Why do I like high-dividend stocks so much? In a January 1, 2011 Basic Training article, I described seven dividend stocks that you could hold for a year. How did they do in this volatile market?
As of August 24, 2011, those stocks had averaged a 12% year-to-date return compared to the S&P 500’s 6% loss. Even better, five of the seven picks recorded gains.
They were: Computer Programs & Systems (CPSI), up 41%, B&G Foods (BGS), up 25%, McDonald’s (MCD), up 18%, and Westar Energy (WR) and Verizon Communications (VZ), both up 6%. The two losers were DuPont (DD) and Microchip Technology (MCHP), both down 6% (returns include price changes plus dividends received).
Not Rocket Science
Coming up with that list wasn’t rocket science. All I did was pick relatively high-dividend-paying stocks with solidly entrenched positions in boring slow-growth market sectors that those of you trying to find the next Google (GOOG) or Netflix (NFLX) avoid like the plague.
Five More Picks
What to do next? Stick with that relatively conservative list or try my five new picks paying 7.6% to 19.6% expected dividend yields described below (yield is the next 12-month’s dividends divided by the share price). This new list presumes that the U.S. and global economies are not going to fall off a cliff as so many are predicting. Don’t buy this list if you disagree with my presumption.
American Capital Agency (AGNC) 19.6% yield
Real estate investment trusts (REITs) are corporations that, by law, must invest only in real estate related assets. They don’t pay federal income taxes as long as they pay out at least 90% of their taxable income to shareholders in the form of dividends. American Capital invests in residential mortgages insured by U.S. government agencies Freddie Mac and Fannie Mae. Thanks to that insurance, American doesn’t have to worry about its mortgages going into default. If they do, the appropriate agency buys them back. American borrows at short-term interest rates and uses the borrowed funds to buy the mortgages. Consequently, its profit margin is the difference between short-term and mortgage interest rates. A rise in short-term rates would cut its profits and possibly trigger a dividend cut. However, given current conditions, short-term rates are likely to stay low for the next year or so.
Triangle Capital Resources (TCAP) 10.3% yield
Triangle, a Business Development Company (BDC), lends money to, and takes equity positions in privately held firms U.S. with $20 million to $75 million annual revenues. Similar to REITs, BDCs are not taxed at the federal level if they distribute at least 90% of their taxable income to shareholders. Triangle is a U.S. Small Business Administration approved lender, which gives it access to low cost money because its bonds are insured by the SBA.
SeaDrill (SDRL) 9.7% yield
Controlled by a Norwegian shipping tycoon, SeaDrill, headquartered in Norway, but incorporated in Bermuda, provides offshore oil drilling services. SeaDrill's rigs are mostly new, giving it a competitive advantage over firms with older equipment. SeaDrill only started paying quarterly dividends in March 2010. Since then it has raised its payout in every quarter. SeaDrill’s share price took an almost 15% hit during the recent downturn on concerns that lower crude oil prices would reduce the demand for drilling services. Don’t buy SeaDrill if you’re in that camp.
Windstream (WIN) 8.3% yield
Windstream provides old-fashioned landline telephone service to customers in 29 states, primarily in rural areas. It also delivers broadband Internet, digital phone, and high-definition TV services. Because many subscribers are giving up landline phones in favor of wireless, many investors shun rural telephone companies. Windstream, however, generates plenty of excess cash, which it is using to grow its business by acquiring fiber communication networks and data centers.
TAL International (TAL) 7.6% yield
TAL leases steel shipping containers that are used to ship just about everything by ship, rail and by truck. TAL owns more than 800,000 containers and has its own offices in 11 countries and affiliates in 39 countries. Battered by reduced demand in 2008 and early 2009, business slowed forcing TAL cut its quarterly dividend to $0.01 per share in March 2009. Now, despite all of the negative headlines, the global transport business is booming, shipping containers are in short supply, and TAL’s revenues are running around 40% over year-ago numbers. TAL resumed paying significant dividends starting with its March 2010 $0.25/share payout, which it has since more than doubled to $0.52/share.
Although I’ve researched the stocks mentioned here, they may not suit your investing needs, or economic factors affecting their outlook might change. Do your own due diligence. The more you know about your stocks, the better your results.
Disclosure: I am long MCD, DD, AGNC, TAL, VZ.