I have five dividend stocks that are positioned to outperform in 2012. Investors are seeking a reliable income stream. Dividend investors are seeking safety and high dividend yields. This is due to low Treasury Bond yields. Quantitative easing has left its impact on U.S. savers. This article focuses on five stocks which provide ample yield and are operating in the right sectors.
1. American Capital Agency Corp. (AGNC)
Investors are not likely to find American Capital Agency on the cover of mainstream financial magazines. The company makes money on its ability to borrow short term funds via repurchase agreements and purchase longer duration agency securities. Agency securities are"... guaranteed by U.S. government-sponsored entities, such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, or by a U.S. Government agency, such as the Government National Mortgage Association, or Ginnie Mae."
Treasury Bond rates are low and the long term yields are widening to the benefit of American Capital Agency. In a difficult economic time, this is one sector which I believe should not be ignored by investors. In my view this is the strongest sector in the entire economy. The company offers a 19.3% dividend yield.
The agency mortgage real estate investment trust (mREITs) business model is, in general terms, fairly simple to understand. American Capital Agency borrows short term, buys long term agency (e.g., Fannie Mae) mortgage bond securities at a higher yield, leverages this positive net yield margin difference, and pays out the net profits. As with most issues in life, a concept is easier said than done. As my dear friend and investor, Rodney Stewart, said just last week: "How at the end of every hard earned day people find some reason to believe." I said, Rodney, look at information below - American Capital Agency historical dividend data:
The company has paid out 11 quarterly dividends of $1.40 or greater. Based on a $29.08 per share stock price, a $5.60 yearly dividend offers investors a 19.3% annual dividend yield.
Risks and Hedging
Agency mortgage real estate investment trusts possess prepayment risks, policy risks and interest rate risks.
Assuming an investor purchases 100 shares of American Capital Agency, there is a way to hedge this position. The investor could purchase a protective put to limit the downside to $26 per share. In this example, the protective put will hedge investors through September 21st, 2011. This would require the purchase of 1 put contract (representing 100 shares) for $170. The symbol is AGNC Sep 2012 26.000 put (here). The result is a maximum loss of $478. This assumes American Capital Agency does go below $26 and the investor does not receive any dividends. The stock is likely to pay at least two dividends between today and the put expiration.
I recommend investors buy American Capital Agency and collect the dividends.
2. CYS Investments (CYS)
CYS Investments is an agency mREIT too. The company focuses on investing in agency residential mortgage backed securities (RMBS) collateralized by fixed rate single family residential mortgage loans. Secondly the company focuses upon adjustable rate mortgages (ARMs) which typically have coupon rates that reset monthly.
The company has rewarded shareholders a 14.5% annualized rate of return assuming dividends are not reinvested. The strength of the business model are Bernanke's comments that interest rates will remain low through 2014.
CYS Investments' book value per share, as of September 30, was $12.98 per share. The company offered 25 million shares on January 27th. The net proceeds were $13.13 after the brokers' 15 cent commission per share. This secondary is likely accretive to shareholders' book value per share.
Buy CYS Investments at $13.40 and sit back and collect high dividends for the next few years. The low interest rate environment is ideal for agency mREITs.
3. Verizon Communications (VZ)
Verizon is a leader in delivering communications, information and entertainment solutions. This includes wireless access to smart phones, wireless access to computers, and the growing Apple iPad2 market.
Verizon's focus upon smart phones has increased the company's net revenues and net income. The stock offers a 5.4% dividend yield.
I recommend Verizon at current levels. The dividends should keep pace with inflation. Beyond keeping pace with inflation, I do not have higher expectations. The temporary price break below the 50 day moving average should provide a temporary bottom. This is a blue chip equity with Google Android smart phones and Apple iPhones offering new products on an annual basis.
4. Exelon Corporation (EXC)
Exelon continues to outperform as a U.S. utility entity. The company is the biggest operator of nuclear plants in the U.S. Exelon delivers power to about 5.4 million customers in northern Illinois. The utility company also proves natural gas to 494,000 customers in the Philadelphia area.
I prefer to see the dividends growing. The below table indicates the dividends have remained stable since October 2009. In this economy I will accept a 5.3% yield. I need a diverse source of income streams that are recession resistant. The utility sector is such an industry to outperform the overall market.
5. Altria Group, Inc. (MO)
Altria Group incorporated in Virginia in 1985. As of December 31, 2010, Altria Group's wholly owned subsidiaries included Philip Morris USA Inc. (PM USA), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; UST LLC (UST), which through its subsidiaries is engaged in the manufacture and sale of smokeless products and wine; and John Middleton Co. (Middleton), which is engaged in the manufacture and sale of machine made large cigars and pipe tobacco. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary of Altria Group, Inc., maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group held a 27.1% economic and voting interest in SABMiller plc (SABMiller) as of December 31, 2010.
Fourth Quarter Results
Altria's fourth quarter results were 100% acceptable, in my view. In 2011, the secular decline in cigarette demand continued to impact Altria's cigarette revenues. The pricing powers allowed Altria to grow the company's operating profits. Per the company's expectations, the results were fully anticipated:
Altria's 2011 full year earnings were $2.05. This was 7.9% higher from 2010 levels. Marlboro retains a 42% market share of the U.S. cigarette sector. The smokeless tobacco unit was flat for 2011 versus the 2010 year. For 2012, Altria expects to grow adjusted earnings per share between a range of $2.17 to $2.23. As an investor, I want a solid dividend and a recessionary resistant dividend.
Here is a history of Altria's dividend history:
The investor can see Altria's management increases the dividend each year. The 5.8% annual yield is a terrific yield based upon a 2% Treasury Bond yield. This equity represents a conservative, high income, cash cow business model. The stock will, however, provide a steady and increasing dividend for individual investors.
The income investor needs income. Safe, secure and positioned for a recession are required holdings. Wall Street has proven to serve its own needs. Individual investors are forced to identify stocks which are suitable for their investing income needs.