5 Monster Dividend Stocks: Which Are Good Buys?

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 |  Includes: AGNC, GNI, PSEC, SFL, UVE
by: Stock Croc

It is easier said than done to identify great dividend-yielding stocks that enhance your portfolio through a solid, regular income stream. There are a wide variety of factors to consider, from the size of the company, the regularity of dividend payments, performance indicators and, for many income investors, the most important is the size of the dividend yield. Many investors fall into the trap of only focusing on the size of the dividend yield and chasing stocks with exceptionally high dividend yields to the detriment of other factors, but as all seasoned investors know, the greater the return, the riskier the investment.

Currently with ten year bond yields only marginally higher than the low they touched in 2011 of less than 2%, high-yielding stocks are coming under even greater investor focus. In this article I have analyzed five highly tempting dividend stocks for investors, as they all have dividend yields of greater than 9% to determine whether they truly are worthwhile investments. As always, please use my analysis as a starting point and conduct your own due diligence prior to investing.

American Capital Agency Corp (NASDAQ:AGNC)

American Capital is a real estate investment trust (REIT) that invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or sponsored entity. As a REIT the company is not subject to federal income tax if it distributes at least 90% of its taxable income to its shareholders. American Capital is currently trading at around $28 with a price to earnings ratio of 5. Its current trading price gives it a market cap of $6.3 billion, and it has a 52 week trading range $22.03 to $30.76. American Capital declared its fourth quarter cash dividend of $1.40 in December.

The company reported a solid 33% rise in third quarter 2011 earnings to $415 million, and during the same period reported a strong 41% rise in net income to $250 million. Its balance sheet weakened during the third quarter 2011, with cash and cash equivalents dropping by 97% to $1.4 billion and total debt rising by 12% to $39.4 billion.

American Capital pays the highest dividend in the residential REIT industry, with a monster yield of 20% and this is substantially higher than many of its competitors. On this basis, it remains a better bet than Annaly. In fact its yield is greater than Equity Residential (NYSE:EQR), the largest industry participant by market cap of $16.5 billion, which pays a dividend yield of 4%, and AvalonBay Communities (NYSE:AVB), the second largest industry participant by market cap of $12 billion, which pays a dividend yield of 3%. The company has a return on equity of 22.5%, which is greater than both Equity Residential’s 18.5% and AvalonBay Communities’ 4%.

American Capital’s stock price has relatively low price volatility with a beta of 0.57, which is a key attribute of a good income-generating stock, as any stock with a beta of less than one won’t generally experience the same degree of price volatility as the market.

American Capital’s dividend yield of 20% is exceptionally attractive, as it is almost ten times greater than the current ten year Treasury bond yield and six times the reported inflation rate of 3.4%. Furthermore, with an earnings yield of 25%, which is over ten times the current ten year Treasury bond yield, the stock is undervalued by the market, even when it is considered that it is only trading at a 9% discount to its 52 week high.

For all of these reasons I believe the company currently offers a solid opportunity to take advantage of its monster dividend, which is substantially higher than most returns available through either CDs, bonds or other fixed interest instruments.

Great Northern Iron Ore Property (NYSE:GNI)

Great Northern is a conventional non-voting trust that owns and leases mineral and non-mineral lands on the Mesabi Iron Range in northeastern Minnesota. Its mineral interests total 12,033 acres on the Mesabi Iron Range Formation, including approximately 7,443 acres that are wholly owned. It is currently trading at around $113 with a price to earnings ratio of 8. At current prices it has a market cap of $170 million and its 52 week trading range is $92 to $131.85.

The company reported a 1% drop in third quarter 2011 earnings to $6.5 million, and during the same period reported a 0.1% rise in net income to $5.7 million. Its balance sheet strengthened during the third quarter 2011, with cash and cash equivalents rising by 17% to $941,000 and its debt position overall remained unchanged. The company portrays a debt free balance sheet with no long-term debt.

