Obviously, this group is dominated by small- and mid-cap stocks, which can provide more volatility than the traditional large-cap dividend stocks often favored by income investors, names such as Procter & Gamble (PG) and Coca-Cola (KO). In particular, this list comprises some of the riskiest names in the group, and, not coincidentally, the stocks with the highest yields:
1. SeaCube Container Leasing (BOX)
Closing Price 3/29: $17.23
Dividend (Yield): $1.04 (6.04%)
SeaCube initiated a dividend soon after its November 2010 initial public offering, and has raised it three times since then, with the most recent raise to a 26-cent quarterly payout.
There are some risks here, of course. Global shipping is a notoriously volatile business, and extremely sensitive to economic conditions. However, SeaCube predominantly enters into long-term contracts with global shipping companies, lessening some of the economic and credit risk normally associated with the industry. The payout ratio is a bit high at 53%, but with earnings expected to rise to $2.51 and $2.67 in 2012 and 2013, respectively, the dividend looks supportable.
The other key risk is the company's debt-heavy balance sheet. Total debt rose over $400 million in 2011 to $1.2 billion, dwarfing the company's $350 million market capitalization. This leverage will raise earnings and cash flow but does increase downside risk to the dividend and the stock valuation.
BOX is a higher-risk play than most income investments, but the strong yield, emphasis on dividend growth and stock performance (the stock has just recently pulled back from its all-time high; total return since the IPO is approaching 100% with dividends reinvested) make it worth a look.
2. Dover Downs Entertainment (DDE)
Closing Price 3/29:$2.50
Dividend (Yield): $0.12 (4.80%)
Dover Downs runs the Dover Downs racetrack complex in Delaware, which also includes a casino and a hotel in addition to its legacy harness racing program. The company earned 17 cents per share in 2011, putting its P/E right around 15, with tangible book value at $3.55 per share, a notable premium to its current trading range.
While the payout ratio seems high at 70%, it is notably lower on a cash flow basis. The $3.9 million paid in dividends in 2011 were just 35% of its levered cash flow (defined as free cash flow less net interest expense). The dividend was cut from 5 cents quarterly to 3 cents in late 2009, and has remained unchanged since.
There are a host of challenges facing Dover Downs, which I covered back in January for gambling news site CalvinAyre.com. New competition from casinos in Pennsylvania, and, soon, Maryland, may hurt already flat revenues. Overall slot revenues in the state have fallen for 15 consecutive quarters since Pennsylvania's first casino opened in 2007. The company is also facing an onerous tax agreement with the state, signed before the intense out-of-state competition began.
Still, the company has managed to keep revenues flat by increasing hotel occupancy (the popularity of the nearby NASCAR track has helped), and has cut its expenses to maintain profitability. Those cuts may have long-term costs, as lower marketing, promotional and capital expenditure spend make the casino less attractive to potential gamblers. But there is still room for some growth in investment based on current cash flow.
In addition, the state of Delaware has discussed lowering the company's tax burden, which would cause an immediate and substantial gain in the stock. DDE is a bit of a risky play, but the company's ability to generate cash and profits, and the value of its non-gambling assets make it a risk that may be worth taking, particularly below $2.40, where the yield crosses above 5%.
3. NutriSystem (NTRI)
Closing Price 3/29: $11.42
Dividend (Yield): $0.70 (6.13%)
NutriSystem, quite honestly, is having its lunch handed to it (bad pun intended) by industry leader Weight Watchers (WTW). While WTW is showing growth and a strong bull run year-to-date, NutriSystem seems to be spinning its wheels. NTRI has been bouncing along near long-term support around $11 per share, and is trading at the same levels it did during the depth of the stock market plunge in early 2009.
At first glance, the weak stock performance - and high yield - appear justified. 2012 guidance issued in conjunction with fourth quarter earnings projects full-year EPS of just 45 to 55 cents, well below the company's 70 cent annual payout. That earnings report - which included a surprising fourth quarter loss - knocked the stock down some 11%.
But the real story behind NTRI, even as it struggles, is its cash flow. Free cash flow in 2011 was $39 million, double the dividend paid out to shareholders. This is nothing new. The 50% payout ratio on a cash flow basis is the highest the company has faced in five years. The dividend will be supported by a $150 million share buyback authorization - representing some 46% of shares outstanding at the current price.
Even while struggling, the company still covers its generous yield, and has potential for a turnaround. As Clay Mahaffey noted in an interview with Seeking Alpha's George Jarkesy this week, SG&A expenses are 42% of sales at NutriSystem, versus just 27% at Weight Watchers. This is due in part to WTW's dominance of the higher-margin online platform, but plainly, NutriSystem has room for margin improvement of its own. Investors can wait for a turnaround in the still-growing industry, with a 6% yield providing a solid incentive for patience.
4. RadioShack (RSH)
Closing Price 3/29: $6.31
Dividend (Yield): $0.50 (7.93%)
OK, so you probably know RadioShack, and you may know that the stock is now trading at about a 20-year low, after a series of earnings misses over the last couple of quarters.
Still, as I noted last month, there remains hope for RSH. The stock is now trading below tangible book value, and the dividend yield is attractive at nearly 8%. The stock's downward slide has been led by management errors - notably, the decision to transition to lower-margin sales of wireless products and plans and de-emphasize the higher-margin legacy business of electronics and components.
But RadioShack still generates plenty of free cash, and CEO Jim Gooch reiterated his commitment to the dividend on the most recent conference call. Net debt is slight - around $100 million - meaning the constant comparisons to now-defunct Circuit City are premature, at best. The company's recent announcement that it would add 1,000 franchised locations in Southeast Asia - a low-risk, high-return type of move - did little to budge the stock, but showed the company's brand and business model still have some value.
RSH remains a risky play. Gooch's commitment to the dividend should face skepticism, given the aborted share repurchase program announced in October, and rescinded just three months later. The struggles at Best Buy (BBY) - whose own earnings miss likely contributed to RSH's 2% drop on Thursday - show the difficulty for technology and electronics resellers in the current Amazon-dominated environment. But the value of the company's assets remains a strong downside cushion, and even amidst a difficult 2011, free cash flow more than doubled the cash distributed to shareholders. High yields such as the 7.9% offered by RSH usually come from distressed stocks, and this one is no different. But the stock remains an interesting contrarian play, with substantial income potential - at least in the short term.