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In Part I we featured seven companies with yields as high as 25%. Please do not base your investment decisions on yield alone. In general, one takes on more risk when one invests in companies that sport very high yields. Novice players should take the time to understand what they are getting into and not just open up a position based on high yields only. It might be okay to take on higher risk with small amounts of capital but throwing a large amount of capital into a stock just because it offers a high yield only could be a recipe for a disaster.

Key metrics such as operating cash flow, levered free cash flow and payout ratios on each company have been provided as this information is important when it comes to making your selection.

Normally, individuals need to focus on Payout ratios but in the case of REITs the payout ratio is not really that important because REITs are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for REITs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the dividend declared per share.

Our favourite play on this list is Annaly Capital Management Inc (NLY). It has been paying dividends since 1997, has a five-year dividend average of 12.8%, a very healthy five-year dividend growth rate of 40% and a total return of 91% for the past five years. Net income for the past 3 years is as follows; in 2008, it came in at $346 million, in 2009 it surged by more than 600% to $1.9 billion, and in 2010 it dropped to $1.26 billion.

Two other notable plays are American Capital Agency Corp (AGNC) and Invesco Mortgage Capital Inc (IVR), with yields of 19.9% and 23.9% respectively.

American Capital Agency Corp has enterprise value of $43.82 billion, a quarterly revenue growth of 320%, a quarterly earnings growth of 317%, a ROE of 23.9%, a three-year dividend growth rate of 37.9%, a total return of 112% for the past three years, and has been paying dividends since 2008.

AGNC also sports the following per share data and valuation ratio; a Price Earnings 3.90, Price/Sales 3.90, Price/Book 1.05 and Price/Cash Flow 7.40 Earnings per share 7.15, Sales per share 5.32, and Cash Flow per share of 3.81.

Invesco Mortgage Capital Inc has enterprise value of $43.82 billion, a quarterly revenue growth of 197%, a quarterly earnings growth of 207%, a ROE of 20.25%, an operating margin of 91%, a profit margin of 89.1% and has been paying dividends since 2010.

Invesco Mortgage Capital Inc also sports the following per share data and valuation ratios. Price Earnings 12.80, Price/Sales 6.74, Price/Book 0.75 and Price/Cash Flow 13.00. Earnings per share 1.34, Sales per share 2.55, and Cash Flow per share of 1.3

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 stocks that offer significantly higher yields but with a slight increase in risk might be interested in this article, 5 Magnificent Material Plays With Tempting Yields As High As 10.5%.

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% means that the company is dishing out more money to shareholders, then it's making. This situation cannot last forever. In general if a company has a high operating cash flow and access to capital markets, it can keep this going on for a while. Companies only pay the portion of the debt that is coming due and not the whole debt so this trick can technically be employed to maintain the dividend for some time.

(Click charts to expand)

Ellington Financial LLC (EFC)

Ellington Financial LLC has enterprise value of $8.46 billion, a quarterly revenue growth of 40.6%, a ROE of 6.37%, a profit margin of 40.35%, and has been paying dividends since 2010. Ellington Financial LLC is trading over 5 dollars below book value.

Net income for the past two years is as follows; in 2009, it came in at $93 million, and in 2010 it dropped to $43 million. For 2011, net income so far stands at roughly -$2 million.

Key ratios

  • Price to sales 6.74
  • Price to tangible book 0.75
  • Price to cash flow 13.00
  • Price to free cash flow -0.50
  • 5-year sales growth N/A
  • Inventory turnover N/A
  • Asset turnover 0.0

  • ROE 6.37%
  • Return on assets 0.89%
  • 200-day moving average $ 18.31
  • Total debt $919 million
  • Book value $22.84
  • Dividend yield 5-year Average N/A
  • Dividend rate $2.51
  • Dividend payout ratio 91%
  • Dividend growth rate 5-year average N/A
  • Consecutive dividend increases 1 years
  • Paying dividends since 2010
  • Total return last 3 years N/A
  • Total return last 5 years N/A

New York Mortgage Trust Inc (NYMT)

It has enterprise value of $ 356 million, a profit margin of 48.9%, a quarterly revenue growth of -76%, a ROE of 10.3%, a five-year dividend growth rate of 40%, a three-year dividend average of 56%, a total return of 346% for the past three years, and has been paying dividends since 2008.

