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Extremely low rates and market volatility are driving more investors into the world of dividend investing. While there are many companies that offer high yields with relatively low-moderate levels of risk, there are others that offer extremely high yields but are associated with much higher levels of risk. Investors should take the time to study the company; do your due diligence and do not jump into a company just because it offers a high yield? Risking a small amount of your capital won't put you in the dog house, but betting the house will.

We have provided some key metrics on all the mentioned companies that should prove to be useful in helping you make your final choice.

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.

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.

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.

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 some time. If the payout ratio continues to increase, the situation warrants close monitoring as this situation cannot last forever.

However, when it comes to REITS [(NYSE:RSO) is one example], 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.

Stock

Dividend

Market Cap

Forward

PE

EBITDA

Quarterly Revenue growth

Beta

Revenue

Cash flow

BKCC

12.20%

633M

8.40

---------

34.00%

1.98

120M

-132M

RSO

18.00%

425M

13

-------

29.20%

2.16

66M

15M

STD

8.00%

65B

6

9.65B

7.6%

1.86

43.7B

69B

MSB

16.9%

360M

9.7

N/A

20.70%

1.82

33.12M

16.73M

NCT

12.6%

508M

3.72

N/A

-83.00%

3.70

280M

52M

BlackRock Kelso Capital Corporation (NASDAQ:BKCC)

It has an enterprise value of $ 921 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 three 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. For 2011, net income so far is roughly $69.9 Million; if net income for the next quarter matches that of the last, then the total net income for the year could soar well past the $82 million mark. BKCC is also trading roughly $1.10 below book value.

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 warning signs

Dividend growth for the past 3 years is a negative, and the payout ratio is above 150%. However, on the bright side it sports a decent quarterly revenue growth rate of 34%, and net income has been increasing nicely over the past three years.

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 $8.44
  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

Resource Capital Corp (RSO)

Resource Capital Corp has an enterprise value of $2.05 Billion, a price/sales value of 6.2; a quarterly earnings growth rate of 6.3%, a quarterly revenue growth rate of 29.2%, a ROE of 7.3%, a total three-year return of 129%, a EPS of 0.32, sales per share of 1.64, cash flow per share of 0.38, price/sales of 3.41, a price/book 1.04 and a price/cash flow of 16.10. RSO announced a dividend payment of $0.25 per common share for the quarter ending Dec 31, 2011.

Net income for the past three years is as follows; in 2008, it was -$3. Million, in 2009 it tripled to $6.3 million and in 2010, it tripled again to $19 million. For 2011, it stands at $37.2 million. Insiders have purchased over 56,000 shares since March at $.478-$7.13 a share. The full list of insider transactions can be accessed here.

Key ratios

  1. Price to sale 3.41
  2. Price to tangible book 1.05
  3. Price to cash flow 15.50
  4. Price to free cash flow 28.20
  5. 5 year sales growth -3.6
  6. Inventory turnover N/A
  7. Asset turnover 0.10

  1. ROE 7.32%
  2. Quarterly earnings growth (year over year) 6.3%
  3. Total debt $1.7 billion
  4. 200 day moving average $ 5.57
  5. Book value $5.76
  6. Dividend yield 5 year Average 22.8
  7. Dividend rate $1.00
  8. Payout ratio 312%
  9. Dividend growth rate 5 year average 2.13
  10. Consecutive dividend increases 0 years
  11. Paying dividends since 2006
  12. Total return last 3 years 129%
  13. Total return last 5 years -30

A weekly close below 5 will indicate that it's going to retest its lows; a weekly close above 6 could propel it as high as 7.20-7.50.

Banco Santander SA (STD)

It has enterprise value of $129.5 billion, a price/sales value of 1.46, a revenue growth of 7.6%, a quarterly earnings growth rate of 10.3%, a five-year dividend growth rate of 13.25%, a total return of 3.94% for the past three years, a price/sales 0.83, a price/book 0.65, a price/cash flow 7.10, a EPS 0.91, sales per share of 9.55 and has been paying dividends since 1990.

Net income for the last three years is as follows; 2008 it came in at $13.1 billion, 2009 it moved up a bit to $13.5 billion and in 2010, it dropped to $12.2 billion.

STD is trading $3.50 below book value.

Key ratios

  1. Price to tangible book 0.96
  2. Price to cash flow 6.80
  3. Price to free cash flow 0.80
  4. Price to book 0.62
  5. 5 year average PE ratio 9.4

  1. ROE 10.73%
  2. Return on assets 0.67%
  3. Total debt $420B
  4. 200 day moving average $ 8.69
  5. Book value $10.62
  6. Dividend yield 5 year Average 7.10%
  7. Dividend rate $0.69
  8. Payout ratio --
  9. Dividend growth rate 5 year average 13.25%
  10. Paying dividends since 1990
  11. Total return last 3 years 3.94%
  12. Total return last 5 year -41%

Mesabi Trust (NYSE:MSB)

It has an enterprise value of $ 359 million, a quarterly revenue growth rate of 20.4%, a quarterly earnings growth rate of 20.4%, a sizzling ROE of 690%, a very strong three-year dividend growth rate of 55.6%, a total three-year return of 235%, and has been paying dividends since 1990. It has levered free cash flow rate of $6.96 million.

Net income the past three years is as follows; in 2008, it reported a net income of $3.6 million, it 2009 it dropped to $12.4 million and in 2010, it rose to $34.2 million. For 2011, net income so far is roughly $26.8 million; if it maintains this pace, then net income for 2011 could top the $39 million mark.

