Last week I told you about 5 "Dividend Divas" that I hold in my portfolio. These lovelies sport strong yields of 2.9 percent of more, have modest payout ratios of 70 percent or less, and show great legs with respectable records of increasing their dividends over the last five years. This list included the likes of pharmaceutical and medical device manufacturer Abbott Laboratories (NYSE:ABT), utility giant Exelon Corporation (NYSE:EXC), household goods staple Kimberly-Clark Corporation (NYSE:KMB), king of fast food McDonald's Corporation (NYSE:MCD), and package delivery champion United Parcel Service, Inc (NYSE:UPS).
Together these five stocks yield a sturdy average of 3.4 percent, a track record of 13.3 percent dividend growth over the last five years on average, and still have room to give more in the future with an average payout ratio of less than 57 percent. They are the backbone of my portfolio, and I hope to add more stocks like them to my holdings in the future.
However, with the figures I just mentioned, these Divas can't account for the 5.3 percent average yield that my portfolio puts out as a whole. So, today, I turn to the darker side of my holdings, and tell you about the 5 "Dividend Monsters" that boost my bottom line, but which, being monsters after all, I need to keep a close eye on, lest they wreck havoc on my nest egg.
The criteria for being a Dividend Monster in my account are much simpler than the requirements for being a Dividend Diva: Yield at least 8.4 percent, and do it well! Now, being Monsters, these stocks are, by certain criteria and probably by certain townsfolk, misunderstood, at least in my opinion. By that I mean, they don't have great numbers when it comes to payout ratio or five year average dividend growth rates, like the Divas do; but there are other traits that made them worth adding to my growing band of equities, reasons I included them in my portfolio despite what may be considered more rational ideals. I'll get to each on a case-by-case basis after I've given you their metrics.
In an earlier pair of articles I described what I refer to as My Mad Method for evaluating stocks to add to my holdings. Once I've purchased a stock, I continue to rank it according to this same Method, but now against all the other stocks that I hold rather than stocks that I'm considering buying. This is the "MMM Rank" that you see in the table below, and as with all my rankings, the lower the better (I have a total of 29 positions currently).
In addition to this, I also include another modified ranking on the spreadsheet I use to track my investments. This other ranking takes the MMM Rank and ranks how much each stock has increased or decreased in value since I purchased it, and how much I expect to earn in dividends from each stock during the course of the current calendar year. By combining the MMM Rank and these two other rankings, I come up with a final Portfolio Ranking, also shown in the table below. This lets me see how a stock is holding up after I've acquired it, and also helps highlight stocks that may be underperforming and which may need to be pruned from the total crop. I should point out that I favor holding a position once I've entered into it, unless there are significant reasons to sell it, such as a change in the fundamentals of the company, its management, its products or position in its market, etc.
And now, without further ado, in alphabetical order by their ticker symbols, the Monsters and their data as of May 4th, 2012:
Freehold Royalties, Ltd.
Annaly Capital Mgmt
National Presto Industries
StoneMor Partners, L.P.
The Abominable Snowman
First up, hailing from the Great White North, is Freehold Royalties, Ltd., an oil and natural gas developer with interests primarily in western Canada. You'll notice from its ticker symbol that its is what is refered to as a "Pink Sheet" stock, in that it trades on a foreign exchange, in this case the Toronto Stock Exchange, but can usually still be purchased from a brokerage in the USA. I'm not an expert on "Pinks", although I've got several of them in my portfolio thanks to my former broker. Like many energy exploration and development companies, Freehold Royalties has seen some rocky performance lately, but its yield and relatively good standing in My Mad Method and Portfolio Rankings allow me to give it the home it needs. (Someone has to receive those dividends, after all!)
Next is Annaly Capital Management, a mortgage Real Estate Investment Trust, or mREIT, and it is The Beast of my portfolio with the highest yield of all of my positions. There are plenty of articles on Seeking Alpha that describe what mREITs are, so I won't go into too much detail here, but put simply mREITs invest in real estate in various forms, and they have to return at least 90% of what they earn as dividends to their shareholders in order to receive the special tax treatment that they enjoy, which is why mREITs tend to be such high yielders. NLY is not the highest yielding mREIT out there, but I think it's probably the safest, in that it invests in mortgages backed by government agencies such as Freddie Mac and Fannie Mae. NLY's ability to return such a high yield is directly tied to the low bond rate that the Fed has currently set, and which they have said will stay as low as it is until at least the end of 2014.
