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Today, we are going to look at five stocks that offer very high yields, but investors should consider at least two of them to be speculative in nature: Chimera Investment Corporation (NYSE:CIM) and Teekay Tankers Ltd (NYSE:TNK). Kohlberg Capital Corporation (NASDAQ:KCAP) should also be avoided by individuals with low tolerances for risk. Novice investors should familiarize themselves with some of the following metrics before deploying money into high-yielding dividend stocks. Traders should not base their investment decision on yield alone but examine some of the key metrics described below. Do your due diligence before deploying any capital. In most cases, stocks that offer very high yields are usually associated with higher levels of risk. It is okay to deploy some capital into riskier plays but betting the house is asking for trouble.

Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the market cap.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa. Individuals searching for smaller cap stocks that offer high yields might find this article of interest.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders then they are making. This situation cannot last forever. In general, if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios.

Our favourite play on the list is Energy Transfer Partners, L.P. (NYSE:ETP). ETP has a quarterly revenue growth rate of 32.9%, a very large cash flow of $1.1 billion, a ROE of 13.4%, a five-year dividend growth rate of 7.56%, a total three-year return of 67%, and has been paying dividends since 1996.

Two other noteworthy players are Linn Energy, LLC (LINE) and Southern Copper Corp (SCCO), with yields of 7.3% and 9.00% respectively.

LINE increased production by 30% in 2011, and is set to increase production by another 40% in 2012. It also has a very impressive three-year total rate of return in excess of 281%, a 5 year dividend growth rate of 22.5%, five year dividend average of 10.5%, a price to book of 12.72, a price to cash flow of 11.10 and a price to free cash flow of 21.60. LINE also has a quarterly revenue growth of 32.8% and levered free cash flow rate of $189 million. Net income for the past 3 years is as follows; in 2008 it came in at $999 million, in 2009 it dropped to -$299 million, and in 2010 it came in at $114 million. For 2011, net income so far stands at $831 million. If the next quarter matches the current quarter, net income will soar well past the $ 1 billion mark.

SCCO has an enterprise value of $26.3 billion, a quarterly revenue growth rate of 38%, an impressive quarterly earnings growth rate of 81% a ROE of 57.3%, a very impressive five-year dividend growth rate of 53%, a total three-year return of 134%, and has been paying dividends since 1996. It has a strong levered free cash flow rate of $1.53 billion. Net income for the past 3 years is as follows: In 2008 it came in at $1.4 billion, in 2009 it dropped to $929 million and in 2010 it surged to $1.54 billion. For 2011, it stands at $1.8 billion.

Stock

Yield

Market cap

Forward PE

EBITDA

Quarterly revenue growth

Beta

Revenue

Cash flow

KCAP

11.1

149M

8.6

-------

-10.30%

1.89

258M

89M

CIM

19.10

2.6B

5.5

--------

-37%

0.78

614.1M

409M

BKCC

12.30

597M

7.9

---------

34.00%

1.98

120M

-132M

TNK

20.00

224M

25

50.23M

-14.10%

1.20

111M

45.6M

ETP

7.80

9.5B

18

1.62B

32.9%

0.63

6.4B

1.13B

Kohlberg Capital Corporation (KCAP)

It has an enterprise value of $209 million, a quarterly revenue growth rate of -10.30%, a weak ROE of 1.09%, a three-year dividend growth rate of -21%, a total three-year return of 140%, and has been paying dividends since 2007. It has a levered free cash flow rate of $52 million.

Net income for the past three years is erratic. In 2008, it came in at -$9.58 million, it 2009 it turned positive and soared to $34 million and in 2010 it dropped significantly to -$14 million. If it maintains its currently pace of quarterly earnings, its earnings for the year should come in higher than 2010. For 2011, net income currently is positive and stands at $ 9 million.

Potential negatives

It has a negative 3 year dividend growth rate of -21% and a negative quarterly earnings growth rate of -10.3% and rather weak ROE of 1.09%.

On the bright side, the payout ratio is below 100%, it has a positive levered free cash flow rate of $52 million, it is trading roughly 1.70 below book value, sports a five year average dividend yield of 18.5%, and has a strong three year total return of 140%. It has a rather high beta of 1.89, which makes it a good candidate for selling out of the money covered calls. Selling out of the money covered calls provides dividend investors with another income stream.

The technical picture is mixed. If it can close above $7.20 on a weekly basis the outlook will turn bullish. Consequently a weekly close below $5.90 will most likely result in a re test of the lows. As a result of this, only speculators should consider opening a position now.