In comparison to its competitors, Great Northern has a monster dividend yield of 20%, which is the highest in the steel and iron industry. This dividend yield is a lot higher than POSCO (NYSE:PKX), the largest industry participant by market of $29 billion, which has a dividend yield of 1%, and Tenaris (NYSE:TS), the second largest participant with a market cap of $23 billion, which has a dividend yield of 1%. Great Northern’s return on equity of 187% is the highest in the industry and substantially higher than both POSCO’s 10% and Ternis’ 12%.

Great Northern is also has an exceptionally stable stock price with a beta of 0.21, which bodes well for investors seeking to protect their investment capital, as the stock price is substantially less volatile than the market. Its dividend yield is almost ten times greater than current ten year Treasury bonds and six the time rate of inflation, which makes it a compelling income play.

In addition, with an earnings yield of 13%, which is more than five times the current ten year Treasury bond yield, it appears the company has been undervalued by the market at its current price. This makes it an even more attractive income generating investment opportunity, even when allowing for a fair risk premium over the risk free rate.

The company will trade ex-dividend on 31 January 2012, paying a fourth quarter dividend of $5.75. This is approximately 5% of the stock’s current value, and for any investors considering purchasing the stock after this date, it is essential to look for at least a 5% discount in its price as of that date.

Finally there is one important point to be considered: the company operates as a trust that is set to dissolve in April 2015, with all of its mineral assets and active leases being conveyed and transferred to Glacier Park Company, a wholly owned subsidiary of ConocoPhillips (NYSE:COP). This means as of that date the company will cease to exist and the stock will be retired. For this reason despite Great Northern looking highly attractive on fundamentals as a monster dividend stock, it is one that I would prefer to avoid.

Ship Finance International Limited (NYSE:SFL)

Ship Finance owns and operates vessels and offshore related assets in Bermuda, Cyprus, Malta, Liberia, Norway, the United States, Singapore, the United Kingdom, and the Marshall Islands. The company is also involved in the charter, purchase, and sale of maritime assets. The company is currently trading at around $10, with a price to earnings ratio of 6. It has a 52 week trading range of $8.62 to $2.67 and at its current price it has a market cap of $771 million. The company also declared a fourth quarter cash dividend of 39 cents per share on 9 December 2011.

In the third quarter 2011, Ship Finance reported a 25% drop in earnings to $97 million and for the same period reported a massive 218% fall in net income to -$75 million. Its balance sheet also weakened during this period with cash and cash equivalents dropping by 44% to $256 million, although total debt also dropped by 6% to $6 billion.

In comparison to its competitors Ship Finance pays a monster dividend yield of 16%, which is the third highest in the shipping industry. This dividend yield is substantially higher than the likes of Kirby Corporation (NYSE:KEX), the largest industry participant by market cap of $3.72 billion, which doesn’t pay a dividend, and Golar LNG (NASDAQ:GLNG), the second largest participant by market cap of $3.7 billion, which pays a dividend yield of 3%. It also has effective management, delivering a return on equity of 16%, which is the third highest in its industry and greater than both Kirby’s 13% and Golar’s 4%.

However, its stock price in comparison to the market is relatively volatile as it has a beta of 1.31, and while this bodes well for possible stock price growth, it is not something I find desirable in an income-generating stock. However, the company’s dividend yield is more than five times greater than the yield on ten year Treasury bonds and substantially higher than the inflation rate. This makes it a compelling investment especially when we consider that the company has an earnings yield of 17%, which is more than a six times ten year Treasury bond yields, indicating that the stock is undervalued as its current trading price, a 16% premium to its 52 week low of $8.62.

However, despite the monster dividend yield and unfair market valuation, the high beta and volatile net income leave me with some concerns about the stock maintaining its value and the company being able to maintain the dividend yield. Therefore, I don’t feel that it is worthy of further research and analysis.

