.23 though, which is a testament to the company’s consistency regardless of other stock market conditions. Annaly reports earnings on August 3rd, so look for this to be a factor in the short-term performance of the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.