  1. Price to tangible book 0.79
  2. Price to cash flow 70.70
  3. Price to free cash flow 2.00
  4. 5 year sales growth N/A
  5. Inventory turnover N/A
  6. Asset turnover 0.10

  1. ROE 1.09%
  2. Return on assets 3.88%
  3. 200 day moving average $6.65
  4. Total debt $60 million
  5. Book value $8.29
  6. Dividend yield 5 year Average 18.40%
  7. Dividend rate $0.72
  8. Payout ratio 93%
  9. Dividend growth rate 3 year average -21%
  10. Consecutive dividend increases 0 years
  11. Paying dividends since 2007
  12. Total return last 3 years 140%
  13. Total return last 5 years -31%

Chimera Investment Corporation (CIM)

Chimera Investment Corporation is a specialty finance company that invests in residential mortgage-backed and a wholly-owned subsidiary of Annaly Capital. It has an enterprise value of $ 8.89 billion, a quarterly revenue growth rate of -37%, a ROE of 17%, a three-year dividend growth rate of 17.43%, a total three-year return of 37%, and has been paying dividends since 2007. Net income for the past three years is as follows. In 2008, it stood at $51 million, in 2009 it dropped to $42 million and in 2010, it dropped significantly to $16.3 million. It has a levered free cash flow rate of $31.8 million.

Potential warnings

The dividend has been cut from $0.13 to $0.11; this is troubling because CIM has only been paying dividends since 2007. It also has a negative quarterly revenue growth of -37%, and the total return for the past 12 months has been -26.81%. Only speculators should consider this play. On the positive side, it is trading 70 cents below book value; this is quite significant on a percentage basis as the stock is only trading at $2.53.

It is attempting to put in a bottom, and as long as it does not close below 2.30 on a weekly basis the outlook will remain neutral. A break below 2.30 on a weekly basis means that it will go on to put in a series of new 52-week lows. Consequently, if it can trade above 3.00 on a weekly basis, the outlook will turn bullish and CIM should be in a position to test the 3.60-3.90 ranges before pulling back.

Key ratios

  1. Price to tangible book 0.81
  2. Price to cash flow 5.40
  3. Price to free cash flow -14.10
  4. 5 year sales growth N/A
  5. Inventory turnover N/A
  6. Asset turnover 0.00

  1. ROE 17.75%
  2. Return on assets 6.55%
  3. 200 day moving average $2.99
  4. Total debt $6.2B
  5. Book value $3.27
  6. Dividend yield 5 year Average 12.6%
  7. Dividend rate $ 0.51
  8. Payout ratio 104%
  9. Dividend growth rate 3 year average 17.43%
  10. Consecutive dividend increases 1years
  11. Paying dividends since 2007
  12. Total return last 3 years 37.42%
  13. Total return last 5 years N/A

BlackRock Kelso Capital Corporation (BKCC)

It has an enterprise value of $ 910 million, a quarterly revenue growth rate of 34%, a ROE of 10.8%, a three-year dividend growth rate of -2.52%, a total three-year return of 22.9%, and has been paying dividends since 2007. It has levered free cash flow rate of -$7.7 million. Net income has been rising for the past 3 years. In 2008, it reported a loss of 150 million, it 2009 it reported a profit of 67 million and in 2010 it reported a profit of 71 million. If it maintains its currently pace of quarterly earnings, its earnings for the year should come in higher than 2010. For 2011, net income so far is roughly $69.9 million.

Insider action

Black Rock Kelso Capital Advisors LLC purchased 200, 000 shares in March at an average price of 10 per share. Director Jerrold Harris purchased 13,000 shares in March and May for an average price of 9.64-9.76 a share. The full list of transactions can be accessed here.

Potential warnings

Dividend growth for the past 3 years is a negative, and the payout ratio is above 150%. However, on the bright side it is trading roughly 1.50 below book value, sports a decent quarterly revenue growth rate of 34%, and net income has been increasing nicely over the past three years. As this stock has a high beta, traders should consider selling out of the money covered calls as a way to earn extra income.

