Dividend investors want high yield dividends. Sometimes a high yield stock is on the cusp of decreasing its payout. Performing proper due diligence requires looking at the company's business model. This will provide insights into the sustainability of a company's annual dividend yield. In this article I will focus on 5 dividend stocks with a 14.2% and above dividend yields.
AG Mortgage Investment Trust, Inc. (MITT)
AG Mortgage Investment Trust is a Maryland corporation that invests in, acquires and manages a diversified portfolio of residential mortgage assets. The mortgage real estate investment trust (mREIT) is established to own non agency mortgage backed securities and agency mortgage backed securities. AG Mortgage initially plans to own primarily agency mortgage backed securities. In time the mREIT plans to own non agency mortgage backed securities.
The external manager is AG REIT Management, L.P., which is a subsidiary of Angelo, Gordon & Co., L.P. AG Mortgage. Per its latest 10Q filing, it has 91.67% in agency mortgage backed securities:
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The third quarter book value per share is $20.64. AG Mortgage is currently trading at $19.69. This represents a 4.6% discount to the September 30th book value. AG Mortgage did pay a 70 cent dividend which went ex-dividend on December 28th. I'll have to pass on AG Mortgage. The initial public offering lock up ends January 31st, 2012. This could put some temporary pressure on the shares. The discount to net asset value is not compelling to establish a position.
Cornerstone Progressive Return (CFP)
Cornerstone Progressive is a closed end fund. The fund attempts to achieve total return through investment in U.S. listed equity securities and U.S. dollar denominated debt securities.
Cornerstone Progressive pays a monthly 10.3 cents per share. This is part of a managed distribution policy. The fund previously paid 20.5 cents per share until April 2010. The fund is liquidating itself by paying out more than it is earning. This fact is proven by a -6.6% annualized rate of return over the past 5 years. The yield is 17.55%.
The fund should be purchased, in my view, by investors who want to lose money. There isn't another outcome due to the payout ratio and the 22.55% premium to net asset value. Per the November 18th SEC N-Q filing, here is an example of what assets Cornerstone Progressive owns:
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The fund should be avoided for all investors. The fund trades at a 22.55% premium to net asset value. This means share holders are paying $122.55 for $100 worth of assets.
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Avoid Resource Capital Corp. (RSO)
Resource Capital's principal business actions include purchasing, selling, and managing a diversified portfolio of commercial real estate related assets and commercial finance assets. The company is a speciality finance entity. Resource Capital is set up as a real estate investment trust.
The company's assets include: commercial real estate-related assets such as commercial mortgage backed securities; B notes and mezzanine debt; residential real estate related assets such as residential mortgage-backed securities. Other assets include asset backed securities, syndicated bank loans, and equipment leases.
I want to avoid financial assets which are not Level 1 on the balance sheet. Assuming an investor knows how to value impaired financial instruments, then Resource Capital is a better fit. Assets, per page 14, show the fair value versus gross unrealized losses.
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Resource Capital's external manager is a subsidiary of Resource America (REXI). Resource America acts as an asset management company. Resource America has three core business units: financial fund management, real estate, and equipment finance.
Resource Capital currently offers a 17.8% yield. The 5 year return, annualized, has been .1%. I recommend avoiding this stock due to the inherent risks involved in pricing Level 2 and Level 3 assets on the balance sheet.
Whiting USA Trust I (WHX)
Whiting USA Trust I is a statutory trust formed in October 2007 under the Delaware Statutory Trust Act. The initial capitalization of the Trust estate was funded by Whiting Petroleum Corporation (WLL) in November 2007. Whiting Petroleum Corporation is a $6 billion market cap. Whiting Petroleum is involved in the acquisition, development, exploitation, exploration, and production of oil and natural gas in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast, and Michigan regions.
The Whiting USA Trust 1 was formed to acquire and hold a term net profits interest for the benefit of the Trust unit holders pursuant to a conveyance to the Trust from Whiting Oil and Gas.
The Whiting USA Trust 1 will cease operations when the net profit interest has reached 9.11 million barrels of oil equivalent (MMBOE) production and sold from the trust's underlying properties. The 9.11 MMBOE is equivalent to 8.20 MMBOE in respect to the Whiting USA Trust 1's right to receive 90% of the net proceeds.
I recommend avoiding this trust due to the short term potential prior to the trust's termination. As of December 31st, 2010, the trust has produced 3.90 MMBOE of the 8.20 MMBOE maximum. There are plenty of new trusts which possess a longer life span.
Apollo Investment Corporation (AINV)
Apollo Investment is a business development corporation. The company is a leading provider of subordinated debt and equity capital to middle market companies. The business development corporation creates current income and capital appreciation through debt and equity investments.
The business development corporation has distinct advantages. To qualify, the company must invest 70% of funds in qualifying assets. Secondly the company must distribute a minimum of 90% of its income and short term capital gains to shareholders each year. The benefits allow the company to remain exempt from U.S. Federal income tax.
The security has a $8.12 book value per share. Apollo Investment is trading at $7.04 or trading at a 13.3% discount to book value. The company is currently paying a 28 cent dividend per quarter. This equates to a 16.3% annual yield. Based upon current earnings, however, Apollo Investment is likely to decrease its dividend in future quarters. The amount is likely to be in the range of 20 cents to 25 cents per quarter. Here is an example of the type of Level 2 and Level 3 assets on Apollo Investments' balance sheet:
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I recommend waiting for the 1st quarter dividend announcement prior to establishing a position. The investor should know what the current yield is based upon the possibility of a dividend cut.
I prefer to minimize risk exposure while obtaining capital gains and dividends. This choice requires avoiding any equities with assets I cannot adequately define in a struggling economy. The above 5 names don't appeal to me on a risk to reward basis. This is the case, despite the 14.2% and above stated yields on the names.