I want to thank all of the authors that contributed to this article. Please note that information from the authors was compiled over a couple of weeks, so I've put the updated yields in parenthesis next to the first occurrence of the tickers.
My Focus and Thoughts
My investment focus is on growth and income with higher yielding dividend stocks. I recently retired, and I love dividends, but I love dividends even more if they grow.
As most of you know, many high dividends are high (on a percentage basis) because the prices of the stocks have been battered. To add insult to injury, most are battered for good reason, and sometimes end up cutting those hefty dividends, leaving you will a smaller income. For that reason, and understandably, many people shy away from higher yielding stocks. However, I have found that there are always some high yielding stocks that don't fit the profile of a company in trouble. There may not be many, but there are always some that are overlooked, or sitting at an industry bottom. I am always on the lookout for them.
I was thinking about how the market has been so volatile over the past few months, particularly for higher dividend stocks. It seems to me that for awhile there, almost every dividend stock moved up and down with the price of oil whether there was an obvious relationship or not. You might think that if oil prices go down too far, a lot of jobs will be lost, the global economy could be in jeopardy, and the economy could tank. But you might also think that if oil prices go too high, inflation will run rampant, costs of goods will rise, and the economy will tank. My view is that neither of those scenarios is likely long term. Supply and demand will likely balance out in the middle over time. I don't believe the wild price swings we have been seeing are based on the likely long-term outcomes for these companies or the economy. I think they are more likely short term trading based on the speculated direction of oil prices. So under all that rubble, the real question I have is whether there are any higher dividend stocks that will sustain in the long term.
Enough Don - What did the authors pick!?
So, I decided to ask two questions of some of our prominent authors here on Seeking Alpha. I promised everyone that I would make it clear in the article that their picks are totally speculative and these are not recommendations. These picks are based on a 10-year horizon. It may be that there are no high dividend stocks that can maintain for the next 10 years. These picks are food for thought. A lot of due diligence would be required on any of them. So, here are the questions I posed to the authors, and their answers:
Question 1) If you had to pick one stock with a current dividend between 8% and 10% that you could not sell for 10 years, which one would it be?
Question 2) If you had to pick one stock with a current dividend over 10% that you could not sell for 10 years, which one would it be?
Please note that in this article, the term dividends is going to be used to describe both dividends and distributions (think of both as income). We all know there is a difference, but for the purpose of this article, we are going to think of both of them as income you might receive. So, let's not over complicate things with semantics. Also, a few authors snuck in some picks that were lower than 8%. I included them as this is all just food for thought.
I told the authors to pick one stock for each question, and give a brief explanation with links to any articles they had written on the picks or maybe articles they liked. The authors and their responses are in alphabetical order by first name.
1) Adam Aloisi - Adam is a full time investor in stocks, bonds, options, and real estate who previously worked as a financial/investment journalist/analyst. Previous industry stints include privately held SageOnline Inc. -- where he held multiple positions -- as well as Multex.com, acquired by Reuters, where he was an equity research editor. He is not an advocate of any single portfolio strategy; he promotes a "go anywhere" philosophy predicated on value.
For the 8%-10% choice, I thought immediately of CEF option-income funds. While there are a breadth of choices, my pick would be Eaton Vance Tax-Managed Buy-Write Opportunities Fund (NYSE:ETV) (yield as of close on 4/19/16 was 8.82%). The fund writes near-the-money index calls against virtually its entire portfolio, which consists of both Nasdaq 100 and S&P 500 stocks. The fund currently yields 9% and trades at a mild premium to NAV -- by reason of its above-average NAV returns through the years. In a recent publication it was stated to have a little over 200 positions. The income is generally classified as tax deferred return of capital, which means this is a fund that you want to own in a non-qualified account. While the nature of the fund limits upside in a raging bull market, if we have another "Lost Decade," this is an ideal high-yield holding for the tax conscious income investor. The diversified nature of the fund would enable me to sleep well at night on a 10-year forcible hold. All things considered, this may be one of the more durable 9% yields one can find in the market today. Potential capital upside is icing on the cake.