Key ratios

  1. Price to tangible book 0.88
  2. Price to cash flow 8.60
  3. Price to free cash flow -2.90
  4. 5 year sales growth 16.79%
  5. Inventory turnover N/A
  6. Asset turnover 0.10

  1. ROE 10.70%
  2. Return on assets 5.08%
  3. 200 day moving average $8.48
  4. Total debt $ 317 million
  5. Book value $9.75
  6. Dividend yield 5 year Average 11.50
  7. Dividend rate $ 1.10
  8. Payout ratio 150%
  9. Dividend growth rate 3 year average -2.52%
  10. Consecutive dividend increases 1 years
  11. Paying dividends since 2007
  12. Total return last 3 years 22.95%
  13. Total return last 5 years N/A

Teekay Tankers Ltd (TNK)

TNK has an enterprise value of $ 591 million, a quarterly revenue growth rate of -14%, a very weak ROE of -0.2%, a three-year dividend growth rate of -33%, a total three-year return of -30%, and has been paying dividends since 2008. Net income for the past three years is as follows. In 2008, it stood at $51 million, in 2009 it dropped to $42 million and in 2010, it dropped significantly to $16.3 million. It has a levered free cash flow rate of $31.8 million.

Potential warnings

Dividends have been declining for sometime now; the last cut took the dividend from $0.21 to $0.15. The 3 year dividend growth rate is - 33.18%. Only speculators should consider this play. On the positive side, it is trading significantly below book value. The stock has taken a massive beating so the worst could be priced in. It is attempting to put in a bottom, and as long as it does not close below 3 on a weekly basis the outlook will remain neutral. A weekly close above 5.00 will turn the outlook bullish and should result in a test of the 7.20-8.50 ranges.

Key ratios

  1. Price to tangible book 2.67
  2. Price to cash flow 6.90
  3. Price to free cash flow -3.00
  4. 5 year sales growth -5.57%
  5. Inventory turnover 17.70
  6. Asset turnover 0.50

  1. ROE -0.20%
  2. Return on assets 0.97%
  3. 200 day moving average $6.04
  4. Total debt $ 374 million
  5. Book value $8.06
  6. Dividend yield 5 year Average N/A
  7. Dividend rate $ 0.83
  8. Payout ratio 198%
  9. Dividend growth rate 3 year average -33.18%
  10. Consecutive dividend increases 0 years
  11. Paying dividends since 2008
  12. Total return last 3 years -30.69%
  13. Total return last 5 years N/A

Energy Transfer Partners LP (ETP)

ETP has an enterprise value of $17.55 billion, a quarterly revenue growth rate of 32.9% a ROE of 13.4%, a five-year dividend growth rate of 7.56%, a total three-year return of 67%, and has been paying dividends since 1996. Net income for the past three years is as follows: In 2008, it was $866 million, in 2009 it dropped to $791 million and in 2010, it dropped again to $617 million. For 2011, it stands at $462 million. It has a levered free cash flow rate of -$309 million.

Key ratios

  1. Price to tangible book 2.67
  2. Price to cash flow 6.90
  3. Price to free cash flow -3.00
  4. 5 year sales growth -5.57%
  5. Inventory turnover 17.70
  6. Asset turnover 0.50

  1. ROE 13.46%
  2. Return on assets 5.66%
  3. 200 day moving average $ 44.91
  4. Total debt $ 8.08B
  5. Book value $23.75
  6. Dividend yield 5 year Average 8.00%
  7. Dividend rate $ 3.58
  8. Payout ratio 260%
  9. Dividend growth rate 5 year average 7.56%
  10. Consecutive dividend increases 0 years
  11. Paying dividends since 1996
  12. Total return last 3 years 67%
  13. Total return last 5 years 16%

Conclusion

The pullback we were expecting has started. In fact, we have mentioned this in several of our recent articles, one of which was published on the 27th, in which we made the following comment:

Going forward, we think that the markets could put in a short term top around the 27-29th of this month. The pullback should provide traders with a good opportunity to open up long positions.

The SPX is still projected to test the 1300-1320 ranges, but the ride up is going to be very volatile in nature. After that we are expecting a pretty strong correction, which could take the market below the October lows. As a result, long term dividend players might want to wait for more opportune moments to present themselves before deploying large amounts of capital into the market. We will be in a better position to issue downside targets early next year. However, the charts are clearly indicating that some surprise (negative in nature) could hit the markets as early as mid January.

All the graphs in this article were sourced from dailyfinance.com



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Do not treat this as a buying list. It is very important that you check the finer details in each of the mentioned plays before deploying even one penny into them. What might be good for one investor could be terrible for another investor.

Source: 5 Dividend Stocks With Yields As High As 20%