While NLY has not performed well over the course of 2012 in terms of equity, the dividends I've received so far from the company have offset the loss in equity that I've incurred by a factor of 3-to-1, and that's from only two quarter's worth of dividends. As long as the Fed keeps interest rates in the basement, I'll let The Beast roam free in my portfolio, and in fact I just added a bit more to it last week. But at the first sign of a substantial hike in interest rates by the Fed that would result in NLY's yield dropping below 5 percent, I'll have no qualms about putting NLY down.
The Three-Headed Monster
One of my favorite holdings, National Presto Industries is a very well managed company focused on only three market segments: Household appliances, such as pressure cookers and the like; Defense, primarily the manufacture of 40mm ammunition; and absorbent materials, or in other words, adult diapers. Such diversity! The Current Yield that I have listed in the table above is calculated from my own personal spreadsheet. If you look up NPK's yield on most financial websites, you'll find it listed as only 1.4%. The reason for the difference, and why it qualifies as a Monster, is that over the last 7 years or so, NPK has regularly issued a special dividend that brings its real yield up to the level I've listed here.
The president and CEO of the company holds over 25% of the shares; she pays herself a modest salary, as CEO salaries go, but boosts her annual compensation through the once-a-year special dividend. NPK has been beaten down since it announced its annual special dividend this past February, as the company wasn't able to pay out as much as it has in recent years, although, at least in my humble opinion, it still took good care of shareholders with a $1.00 regular dividend and a $4.00 special dividend for a total of $5.00 for the year. There was a huge sell-off of the stock after this year's dividends were collected, which I think just represents a major buying opportunity for those of us who have faith in this little beastie, although I probably won't be adding more to my position until later in the year. One needs to keep an eye on the current price, which is still trending down, and pick a point where you can get in at a bargain-basement price before the treasure hunters start stocking up on it as 2013's ex-dividend date approaches.
Creature from the Deep
SeaDrill, Ltd., based in Bermuda, is a relatively new company with an amazing business plan and a fantastic philosophy of giving as much back to shareholders as possible. SDRL leases out its fleet of ultra deep water oil and gas drilling vessels to well established petroleum exploration companies for rates in the neighborhood of $600,000 or more per day. I don't think the world's thirst for oil is going to be slaked any time soon, and that's pushing the exploration and development companies into very deep waters off the coast of the Americas and Africa, and even in the North Sea. SDRL currently carries a lot of debt, but that's due to its aggressively building out its fleet, which is enjoying a very high utilization rate.
I have a couple of energy exploration plays in my portfolio, but this is the best in terms of dividend yield. I'm not too worried about SDRL continuing to meet my standards for maintaining itself as a Dividend Monster in my holdings in the years to come. As new sources of land-based oil becomes harder and harder to find, oil and gas companies must plumb the depths of the world's oceans to find ever more scarcer sources of the stuff that we cannot seem to live without, and SeaDrill is in a great position to both facilitate that and profit from it at the same time for a long time to come.
Finally, we have StoneMor Partners, L.P. which, along with NPK and SDRL, has one of my favorite business models. STON is one of the largest owners of cemeteries and other end-of-existence facilities, which it has been steadily growing through many and frequent acquisitions of smaller cemeteries and funeral service providers. STON has over 270 worth of real estate capacity for its existing cemeteries, and management has been making literally hundreds of acquisitions over recent years, so they know what they're doing there.
The problem with STON is that it's very difficult to get a clear picture of how it's doing from its financial statements due to the way it has to book its revenue. Many, if not most, people purchase burial plots and the related funerary services in advance, but limited partnerships such as StoneMor can't book most of that money as revenue as it has to put the money into a special reserve, and then can book it as revenue when the eventual time for the customer is up and STON's services get consumed. Even though as a general population we're living longer than ever, eventually the Grim Reaper catches up with all of us, and that's where StoneMor and its kind come into the picture. It's a business that people are literally dying to get into (sorry), and from where I sit a guaranteed money maker.
So that is my menagerie of Dividend Monsters, the big, bad and ugly that boost the average yield of my portfolio to the level I'm currently enjoying. Having such creatures in my portfolio is not without its risks, but even though I'm at the half-century mark, I personally need to allow for more risk in my holdings than others might be able to stomach at my age. I'm a bit late to the retirement planning game, and need to play a bit of catch-up, so I have to allow for more risk than a traditional financial planner may advise for someone at my stage of life and employment. But I'm confident that, through the ups and downs of the market that are bound to occur before I retire and even into my retirement years, I'll be able to continue to grow my nest egg and eventually generate the income I'll need when I either can't or just don't want to work for someone else anymore. Until then, I'll keep a keen eye on these Monsters, and I'll even let some of them grow over time, but I've got a "Sell" button on my online brokerage account, and I'm not afraid to use it!
DIsclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.