Net income for the past three years is as follows; in 2008, it came in at -$24 million, in 2009 it surged $11.6 million, and in 2010 it dropped to $6.8 million. For 2011, net income so far is roughly $6.6 million.

Potential negative development

On December 22, 2011, the company provided formal notice to Nasdaq indicating that, effective on December 30, 2011, the company would no longer be in compliance with Nasdaq's independent director and audit committee requirements as set forth in Nasdaq Listing Rule 5605. Pursuant to Nasdaq Listing Rules 5605(b)(1) A and 5605(c)(4), the company is given a cure period during which it is required to regain compliance with these listing rules. Under the listing rules, the company has until the earlier of the company's next annual stockholders' meeting or December 30, 2012. If the company's next annual stockholders' meeting is held before June 27, 2012, then the company will be required to evidence compliance by June 27, 2012. The company expects to receive formal notification from NASDAQ re: this failure to satisfy continued listing rules during the first week of 2012.

On a positive note, NMYT terminated the advisory agreement it had with harvest capital strategies eliminating $1 million in annual expenses or 0.07 per share. It announced a fourth-quarter dividend of 25 cents and a special dividend of 10 cents, bringing the total dividend payment to 35 cents.

Key ratios

  • Price to sales 3.27
  • Price to tangible book 1.06
  • Price to cash flow 10.30
  • Price to free cash flow 32.80
  • 5-year sales growth 14.00%
  • Inventory turnover N/A
  • Asset turnover 0.10

  • ROE 10.37%
  • Return on assets 1.61%
  • 200-day moving average $ 7.10
  • Total debt $363 million
  • Book value $6.75
  • Dividend yield 5-year Average N/A
  • Dividend rate $.90
  • Dividend payout ratio 126%
  • Dividend growth rate 3-year average 56%
  • Consecutive dividend increases 0 years
  • Paying dividends since 2008
  • Total return last 3 years 346%
  • Total return last 5 years -63%

Annaly Capital Management Inc (NLY)

It has enterprise value of $101.3 billion, a profit margin of 80.62%, a ROE of 8.73%, a five-year dividend growth rate of 40%, a five-year dividend average of 12.8%, a total return of 55% for the past three years, and has been paying dividends since 1997.

Net income for the past three years is as follows; in 2008, it came in at $346 million, in 2009 it surged by more than 600% to $1.9 billion, and in 2010, it dropped to $1.26 billion. The dividend was cut from 60 cents to 57 cents; the most likely reason for this is that NLY is taking action now and deleveraging its positions. It has one of the most astute management teams in the industry, and they are taking preventive action now for they feel that long-term rates may have put in a bottom. The charts are clearly indicating that long-term rates have nowhere to go but up; the herd is blindly jumping into treasuries because of the perceived sense of safety they offer. The herd always comes to the party late and usually when they become aggressive buyers the smart thing to do is flee for the exits.

Key ratios

  • Price to sales 6.85
  • Price to tangible book 0.99
  • Price to cash flow 14.20
  • Price to free cash flow 2.50
  • 5-year sales growth 14.76%
  • Inventory turnover N/A
  • Asset turnover 0.0

  • ROE 8.73%
  • Return on assets 1.14%
  • 200-day moving average $ 17.07
  • Total debt $90.5B
  • Book value $16.22
  • Dividend yield 5-year Average 12.80%
  • Dividend rate $2.44
  • Dividend payout ratio 120%
  • Dividend growth rate 5-year average 40.2%
  • Consecutive dividend increases 0 years
  • Paying dividends since 1997
  • Total return last 3 years 55%
  • Total return last 5 years 91%

Anworth Mortgage Asset Corp (ANH)

It has enterprise value of $8.46 billion, a quarterly revenue growth of 24.5, a quarterly earnings growth of 25.5%, a ROE of 12.7%, a five-year dividend growth rate of 101%, a total return of 46.9% for the past three years, and has been paying dividends since 1998. ANH is also trading roughly 70 cents below book value.

