No matter what type of investor you may be, stocks that pay a dividend should make up at least part of your portfolio. Either to offset riskier assets or for diversification purposes, a company that pays out a stable dividend should be part of any worthwhile investment strategy. We shall take a look at four stocks and consider how sustainable their dividend really is.
Annaly Capital Management (NLY): Annaly Capital Management is classified as a real estate investment trust and has a rather unique business model. The company only invests in government sponsored mortgage-backed securities, giving it an added measure of security and separating it from other real estate investment trusts that invest in physical real-estate. However, they do borrow to buy the securities and are susceptible to lower profits during periods of high interest rates. Needless to say the company has done very well over the past few years with the prime rate sitting at near 0%. In January of 2008 the dividend yield on the stock was a mere 5%. By the fourth quarter of that year the yield was approaching 15% and has remained in that range through today where it stands at 14.10%. Being a real estate investment trust, by definition most of Annaly Capital Management's profits are paid out as dividends. The company's dividend yield is currently 14.74%. This makes it the highest of the top ten large cap stocks in terms of dividend yield. The company's cash flow over the period shows a steady increase in investment activity and accounts receivable. Most notable is a net income increase from a net profit of $346 million in 2008 to a net profit of $2 billion in 2009. Annaly Capital Management is in a good position to sustain these profits in the foreseeable future or in the Feds words "for an extended period of time."
Chimera Investment Corporation (CIM): Chimera Investment Corporation is also a real estate investment trust. The company follows the same business model as Annaly Capital Management (NLY) and is actually externally managed by Annaly. However, each company's results are like night and day. As to whether the problems at Chimera are internal and structural in nature is a matter of speculation. That is an organizational matter that we are not privy to-- we can only work with and gauge risk through results, and, at least for profitability Chimera shines. Chimera has needed to reduce its dividend in the past and recovered from the lack of cash flow. In December 2008 the company found it necessary to reduce its dividend to $0.04 from the previous quarters $0.16 only to begin raising it to normal levels nine months later. This shows some resiliency in the company's management and should ease the worries of the long term investor. The company's payout ratio is currently 110%, meaning the company is paying the dividend with borrowed funds at this point which is not sustainable. Chimera Investment Corporation currently has cash on hand of only $9.8 million and the dividend payments for the past year were over $500 million to put this in perspective. The revenues and earnings per share have been in a significant downtrend over this year but do show some improvements on a year to year basis. At this point Chimera Investment Corporation would be more of a speculative stock, in contrast to an income investment and should be positioned as such in your portfolio. If you are a long term investor in the company you should be aware of the inconsistencies (historically) in the dividend payments.
Nokia (NOK): Nokia is the largest manufacturer of telephone handsets in the world. Although the company faces stiff competition in this market it has remained the leader since it brought the technology to the world in 1987. The company has also diversified its operations in telecommunications over the years through its innovative research and development as well as strategic mergers, accusations and joint ventures. Since the company started offering a dividend in 1996 it has continued the payment through thick and thin and increased the dividend when prudent. The only times Nokia diverted from this upward trend were during the dotcom bubble burst and the great recession (see this article). The company is operating on a substantial cash flow of $3.75 billion and a recent downturn in the stock price has created a high yield of 0.55 or 10.10% with a forward yield of 0.48 or 9.20%. Nokia currently has cash on hand of over $14.24 billion which is more than enough to cover dividends and the added advertising expense of what may be its next blockbuster revenue producer-- the Lumia 900. In short Nokia looks to be in a good position to sustain its dividend payments and most probably increase them as we come out of the recession.
Windstream (WIN): Windstream provides DSL and broadband internet, wireline telephone and cable services to rural areas in the south and southwest United States. Since 2006 Windstream has paid the same quarterly dividend without fail no matter what the economic climate. This alone says a lot about the stability of the dividend and the predictability of future payments. A recent downturn in the stock price has also created an increase in the dividend yield to 8.39%. This yield makes Windstream the second highest in the whole of the S&P 500. The company has revenues of over $4 billion and a market cap of over $6 billion. Although not as large as AT&T (T) or Verizon (VZ) and a little more volatile in stock price, the company is doing just as well and is a lot cheaper comparatively (ee this article). Windstream is also making inroads to allow for VoIP support on their data lines to tap into a potential market that would otherwise be in direct competition to their landline business. Being in a growth industry (broadband) with ever increasing revenue and cash flow metrics as well as debt reduction makes Windstream's ability to sustain its dividend very probable if not a foregone conclusion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.