In the 10%-12% group, while I own a handful of stocks in this yield range amounting to a very small percent of my overall portfolio, it came down to two stocks New Senior (NYSE:SNR) (yield as of close on 4/19/16 was 9.54%), a pure play senior housing REIT, and Hercules Capital (NYSE:HTGC) (yield as of close on 4/19/16 was 10.26%). I eliminated New Senior even though I think private pay senior housing assets may represent one of the strongest areas of real estate NOI growth as baby boomers continue to age. The company is highly levered and I find management somewhat shaky based partly on the external relationship with Fortis, as well as some of its near-term decisions. The path to growth is limited right now, although the dividend is covered and see very low likelihood of some sort of collapse.
Hercules, which I see as a better 10%-12% choice, is a BDC that invests largely in technology and biotech/pharmaceutical upstarts, has internal management, and a well diversified loan portfolio. Although the company is susceptible to problems in a recession, I don't think you're going to find a 10%-12% yielding company that is not. I simply don't see a scenario where it would go to zero, given the diversity and breadth of the loan portfolio (~85 companies). The company has vowed to steer clear of commodity levered assets and MBS. Plus, management is internal with clear shareholder alignment, which can't be said for a large number of BDC companies.
Adam owns SNR and HTGC. He does not own ETV.
2) Albert Alfonso - Albert is a long-term investor with a high risk tolerance. His investing focus is on finding and analyzing high-yield dividend paying stocks. He prefers deep value plays and/or stocks with a strong track record of dividend growth. The sectors he covers range from upstream MLPs, mREITs, BDCs, and dividend-growth stocks.
For the 8%-10% range, I would pick ONEOK (NYSE:OKE) (yield as of close on 4/19/16 was 7.15%). It has a 1.30x coverage ratio (extremely strong) and yields 9%. Main risk is if its MLP ONEOK Partners (NYSE:OKS) needs to cut the distribution. Read more here.
For the 10%+ yield club, I would pick Ellington Financial (NYSE:EFC) (yield as of close on 4/19/16 was 11.63%). It has strong dividend coverage (~1.20x) and yields The dividend yield is nearly 12%. Main risk factors are a flatter yield curve, which has resulted in it lowering the dividend twice since 2014. Also, it is an LLC, not C-Corp, so it not suitable for IRAs. Read more here.
Albert owns OKE.
3) Bob Ciura - Bob is an investment analyst, and has experience working as a research analyst for a mutual fund.
I personally own BP (NYSE:BP) (yield as of close on 4/19/16 was 7.49%) and I plan to own it for the next 10 years or longer. I believe sooner or later, oil prices will rise again, although to what exact level nobody knows for sure. But what I do know is that oil will be around for a long time to come. And BP is making major investments in natural gas and LNG, which should meaningfully add to future earnings. In the meantime, the company's significant asset sales and cuts to capital expenditures could keep the 8% dividend intact. Although a caveat to this is that if oil plunges back to $25, a cut is likely. Still, I'm willing to take this high-yield bet.
I don't own any stocks with 10% or greater yields, and I generally don't cover such extreme high-yielders. But one 10% yielding stock I've always been interested in is StoneMor Partners (NYSE:STON) (yield as of close on 4/19/16 was 11.06%). That's because StoneMor isn't your typical 10% MLP in the oil and gas space, nor is it a BDC. There is an old saying that the only two certainties in life are death and taxes. StoneMor has built a nice business by owning and operating cemeteries across the United States. It also offers funeral-related products like caskets and urns.
The company generates healthy levels of distributable cash flow, which covered its distribution last year. In fact, it's paid 45 consecutive quarterly distributions. And, over the past several years, StoneMor has raised its distribution steadily. Since it has a business model built upon a certainty -- after all, people aren't likely to stop dying any time soon -- the distribution seems secure.
Bob owns BP.
4) Dividend Don - I am an antique dealer and an indie pop rock musician who retired from corporate America. I have worked in Market Research at Procter & Gamble (NYSE:PG), and also as a Healthcare professional. My focus as stated in the beginning of this article is on dividend stocks, particularly those with growth potential, and those that are overlooked by the market.
