My 10 Favorite, Must-Own Dividend Stocks (Part 1 of 2)

by: Todd Johnson

This article focuses on my present 10 favorite dividend stocks. I have bought shares in all 10 names this week. The markets are turbulent and unpredictable. There are, in my opinion, clear winners which stand out in today's economy. In the second article in this series, I will discuss hedges to use with these stocks. Hedges are central to our investing philosphy.

Please allow me to be very clear regarding these articles. I am writing in real-time. When facts change, or when I perceive facts have changed, I adjust my holdings. I try to write these reflections. The economy is in a very difficult situation. The European currency issue is very fluid. I do recommend hedges with all portfolios. My goal, in order to be helpful, is to focus more on hedges. As an investor, you should become familar with options and inverse funds if you want to hedge your portfolio.

1. American Capital Agency Corp. (NASDAQ:AGNC)
As I discussed yesterday, this is a sector to be involved in. Fed Chairman Ben Bernanke gave the green light to buy, own, hold, treasure agency-mREITs. He had 3 dissenters on the board, which is a significant number. His 2 year policy of a 0% Fed Funds rate is highly unusual. A 0% interest rate means he is extremely pessimistic on the economy.

AGNC will benefit by borrowing funds via extremely low interest rates. In turn, AGNC will buy longer-term, and higher-yielding, government sponsored (GSE) paper.

AGNC is currently offering a 19.5% annual dividend yield. The table near the bottom of this article shows the approximate dividend date. The ex-dividend date, by my estimation, should be September 21st.

2. Hatteras Financial Corp (NYSE:HTS)
Hatteras falls into the same category as AGNC. HTS is a 100% agency-mREIT. Investors should gobble up these deals when the price closes below book value per share. HTS offers a 14.8% annual yield. Currently, the stock is trading just a tad above its book value.

I focus upon management teams. HTS' external management is experienced and accomplished. This equity is a solid name to own in the mREIT space. A name to avoid, with a proven failure in the mREIT field, is ARMOUR Residential REIT (NYSE:ARR). The investor demands that the mREIT management team adequately recognize proper ways to hedge their GSE holdings. This is not a time to assume the ARR's management team will "not make the same mistakes".

3. Cypress Sharpridge Investments (NYSE:CYS)
Cypress is a 100% agency-mREIT play. Management is proven, successful, and adept at their goals. The stock is trading slightly above its $12.35 book value per share. The name offers a 18.8% annual dividend yield. CYS does not receive the publicity that the larger agency mREITs receive.

In terms of the agnecy mREITs, investors should watch the yield curve. We do know short-term borrowing costs will remain cheap. The ongoing action is to watch for any decrease in the yield curve with the long-GSE positions providing lower yields. This industry makes their money on a strong yield curve. If this were to change, then we need to revisit our mREITs investments.

4. Annaly Capital Management, Inc. (NYSE:NLY)
Annaly is the long-in-the-tooth agency mREIT equity. Led by Michael Farrell, NLY is the name most commonly owned by retail investors. Management has proven itself through various up and down interest rate cycles. This is a quality agency-mREIT name to own.

Another issue to consider is the impact of Standard & Poor's downgrade upon U.S. debt and GSE paper. If the downgrade impacts the mREITs' leverage use to the downside, then this could potentially compress agency mREITs' earnings per share. This is just one of many issues to watch in this levered sector. We have the wind at our backs, but we need to continually monitor where we stand. If the facts change, then we need to adjust. Period.

Capital preservation is central to any portfolio. Live to play another day. That is how I approach my investing and these articles. Therefore if you witness me changing positions, I will attempt to articulate the rationale.

5. Stonemor Partners LP (NASDAQ:STON)
Times are tough. As the saying goes, death and taxes are unavoidable. The "death" factor is Stonemor's business model. STON operates cemetaries, funeral parlors, cremation services, and related services. STON is a Master Limited Partnership.

When customers (aka, the living) prepay for their burial service, they provide cash to STON. STON invests these proceeds and ideally makes money on the investments. Of course, STON also profits when customers arrive needing services.

I want to be involved in business models which are recession, or even depression, proof. Burying the dead is a business model which will never escape mankind. On that end, we shall honor the deceased and profit in STON.

6. Collectors Universe Inc. (NASDAQ:CLCT)
A fellow reader asked me, in the past week, if I thought CLCT was a growth stock. It was not until a few days later that I fully digested the context of the question, and its answer. Upon reflection, Collectors Universe is a growth stock.

Renaissance Technologies is the largest shareholder with a 6.1% ownership in this $140-million market capitalization company. Renaissance is well known to be very astute quantitative investors with a seasoned genious leading the enterprise.

