For many income investors, it makes sense to invest in "blue chip" stocks that offer solid yields. Stocks like Merck & Co Inc. (MRK), which offers a 3.8% yield, Bristol-Myers Squibb Company (BMY) with a 4.2% yield, or Kraft Foods Inc. (KFT) at 2.8%, all appear to be a relatively safe way to generate income in a very low-interest rate world. Pharmaceuticals, healthcare and food stock like these are defensive in nature because consumers will continue to spend on these basic needs, even during a recession. These types of large-cap stocks make sense as core holdings for many investors, but it can also be rewarding to consider smaller company stocks that might have a higher-risk profile, but also much higher potential returns. Over time, the difference in earning yields of about 3% versus yields of over 10%, can really add up.
For example, with a current yield around 2.8%, Kraft will generate just under 15% returns based on dividend payments over five years. This certainly beats what a money market account will earn, but when compared to high-yield stocks, it looks a lot less appealing. There are some stocks that can provide returns of nearly 15% in just a single year, and perhaps more like returns of 70% or so, over 5 years. Here is a closer look at one stock that has been generating strong yields for investors:
Invesco Mortgage Capital Inc. (IVR) is set up as a mortgage real estate investment trust (REIT). These types of companies are mandated by law to pay out most of the earnings generated to shareholders. This is one reason why REIT stocks offer such high yields.
The other reason is that companies like Invesco use leverage. By borrowing money at low interest rates and using those funds to buy assets that generate higher yields, it is able to generate above-average returns. While excessive leverage can be dangerous, it can also be smart when properly managed. Since the borrowed money is being used to buy relatively stable assets like mortgage-backed securities that generate regular income, the risks are minimized.
Furthermore, this REIT is externally managed and advised by Invesco Advisers, Inc., which is a subsidiary of Invesco Ltd. (IVZ), a top global investment management company. With top-level management, and a very generous dividend yield, it makes sense to consider this stock, especially with multiple insiders buying.
Insiders at Invesco Mortgage Capital appear to see value in this stock and they have been buying. On August 20, 2012, John Day (a director), bought 6,000 shares in a transaction worth about $149,000. On August 5, 2012, Robson Kuster (an officer), bought 1,133 shares in a transaction valued at about $22,000.
Here are some key points for IVR:
- Current share price: $19.95
- The 52 week range is $12.55 to $20
- Earnings estimates for 2012: $2.70 per share
- Earnings estimates for 2013: $2.66 per share
- Annual dividend: $2.60 per share, which yields about 13%
Data is sourced from Yahoo Finance.
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.