My first pick is the PIMCO dynamic income fund (NYSE:PDI) (yield as of close on 4/19/16 was 10.01%). This is a closed-end bond fund that is sitting at a current dividend of around 10% depending on what day you look. This fund has been around since 2012 and has consistently had one of the highest levels of Undistributed Net Income of all CEFs since inception, meaning that they always have had more income than their distributions. Furthermore, they have paid a large variable special dividend every year and increased their dividends fairly often. Since other closed-end bond funds have not been able to come even close to this performance, I believe it's all due to the manager. I'm sticking with him. I just hope he stays there for the next 10 years. I do own this one.
My second pick is H & Q Life Sciences Investors (NYSE:HQL) (yield as of close on 4/19/16 was 7.59%) as my 8%-10% pick. This is a closed-end fund that invests mostly in biotechnology, medical devices, and pharmaceuticals. It pays out a certain percent of its net asset value every three months and has been paying dividends since 1998. So, if the net asset values decrease like they have in this sector recently, the dividend decreases. Of course, they decreased substantially in 2008, but rebounded very rapidly, and are higher than they were pre-recession. They paid 31¢ quarterly in 2007 (pre-recession), fell to as low as 13¢ during the recession, are now at 48¢, and have been as high as 71¢ this year. This sector has been hit hard this year, and HQL was no exception. Since the net asset value has fallen, the dividend falls proportionately. I want to catch sectors like this when they are down for short-term reasons. According to Morningstar, their average return has been 11.65% over 10 years. They are not going out of business unless we are all dead, in which case it doesn't matter. I own this one too.
Don owns PDI and HQL.
5) Dividend Sleuth - Ted is focused on dividends for retirement income portfolios. He follows the four National Association of Investment Clubs Principle of lifetime investment, invest in growth, reinvest earnings and profits, and diversify by industry and size.
I currently own one equity that yields between 8.0% and 10.0%. It's Enviva Partners (NYSE:EVA) (yield as of close on 4/19/16 was 8.86%). It's a master limited partnership and the world's largest producer of wood pellets and wood chips as biofuel for power plants, mostly in Europe. The wood fuel is produced in the southern United States. EVA was founded in 2004 as a joint venture between the private equity Riverside Fund and Hancock Natural Resources Group, a subsidiary of Manulife Financial Corporation. EVA became a public partnership in May 2015, at $20 per unit. I wrote about Enviva in a June 17, 2015 SA article. Michael Fitzsimmons wrote an SA article about EVA on March 22, 2016. Some investors are drawn to EVA because it provides an alternative to coal as a fuel source. It is not without controversy because some environmentalists are opposed to using wood as a fuel source for power plants. At a $21.08 closing price on April 14, 2016, EVA's yield is 8.7%.
Ted owns EVA.
6) Factoids is "a retail investor that gathers, processes and analyzes significantly more data than average. I share that data in my articles. I let the data do the talking. I am only taking dictation as the data tells its message."
The highest yield I would be comfortable with a no looking back 10-year holding would be the exchange traded debt of two decent BDCs. The first ticker is Solar Capital (NYSE:SLRA) (yield as of close on 4/19/16 was 6.67%) -- and that is for a 6.75% coupon bond that matures in 2042 from Solar Capital (NASDAQ:SLRC) that is currently selling below par to have a yield around 6.8%. The second ticker is AIY (yield as of close on 4/19/16 was 6.72%) -- and that is for a 6.875% coupon bond that matures in 2043 from Apollo Investment Corporation (NASDAQ:AINV) that is currently selling above par to have a yield around 6.8%.
Factoids does not own SLRA or AIY.
7) Norman Roberts - Norman is the author of the book "The Dividend Investor's Guide". He is self-described as "patient, analytical, organized, pretty good at math, and always looking for that angle, strategy, or edge to help guarantee my continued market success."
Ashford Hospitality Trust Preferred E (AHT-E) - Yield as of close on 4/19/16 was 8.97% -
Correction from Norman - Don, my effective yield according the price I purchased my AHT-E shares is around 9.30%
8) Richard Lejeune - Richard is a former hedge fund trader now working as an Independent Trader, Consultant and author of the Panick Value Research Report. The Panick Report is a newsletter and alert service focused on undervalued high yield preferred stock issues and some undervalued micro cap equities.