CLCT provides an annual 7.3% dividend yield. The company has zero debt on its balance sheet. There appears to be accumulation in the stock as its relative strength in these times of market turbulence has been nothing short of stunning. In recent days, the stock has seen unusual volume and set 52-week highs.

I believe as a gold investor and coin collector, CLCT is attracting investor interest due to gold's popularity. Gold, per ounce, broke the $1,800-per ounce range yesterday. This is incredible as the U.S.A. is facing deflationary times. Most assets are deflating in value. Gold, as Marc Faber says, is money. A fiat currency which prints money as a course of business has a doomed destiny. History has only repeated that lesson time and time again.

I personally believe gold is a bit overextended right now. Gold-per-ounce has typically traded at a ratio of 10-22x the price of oil. Currently gold is trading near the upper range of 21. Traders will exit their positions in a nanosecond. One either buys gold as a hedge or they buy gold with an exit strategy.

One of CLTC's businesses, PCGS, provides authentication and grading quality to modern and old coins. As gold is $1,800 an ounce, investors want to ensure that their physical gold is authentic. PCGS is the premiere company to provide this service. CLTC is seeing higher traffic as customers are a plenty with gold at these levels. There are many gold "victims" who purchased a fake gold coin worth $0 assuming its value was $1800. PCGS prevents this terrible injustice.

7. MarkWest Energy Partners LP (NYSE:MWE)
Markwest Energy Partners together with its subsidiaries, is involved in the gathering, processing, and transportation of natural gas and oil. MWE, on August 8th, announced a standout quarter. The distribution was increased by 9.4%. Management has delivered exceptional returns for shareholders.

8. Enterprise Products Partners LP (NYSE:EPD)
EPD is a second MLP which offers solid year-in and year-out returns. Enterprise Products Partners has been an amazing performer since its 1998 IPO. The asset base has grown from $715-million since its IPO in July 1998, increasing its asset base from $715 million to $35.5 billion at August 10th, 2011.

The company is involved in the midstream industry with a fixed fee revenue stream. The company has been active in the acquisition front and this is a winning stock. This quality holding has distribution tax advantages, first class management team, and a focused management team keenly focused upon shareholder returns. I would prefer to own EPD over Kinder Morgan (NYSE:KMI). The reason is, I believe Richard Kinder sold out to Goldman Sachs and put the debt burden on the retail investor.

We need to avoid the Richard Kinders of the world, who are so intensely focused upon their own gains, and embrace the Enterprise Products which is more aligned with our "sniff test" business model. Kinder Morgan (KMI) has an outrageous debt level, as a recent IPO, to deal with in a tough economcic background.

9. Student Transportation, Inc. (STUXF.PK)
This equity is more of a "catalyst" position than a pure play dividend play. Student Transportation has been aggressive on the acquisition trail. They are currently traded on the Canadian exchanges. The yield is presently about an annual 8.9%. The Canadian government imposes a 15% tax on out-of-country investors on shares. STUXF management has moved to move to the NASDAQ under the symbol STB.

The move to move to the U.S. markets was positive for Atlantic Power Corporation (NYSE:AT). The same situation should occur for STUXF. An affluent U.S. investor base can only provide a catalyst to the stock price. The stock has acted very well knowing that a move to the U.S. markets is in the making.

I am sure student buses are a solid business. I want to own this name due to the catalyst of co-U.S. and Canada listings. I want to receive the monthly dividends. Further research will show whether owning a student bus maker makes sense long term. I believe concern is warranted whether cities buying student buses is recession-impacted. Time will tell. For now we have the catalyst for dual listing and a solid order base at the present time.

10. Government Properties Income Trust (NYSE:GOV)
We, as a society, have learned there are too-big-to-fail entities. Governments fall into that category, for better or worse. Small business failures thrive. Such is justice in modern times. We can disagree on these facts, but let's survive and invest in the winners who will survive. GOV is a U.S. based REIT which provides office space to government tenants. The yield, 7.9%, is comforting based upon alternative investments. I am 100% comfortable that governments will pay their rent bills. Whether small businesses succeed is another question for another time.

Company Symbol Price Dividend Yield
American Capital AGNC $28.62 $5.60 19.5%
Hatteras HTS $27.00 $4.00 14.8%
Cypress CYS $12.77 $2.40 18.8%
Annaly NLY $17.48 $2.60 14.9%
StoneMor STON $27.80 $2.34 8.4%
Collectors CLCT $17.76 $1.30 7.3%
MarkWest MWE $44.50 $2.80 6.3%
Enterprise EPD $42.06 $2.42 5.8%
Student Tra STUXF.PK $6.17 .552 8.9%
Government GOV $21.23 $1.68 7.9%

Disclosure: I am long AGNC, HTS, CYS, NLY, STON, CLCT, MWE, EPD, STUXF.PK.