Universal Insurance Holdings (NYSEMKT:UVE)

Universal Insurance provides property and casualty insurance products, generating income from policy fees, commissions, premium financing referral fees and the marketing of ancillary services. It is currently trading at around $4 with a price to earnings ratio of 5 and has a 52 week trading range $3.31 to $6.05. At its current price it has a market cap of $141 million.

Universal Insurance reported an 8% drop in third quarter 2011 earnings to $49 million and for the same period a massive 87% drop in net income to $975,000. Its balance sheet also weakened during the third quarter 2011 with cash and cash equivalents dropping by 8% to $329 million and long-term debt increasing by 35% to $186 million. The company declared a fourth quarter cash dividend of 14 cents per share on 19 December 2011.

In comparison to its competitors Universal Insurance pays a solid dividend yield of around 9%, which is the highest in the property and casualty insurance industry. This dividend yield is substantially higher than Berkshire Hathaway (BRK-A ), the largest industry participant by market of $189 billion, which doesn’t pay a dividend, and American International Group (NYSE:AIG), the second largest participant by market cap of $46 billion, which also doesn’t pay a dividend. Its return on equity of 48% is the highest in its industry and greater than Berkshire Hathaway’s 7% and American International Group’s 13%.

Universal Insurance’s stock price is not particularly volatile with a beta of 0.15, and this is appealing for income investors who are reticent about seeing their capital rise and fall in value (although don’t expect the stock to rapidly increase in value should economic conditions improve.)

With its dividend yield being four times greater than the current ten year treasury bonds and more than two times higher than the inflation rate, it presents as an appealing income investment. Even more so when we consider that it has an earnings yield of 20%, more than eight times ten year Treasury bond yields. This I believe indicates the company is undervalued by the market, even though it is trading at a 21% premium to its 52 week low of $3.31. Accordingly, I would have no hesitation in further considering Universal Insurance as a dividend play in my portfolio and feel that it is worthy of further research and analysis.

Prospect Capital Corporation (NASDAQ:PSEC)

Prospect Capital is a business development company operating as a private equity firm specializing in late venture, middle market, mature, mezzanine finance, buyouts, recapitalizations, growth capital, development, and bridge transactions. The company makes secured debt and equity investments in private and microcap public businesses and invests across all industry sectors, with a particular focus on the energy and industrial sectors.

It is currently trading at around $10, with a price to earnings ratio of 7 and a 52 week trading range of $7.41 to $12.38. Its current price gives it a market cap of $1 billion. For the third quarter 2011, Prospect Capital reported a 20% rise in earnings to $46 million and a massive 48% rise in net income to $40 million. However, during this quarter its balance sheet weakened with cash and cash equivalents dropping by 18% to $50 million and long-term debt rising by 37% to $556 million. The company declared a fourth quarter cash dividend of 10 cents per share on 28 December 2011.

Prospect Capital’s dividend yield of 13% is the second highest in the asset management industry. It is substantially higher than The Bank of New York (NYSE:BK), the largest industry participant by market of $26 billion, which pays a dividend yield of 3% and BlackRock (NYSE:BLK), the second largest participant by market cap of $24 billion, which pays a dividend yield of 3%. It is also delivering a solid return on equity of 14%, which is greater than both The Bank of New York’s 8% and BlackRock's 10%.

With a dividend yield of over five times ten year Treasury bonds and more than three times inflation it makes a compelling income play. However, I do have some reservations when its beta of 1.17 is considered, as this indicates that the stock price is somewhat volatile and subject to greater price volatility than the overall market. But when we consider the company’s earnings yield of 14.5%, which is more than six times higher than ten year Treasury bond yields, it indicates that it is relatively cheap at current prices.

Accordingly, I believe the company is worth considering as a monster dividend play despite trading at only a 19% discount to its 52 week high of $12.38 and I certainly consider Prospect Capital as a solid candidate for further research and analysis.

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