I would pick JMP Group (NYSE:JMP) (yield as of close on 4/19/16 was 9.27%), which now yields 9.2% at a recent price of $5.13. My Panick Value Research Report is focused on high yield preferred stocks and exchange traded debt issues. Sometimes finding a good high yield debt issue can also lead you to an attractive income stock. I recently wrote about the JMPC exchange traded debt issue. JMP is a small diversified broker/dealer. They have modest balance sheet leverage, heavy insider ownership and a strong management team. JMP's valuation is very attractive at less than book value. The positive qualities of the JMPC debt issue also apply to the common stock.
I'm going to answer your second question with a little twist by choosing a cumulative preferred convertible issue. BKEPP (yield as of close on 4/19/16 was 10.21%) now yields 10.8% at a recent price of $6.60. See my recent article for details. Since BKEPP is convertible to 1 share of Blueknight Energy Partners (NASDAQ:BKEP), you will capture most of the upside of BKEP with the increased safety of a preferred stock. Unlike many midstream peers, BKEP can thrive in a low commodity price environment.
Richard is long BKEPP and JMP, but not JMPC.
9) Scott Kennedy - Scott is a Certified Public Accountant (CPQ) and a Certified Financial Planner (CFP) (not private practice). He is currently employed with a global accounting firm in the Northeast area (partner). He has masters degrees in accounting and legal studies, and experience with audit, tax, and consulting entities in the following sectors: closed-end funds, energy, financials, healthcare, homebuilders, pharmaceuticals, private equity, REITs, and telecoms.
Regarding the first question, I currently believe one BDC "basically" fits your criteria. Golub Capital (NASDAQ:GBDC) (yield as of close on 4/19/16 was 7.35%) currently has a 7.41% yield. I know that doesn't fit your 8%-10% range, but GBDC is pretty close. This company has continued to trade at a modest premium NAV. However, there continues to be a reason why this stock is valued higher than most BDCs. This is due to the fact while most other BDCs have reduced their dividend, GBDC has maintained their quarterly dividend for several years. In addition, I'm not anticipating a reduction to the dividend in the foreseeable future. The company has an attractive business model and continues to generate positive economic returns. Simply put, it's been a steady/reliable investment for me regarding total returns (change in stock price and dividends received). The following PSEC article provided various metrics about 10 BDC peers (including GBDC). From the data within this article, I believed one can see GBDC has many attractive "traits" that readers should consider.
Regarding the second question, I currently believe another recently converted BDC fits your criteria. Newtek Business Services (NASDAQ:NEWT) (yield as of close on 4/19/16 was 11.24%) currently has an 11.23% yield. This company has recently traded from a modest premium to NAV to a material discount. This was due to the fact the company issued a large amount of shares (around 40% of the existing number of outstanding shares) and reduced its regular quarterly dividend. Now, that might sound like a couple of negative trends. However, with that being said, NEWT also just declared a "one-time" special periodic dividend of $2.69 per share. This was the main reason for the new share issuance and quarterly dividend reduction. Management has reiterated the new, current quarterly dividend of $0.35 per share is sustainable over the foreseeable future and could even slightly increase over the next 12 months. Furthermore, NEWT has a special niche being able to originate and sell SBA Section 7(a) loans (which have traded at material premiums to par for over 10 years) and is only one of a handful of BDCs that continues to have not a capital loss carryforward balance. Simply put, NEWT continues to deliver strong quarterly economic returns (near the top of the sector) while currently being valued near the sector average. I provided a full analysis of NEWT's attractive valuation/business model in this article.
Scott has positions in GBDC and NEWT.
In conclusion: Perhaps this article will inspire some readers to add some other ideas to the conversation. Just remember, this is all very speculative. These are not recommendations. The vast majority of high dividend stocks are likely high because there is a problem, but certainly not all. Which ones do you think could be the exceptions, and why?
Disclosure: I am/we are long HQL, PDI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.