Net income for the past 3 years is as follows; in 2008, it came in at $62.6 million, in 2009 it doubled to $130 million, and in 2010 it dropped to $110 million. For 2011, net income so far stands at roughly $94.3 million.

Negatives

The dividend was cut from 23 cents to 21 cents; this could be due to deleveraging and for the first two quarters of the year cash flow from operating activities was not enough to cover the dividend payments; cash flow for the first two quarters was negative -$128 million and -$7.6 million respectively. It turned positive in the third quarter to $55.08 million, more than enough to cover the dividend obligations, which amounted to $34 million.

Key ratios

  • Price to sales 3.91
  • Price to tangible book 0.71
  • Price to cash flow 7.30
  • Price to free cash flow -2.90
  • 5-year sales growth -4.50%
  • Inventory turnover N/A
  • Asset turnover 0.0

  • ROE 12.73%
  • Return on assets 1.56%
  • 200-day moving average $ 6.78
  • Total debt $6.2B
  • Book value $3.27
  • Dividend yield 5-year Average 12.9%
  • Dividend rate $0.94
  • Dividend payout ratio 103%
  • Dividend growth rate 5-year average 101%
  • Consecutive dividend increases 0 years
  • Paying dividends since 1998
  • Total return last 3 years 46.9%
  • Total return last 5 years 12.3%

Chimera Investment Corp (CIM)

It has enterprise value of $8.77 billion, a quarterly revenue growth of -37.9%, a ROE of 17.75%, a three-year dividend growth rate of 1.24%, a total return of 24% for the past three years, and has been paying dividends since 2007. CIM is trading roughly 70 cents below book value.

Net income for the past three years is as follows; in 2008, it was negative at -$119.8 million, in 2009 it turned positive and surged to $323.9 million, and in 2010 it rose to $523 million. For 2011, net income so far stands at roughly $372 million.

Negatives

It has a negative quarterly earning's growth (year over year) of -43%, and quarterly (year-over-year) revenue growth is declining. Cash flow form operating activities is not enough to sustain the dividend payments. In 2010 cash flows from operating activities came in at $305 million and dividend payments amounted to $518 million. For the past 3 quarters of 2011, dividend payments have been higher then cash flow from operating activities. This is generally not a healthy sign as such a trend cannot continue indefinitely and usually leads to a cut in the dividend payment. This is what appears to be taking place for CIM has lowered its dividend from 13 cents to 11 cents.

Key ratios

  • Price to tangible book 0.81
  • Price to cash flow 5.40
  • Price to free cash flow -14.10
  • 5-year sales growth N/A
  • Inventory turnover N/A
  • Asset turnover 0.0

  • ROE 17.75%
  • Return on assets 5.55%
  • 200-day moving average $ 2.96
  • Total debt $6.2B
  • Book value $3.27
  • Dividend yield 5-year Average N/A
  • Dividend rate $0.51
  • Dividend payout ratio 104%
  • Dividend growth rate 3-year average 1.24%
  • Consecutive dividend increases 0 years
  • Paying dividends since 2007
  • Total return last 3 years 24.3%
  • Total return last 5 years N/A

Conclusion

The markets are trending upward on very low volume; the situation in Europe is still highly volatile and more importantly the charts are indicating that the market is due for 1-2 strong pullbacks; one of them will probably be signficantly stronger than the other. The charts are projecting a short-term peak for the Dow around Jan 19-21, but a more important peak could take hold in March 2012, which would mark the three-year anniversary of this bull.

Long-term dividend investors would be best served by waiting for strong pullbacks before committing new money. Long-term investors could sell covered calls and or naked puts (only use this option if you are bullish on the stock) to hedge themselves and open a new stream of income.

All earnings estimates and revenue estimates sourced from yahoo finance.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: The Highest Paying REITs With Yields As High As 20% - Part II