We have arrived at the halfway point in 2012, and it is an appropriate time to revisit the stocks we featured in the first half of this year. This is the first in a series of articles to update followers on the progress of these investments, and to provide our view of their future for the rest of the year. This article will focus on the stocks we have featured as big dividend payers. Future articles will discuss growth stocks and precious metal investments.
The following chart indicates the 14 dividend stocks in chronological order of their appearance in our articles. We will group these and explain which in each group are still reasonable investment candidates. This will enable us to compile a diversified dividend portfolio of eight stocks. Those eight are highlighted in bold in the chart.
|STOCK||TICKER||PRICE||CURRENT||CHNG %||% DIV|
|Telular Corp.||(WRLS)||$ 8.08||$ 9.37||16%||4.8%|
|Homeowners Choice||(HCII)||$ 10.90||$ 18.09||66%||4.5%|
|Cimatron||(CIMT)||$ 3.95||$ 4.08||3.3%||10.0%|
|Universal Insurance||(UVE)||$ 4.24||$ 3.49||-17%||9.4%|
|Ares Capital||(ARCC)||$ 16.11||$ 16.15||0.2%||9.2%|
|Prospect Capital||(PSEC)||$ 10.77||$ 11.70||8.6%||10.7%|
|Blackrock Health Science Trust||(BME)||$ 27.42||$ 27.99||2.1%||5.5%|
|ING Emerging Market||(IHD)||$ 16.10||$ 14.10||-12%||11.3%|
|GAMCO Natural. Resources||(GNT)||$ 15.74||$ 14.80||-6.0%||11.4%|
|Assoc. Estates REIT||(AEC)||$ 15.24||$ 15.12||-0.8%||4.8%|
|RAIT Financial REIT||(RAS)||$ 4.40||$ 4.79||8.9%||6.9%|
|SR Permian Trust||(PER)||$ 18.95||$ 19.95||5.3%||11.5%|
|Granite Wash Trust||(CHKR)||$ 19.36||$ 20.20||4.3%||12.0%|
|Legacy Reserves LP||(LGCY)||$ 24.25||$ 25.60||5.6%||8.9%|
The Average Dividend Yield of this portfolio is 8.6%. Although the stocks were featured for their income potential, the Average Change in price is 6% over an average of 11 weeks holding period. On an annual basis, that would be equivalent to 28% capital appreciation.
Of the 14 dividend payers that we featured, 10 have appreciated in price. As for the three losers of more than 5%, the question is: has the price drop created a good buying opportunity? Universal Insurance Holdings (UVE) dropped 17% in price due to the poor earnings, predominately due to investment losses in its portfolio of equities. We originally featured this stock in our article on stocks that could increase their dividends. Our rationale was that UVE could turn around investment portfolio losses from the third quarter of 2011, given the general market improvement. UVE was 80% in metal and mining stocks in 2011, and a small effort to diversify has come too late. Despite the market turnaround, this sector has been one of the poorest performers so far in 2012. Although the core business is good, and the dividend looks solid, the insiders are selling and the management investment philosophy is questionable. We will look elsewhere for exposure to insurance and finance in our dividend portfolio.
ING Emerging Market Dividend Fund (IHD) and GAMCO Natural Resources (GNT) were included in our article on closed end funds with income enhanced by option strategies. Both are in currently unpopular sectors (Global and Precious Metals, respectively), but may bounce back over time. Investors could HOLD IHD, but we are not going to add it into our portfolio. Global prospects are suspect, and we think that we will get global diversification in some of the other dividend investments. As for GNC, we do think that there needs to be some exposure to precious metals and we think this is the best income-producing option in that sector.
The other closed-end fund mentioned in that article was the Blackrock Health Science Trust (BME) gives us exposure to the important healthcare industry, and offers a good dividend that is not a "return of capital." In fact, in years past, it has declared an extraordinary year-end dividend to distribute accumulated profits, providing a double-digit annual yield. About 10% of its holdings are foreign stocks, and most of the US-based ones are active in global markets. We will include BME in our portfolio as a keeper.
Microcap Growth Payers.
We featured both Telular Corp (WRLS) and Homeowners Choice (HCII) in the first article in our "Shadow Stock" series, which focuses on microcaps that mimic in some way blue chips. They were suggested for their strong dividend, but have also been good growth investments for us. Cimatron (CIMT) was featured in the same article as UVE above. These three have two important characteristics in common: growing recurring revenue streams and management teams focused on increasing dividends. Despite their rise in price, we think these have solid value for long-term investing. Of the three, WRLS may be the most volatile. It acquired a truck/trailer monitoring company in February, and it could be greatly acretive to earnings or it may be a bust. The next earnings report will give us a better idea how this operation is being assimilated into the WRLS asset security business.
REITs, Trusts, MLPs and BDCs.
In a recent article about REITS, we featured Associated Estates Realty (AEC) as potentially undervalued. Shortly thereafter, AEC initiated a public offering of more than 6M shares of stock, which was not favorably greeted by the market. Despite the stock offering and subsequent dilution, this is a good REIT, which focuses on the hot apartment market. However, we will limit our portfolio to one REIT, and we prefer the other selection in that article, RAIT Financial Trust. RAS has good value metrics, offers a high dividend yield and is diversified in its operations.
In our article about zero interest rates, we featured Prospect Capital (PSEC) and Ares Capital (ARCC) as Business Development Companies that may be possible income substitutes for corporate bonds. These are both well-managed and pay big dividends. We only can include one in our portfolio, so we are going with Ares, since Prospect is skewed a little to the energy sector, and we will have other investments providing exposure to that group.
In our article on Oil Royalty Trusts we featured Chesapeake Granite Wash Trust (CHKR) and Sandridge Permian Trust (PER) as potentially undervalued due to the decline in oil prices and bad publicity for management. We have not changed our opinion on that, but we indicated in that article that we have a preference for MLPs rather than trusts, due to the limited possibilities and finite life span of trusts. Although the trusts' yield is 2.5 to 3% higher than the MLP we liked in that article, we still prefer the fact that Legacy Reserves LP (LGCY) has a good growth history, potential to increase reserves and more ability to raise dividends in the future. We include Legacy in our dividend portfolio.
A macro factor to investing in 2012 is the attraction of dividend-paying stocks and funds. The rates offered by bonds are low, and any increase in the interest and/or inflation rates will eventually cause the market value of the bonds to drop. The risk/return dynamic of this situation favors the dividend-paying stocks, in our opinion.
We have updated our featured dividend investments and have selected eight of those for inclusion in a diversified portfolio. Below is the table which indicates the sector diversification and yield.
|Telular Corp.||Wireless Tech.||$ 9.37||4.8%|
|Homeowners Choice||Insurance||$ 18.09||4.5%|
|Cimatron||CAD Manufacturing||$ 4.08||10.0%|
|Ares Capital||Business Develop. Finance||$ 16.15||9.2%|
|Blackrock Health Science Trust||Healthcare||$ 27.99||5.5%|
|GAMCO Natural Resource Fund||Precious Metals & Petroleum||$ 14.80||11.4%|
|RAIT Financial Reit||Real Estate||$ 4.79||6.9%|
|Legacy Reserves LP||Oil & Gas||$ 25.60||8.9%|
The average yield of this portfolio of investments is 7.9%, which is much better than the average junk bond. Additionally, we think that there is potential for dividend increases in this group. We also think that the potential exists for capital appreciation in some of the microcap growth companies, as well as in the commodity-related funds that are currently beaten down.
Our next update in this series will review the precious metals and copper investments featured earlier this year.