3 Reasons To Buy This Rising Stock With An 8% Yield

Aug.26.12 | About: Starwood Property (STWD)

It's getting tougher to find stocks that offer a meaningful dividend yield, and yet there are few alternatives to dividend stocks, since Treasury Bonds, and traditional savings, and money market accounts yield so little. The Federal Reserve is expected to keep interest rates low until at least 2014, and possibly beyond. This means the demand for dividend-paying stocks should continue for the foreseeable future.

Large-cap stocks that are well-known might have already seen most of the "easy-money" gains due to the run-up over the past couple of years. Many well-known dividend stocks are trading near 52-week highs, and that has pushed the yields lower. For example, Johnson & Johnson (NYSE:JNJ) now yields about 3.6%, Procter & Gamble Co. (NYSE:PG), yields about 3.4%, and Kraft Foods Inc. (KFT) yields just 2.8%. While that is better than money market rates, it is minimal when compared to what some investors might consider to be "second-tier" dividend stocks. This group of stocks does not necessarily include household names, and usually includes much smaller companies. These stocks have also been rising, but in many cases, the yields are still far superior to what the widely-owned dividend stocks pay and that is why these stocks are worth considering. With that in mind, here is a closer look at one company that offers a dividend that more than doubles the yield offered by many (above-mentioned) blue chip stocks:

Starwood Property Trust, Inc. (NYSE:STWD) is one of the country's largest commercial mortgage real estate investment trusts. It provides financing for commercial loans that typically range from $40 million to $500 million. It originates loans in the United States, Canada, the UK and Europe. These loans are often made on properties like hotels, shopping centers, and other commercial spaces. A list of recent loan transactions can been seen here. Here are three reasons to consider buying the stock:

1) Starwood has a top-level management team. Barry S. Sternlicht, is currently the Chariman and CEO of this company. However, some investors might know him as also having been the Chairman of Starwood Hotel & Resorts Worldwide, Inc. (NYSE:HOT), from September 1997 to May 2005. Starwood Hotels was founded by Mr. Sternlicht in 1995, which now has more than 800 properties including brands like: W Hotels, Sheraton, Westin, Le Meridien and Four Points by Sheraton. Obviously, Mr Sternlicht knows the hotel and commercial property business very well and that experience can be invaluable to a lender like Starwood Property Trust.

2) Starwood recently reported solid financial results. For the quarter ending on June 30, 2012, Starwood earned 45 cents per share. This compares favorably with the 43 cents per share it earned in the same period last year. It invested about $433.1 million during the quarter, and closed on a $250 million revolving credit facility. The
CEO seems positive on the future outlook, while remaining focused on yield and safety for shareholders. He recently stated:

"Furthermore, in a world marked by ongoing volatility, in which interest rates have fallen steadily and are expected to remain low well into the foreseeable future, we have built a portfolio that is approaching $2.9 billion of target investments that should yield in excess of a 12% annualized return. We have accomplished this with a loan portfolio that has a weighted average LTV of 65% further supporting our investment thesis that our business model which focuses on producing a safe and therefore compelling risk adjusted return, offers significant value to investors who seek yield combined with safety..."

3) According to recent data on Shortsqueeze.com, over 4 million Starwood shares are currently short. This represents about 7 days worth of average trading volume, which means there could be a short squeeze or at least a steady climb higher as shorts cover. The short thesis seems to be based on hopes for another financial crisis (perhaps due to the debt issues in Europe), or another market correction for other reasons, but so far, the shorts have been on the losing side of this trade for months.

Starwood shares were trading around $20 in June, but the stock has been steadily rising as more investors come to appreciate the yield, solid management, and strong business model that this company offers. With a yield that far outpaces popular dividend stocks like Johnson & Johnson, Procter & Gamble, and Kraft Foods, it makes sense to consider buying this stock on pullbacks, especially on dips below $22 per share.

Here are some key points for STWD:

  • Current share price: $23.25
  • The 52 week range is $15.89 to $23.43
  • Earnings estimates for 2012: n/a on Yahoo Finance
  • Earnings estimates for 2013: n/a on Yahoo Finance
  • Annual dividend: $1.76 per share which yields nearly 8%

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.