It has a very high short interest ratio of 10.3%, which makes it a potential candidate for a short squeeze.

Key factors to keep in mind

The problem is that the cash flow is dependent on the price of the underlying commodity and production levels and thus could be subject to swings. If the swings are wide, the dividends paid out could vary widely from year to year.

While investing in royalty trust can yield steady and hefty returns, there is one potential drawback: depletion. These trusts own royalties on a finite amount of resources, and once those resources are gone; the trust is also gone. Most trusts won't likely hit this point for 1-3 decades, but investors need to understand that the distributions will eventually decline and disappear. It is essential that you do your due diligence before deploying any money into the above-mentioned trust or any trust, for that matter.

Key ratios

  1. Price to sales 10.86
  2. Price to tangible book 76.26
  3. Price to cash flow 11.20
  4. Price to free cash flow -29.30
  5. 5 year sales growth 9.45%
  6. Inventory turnover N/A
  7. Asset turnover 1.80

  1. ROE 690%
  2. Return on assets 111%
  3. 200 day moving average $ 26.58
  4. Total debt $ 0.00
  5. Book value $0.36
  6. Dividend yield 5 year Average 11.00%
  7. Dividend rate $ 2.42
  8. Payout ratio 89%
  9. Dividend growth rate 3 year average 55.6%
  10. Consecutive dividend increases 2 years
  11. Paying dividends since 1990
  12. Total return last 3 years 235%
  13. Total return last 5 years 36%

Newcastle Investment Corp (NYSE:NCT)

It has an enterprise value of $ 3.89B, a quarterly revenue growth rate of -83%, a five-year dividend average of 11.50%, a total three-year return of 555% and has been paying dividends since 2002. It an operating cash flow of 52 million.

Net income for the past three years is as follows; in 2008, net income plunged to -$2 billion, in 2009 even though net income was still negative, it was not as bad as 2008 and came in at -$200 million and in 2010 it turned positive and surged upwards to $621.6 million. For 2011, net income so far is roughly $240 million.

Insider action

Insiders have been aggressively loading up on shares in the past few months. As of September 2011, insiders have purchased almost 2 million shares at a cost of $4.55 a share. Insiders usually invest in their companies only if they feel they are going to money on the investment and this strong show of support should be viewed as a positive. The full list of transactions can be accessed here.

It recently struck a servicing deal with morning star which should help improve its bottom line.

The investment represents the REIT's first in "excess" servicing rights and will generate about a 20 percent "unleveraged return," Newcastle said yesterday in a statement after the close of trading. Nationstar services more than $100 billion of home loans, growing as larger banks scale back in the business and Fannie Mae and Freddie Mac force transfers of contracts to specialists.

The stock has taken a massive beating and the worst news might already be priced in. Insiders have aggressively purchased shares and net income turned positive as of 2010.

Potential warning signs

Quarterly earnings growth rate is -83% and this is of concern, though given the strong show of support from insiders and the recent deal, NCT entered with morning star quarterly earnings should start to improve going forward. However, at this point we would only advise investors who are willing to take on extra risk to deploy money into this stock. Another bright spot is that the payout ratio is very low (6%).

Key ratios

  1. Price to sales 1.37
  2. Price to tangible book 4.70
  3. Price to cash flow 1.20
  4. Price to free cash flow 20.50
  5. 5 year sales growth -10.85
  6. Inventory turnover N/A
  7. Asset turnover 0.10
  1. ROE N/A
  2. Return on assets 11.75%
  3. 200 day moving average $4.93
  4. Total debt $ 3.45B
  5. Book value $1.02
  6. Dividend yield 5 year Average 11.50%
  7. Dividend rate $0.53
  8. Payout ratio 6%
  9. Dividend growth rate 3 year average 0.00%
  10. Consecutive dividend increases 0 years
  11. Paying dividends since 2002
  12. Total return last 3 years 555%
  13. Total return last 5 years -72%

Conclusion

Two other noteworthy players are Linn Energy, LLC (NASDAQ:LINE) and Southern Copper Corp (NYSE:SCCO), with yields of 7.20 and 8.90% 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 three 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 and net income for the year could soar past the $1 billion mark. LINE has a payout ratio of 168%. As LINE is an MLP the payout ratio is not as important; cash flow rates are more important and in that aspect LINE has a very strong cash flow rate.

SCCO has an enterprise value of $27.34 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 three 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. SCCO has a payout ratio of 81%.

BKCC, RSO, MSB, STD and NCT all sport rather high betas; this makes them good candidates to write covered calls as one usually receives higher premiums with stocks that have high betas as opposed to those with low beta. Writing covered calls opens up an extra stream of income and can be used to lower one's net cost per share. Traders, who are bullish on stock and are looking to purchase additional shares at a lower price, can sell naked puts. If the stock trades down to the strike price, you will be assigned the shares, but at a much lower cost. Your final cost is the strike price minus the premium you received. If the stock does not trade below the strike price, you at least get to keep the premium.

The charts continue to indicate that the markets are due for a stronger sell off, and as such, we feel that long-term investors would be best served by waiting until the market experiences a strong pull back before committing large sums of money to this market. An initial top is projected to take place around the 18-20 of this month, but the real correction will most likely occur around March of this year.

All graphs were sourced from smartmoney.com

Source: 7 Dividend Champs With Grand Yields As High As 18%