Income investors in 2011 face the dilemma of a debt bubble. Interest rates are at record lows, and short-term treasuries are expected to earn negative real returns. Investors seeking yield have even bid up the prices of junk bonds and bid down their yields. This can be witnessed in the returns of the high yield debt (junk bond) exchange-traded funds (ETFs), which trade at dividend yields near 8%.
Fear not, gentle bond investors! There are industries and investment instruments featuring securities whose dividend yields are above 8%. Individually, they feel less safe than bonds, but as components of a diversified fixed-income portfolio their individual, peculiar risks are averaged out.
Stocks with dividends competitive with junk bond interest rates (8% or higher) were found among many sectors and types of securities. Two populations with many top dividends were private equity companies and ETFs.
Private equity companies (also called business development companies or BDCs) are firms that invest in companies in ways that are not available to individual investors through public exchanges. Instead of buying shares in publically traded companies like Apple through a discount broker like Scottrade, they purchase equity or lend money to companies that do not issue shares or bonds to the investing public. They can invest in companies like FaceBook which may one day go public, but before there is even an IPO. They can also invest in companies that will never go public, but will always be privately held.
Recently, private equity has been the source of funding for companies who would have found credit from bank-sponsored business loans. Below is a list of best dividend-paying stocks from private equity:
Extreme Dividends from Private Equity Firms | ||||||||
Ticker | Dividend Yield | Payout Ratio | Return on Equity | Performance (Year to Date) | Beta | P/E | P/B | Strategy |
10.2% | 38.0% | 17.6% | 13.5% | N/A | 19.78 | 0.9 | Venture Cap | |
10.3% | 65.8% | 21.1% | -5.5% | 0.46 | 6.65 | 1.24 | Buyouts | |
10.6% | 56.5% | 18.5% | -11.4% | 1.13 | 5.25 | 0.96 | Tech Sector | |
10.7% | 90.3% | 11.3% | -13.8% | 1.72 | 7.88 | 0.91 | Private Equity | |
11.7% | 114.4% | 11.1% | -15.0% | 1.45 | 8.36 | 0.9 | Private Equity | |
14.0% | 77.9% | 13.6% | -14.1% | 0.75 | 6.53 | 0.84 | Private Equity | |
14.4% | N/A | -6.5% | -28.8% | 2.33 | N/A | 0.68 | Private Equity | |
Unfortunately, private equity firm holdings can be valued based on models or appraisals, which are done in-house by employees who hope to keep their jobs or by a third-party with a vested interest in renewing their contracts with the private equity firm. Either way, there is considerable motivation in providing a high valuation. Investors considering private equity must scrutinize the firm they are investing in and its holdings.
Alternatively, individual investors may find high dividends among a few ETFs. Here is a list of ETFS which have a dividend yield greater than eight percent:
Extreme Dividends from ETFs | |||||||
Ticker | Dividend Yield | Performance (Year to Date) | Beta | P/E | P/B | Expense Ratio | Strategy |
9.8% | -8.9% | 1.02a | 12.0 | 1.22 | 0.41% | Diversified Stock | |
10.1% | -5.5% | N/A | 8.6 | 1.11 | 0.49% | Financials and REITs | |
10.5% | -7.7% | 0.74 | 7.6 | 1.02 | 0.48% | Financials and REITs | |
11.2% | -11.6% | 1.7 | 13.0 | 1.05 | 0.70% | Financial and Industrial Stocks | |
11.0% | 10.0% | 0.2 | 14.0 | 2.92 | N/A | Biotech Stocks | |
11.8% | -3.2% | 1.36 | 13.0 | 0.98 | 0.58% | International Real Estate | |
12.3% | 2.8% | N/A | N/A | N/A | 0.85% | Levered MLPs | |
14.6% | -19.7% | 0.76 | 31.7 | 3.4 | N/A | Internet Stock | |
8.4% | 1.0% | N/A | 12.8 | 1.93 | 0.50% | Closed-End Funds | |
9.5% | -3.2% | 1.24 | 15.2 | 0.9 | 0.60% | International Real Estate | |
a Average beta of peer group
Unfortunately, some of these ETFs bundle other funds together and charge an additional fee. Do not buy a fund of Closed-end funds or REITs that you can readily purchase in the market. As an investor, you should be disgusted by fees in general, and there is no shortage of companies lining up to charge you fees.
Instead, consider funds that buy other investments directly or provide you access to markets you cannot access on your own. EWEF, PSP, BBH, MLPL, and IIH provide portfolios of stocks and charge a fee. You only pay fees once, at the final ETF level for exposure to these investments. International real estate funds like DRW and RWX are worthy of consideration by US investors. They might invest in other funds, but many of their holdings cannot be accessed by investors in the United States.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
