Dividend Don

Dividend Don
Contributor since: 2012
Long ARI for a long time - I don't know how this stock has managed to stay under the radar for so long. Great article.
If the insiders aren't buying shares because they know a cut in management fees is coming, I don't know why they would be. Seems to me that the stock will continue to have problems from excessive management fees which will eventually erode profits as they always have in the past.
I think all the insiders have to disclose is that they bought shares. I don't think they are required to tell why. Is that correct? Maybe someone knows.
Main has been touted, and rightfully so, for a number of years now. But unfortunately, they have a fair amount of gas and oil related companies in their portfolio which may present a problem over time. Oil and Gas is the most volatile and speculative part of the market right now and they are overweighted with 8 of their 91 holdings in that sector.
You could look below at, for example, Drilling Info, and say companies are still going to need that. However, companies might not be using the services as much as they were as they cut back on drilling, etc. etc.
I don't know how all of this will pan out, but it makes MAIN a company with high headache potential for me.
DRILLING INFO - DrillingInfo is the premier information service for the domestic upstream oil and gas industry, providing an integrated land, production, and well information.
EMS PIPELINE SERVICES
EMS is a leading provider of gas measurement and other energy infrastructure services to natural gas industry participant
INDIAN HEAD PIPELINE SERVICES is a pipeline construction services company. Indianhead Pipeline Services provides products and support services to transcontinental pipeline construction companies in North America.
NRP JONES manufactures hydraulic, industrial, and oilfield hoses, fittings and assemblies for both original equipment manufacturers and for hose and fitting distributors. The Company serves customers in the oil and natural gas, agricultural, transportation, construction, and mining industries.
OPI INTERNATIONAL (OPI) provides worldwide marine construction support services to the oil and gas operator community.
PRINCIPLE ENERGY provides comprehensive noise mitigation solutions including the design and installation of acoustical sound control systems along with noise measurement, monitoring and analysis services. The Company primarily serves the oil and gas industry
ROCACEIA ENERGY SERVICES, operating as Quality Lease and Rental Services (Quality), provides drill site services and equipment rentals to the upstream oil & gas industry.
TEXAS REEXCAVATION (T-Rex) is a provider of hydro excavation/vacuum excavation services. T-Rex provides excavation services for a variety of industry sectors including, petrochemical/refinery, pipeline, municipal, utilities, construction, oil & gas, engineering, transportation, telecommunication, and environmental.
I think this is exactly what is going on. The question is how substantially will they change it.
Thanks Buzz. Some other food for thought - The payout ratio of only 82.2% appears very impressive, and they just picked up the funds from Funko as you mentioned, so they could very well increase dividends in the future or have a special dividend like they have in the past. But..... the stock price doesn't seem to carry the premium that other stable dividend payers are getting. I haven't been able to figure out why. Is it maybe just a smaller company that has been overlooked or? Any insight here or in a future article would be greatly appreciated.
Would love to hear your perspective on GAIN. It has been a very steady dividend flow since 2009 with slowly rising dividends. Before that, it got beat up like everyone else.
I have had StoneMor in my portfolio for years. It is a very misunderstood stock and always has been, which is why it has always been underpriced and may always be underpriced. They are forced into an accounting method that doesn't account for a revenue flow that they actually have till a few years later. So, every so often someone looks at the numbers who has not dug deeply, and writes an negative article that sounds convincing. Those are simply buying opportunities as this article points out. If the economy totally tanks, people are still going to die. This company is still going to produce a large income stream. It is my opinion that it should be a foundation stock in most retirement income portfolios. The price may bounce all over the place because of articles by the uniformed, but it's a solid and improving dividend and looks to remain that way.
Hi Brad,
I owned NRF over the past year, and did well with it. However, when I bought it, I thought I understood it for the most part even though it seemed a little murky and externally managed, but maybe worth the risk. Then, things got more complicated with the spin-off and I decided I needed to spend a little more time researching the murky parts. The deeper I got into reading everything this company owns and does, the more murky it all became to me as to how all these parts fit together. That's exactly why I sold it very recently. They may do very well, but the big picture of how they are going to do that was not clear to me. STWD pays a similar dividend, is a lot more straightforward, and makes sense to me. I feel like it is the better choice for my risk tolerance.
In my opinion, there is one major thing that has created a nice buying opportunity for OHI. The drop in stock price has little to do with the market, and a whole lot to do with a miscalculation of the dividend on many sites.
OHI paid their regular dividend amount in two increments instead of one because of the timing of the AVIV merger. The total amount OHI paid out was the same, but many sites just use the latest number (which is only part of the quarterly dividend) to calculate dividend percentages. Because of this the dividend appears a lot smaller than it is on many sites right now. For example, Dividend.com and the Dividend Channel both show the dividend yield as 1.97% which is not correct. So, if one of your screens is for a dividend over 3%, it won't show up. It seems obvious to me that a lot of people are temporarily not finding OHI in the first place. I believe this has been the single biggest contributor to the price drop and will rectify itself when the next regular dividend (which will show up at the real rate which is currently just under 6%) shows up and the sites update the dividend data. In my personal opinion, this is a great time to buy.
The other more obvious thing is that OHI said timing was off from the merger and that the funds will all make more sense after a few quarters. That will make all the numbers look better.
A couple of years ago I was a Prospect Capital bull. Here was a company that seemed a little different. They had gotten through 2008 with minimal damage. In 2010, they dropped their dividend from $1.64/year to $1.20/year and disguised it a little by going to monthly payments. That was much better than the average BDC out the other end of 2008. It appeared to be a lag effect. Then, the dividend stayed steady or increased very slightly to $1.33 by January of 2015. They never did get back to the $1.64. Their claim was that they would sell assets they bought at a profit and make more money than the average that way in addition to their steadier income. Given that their management didn't do too bad steering through 2008, it made sense and was a little different than how most BDCs operate, although most or all sell assets at times.
Now, the dividend has been cut to about $1.00/year from that $1.64 in 2008. The probability that I am starting to lean towards is that the company is in slow demise. Management has not been able to make as much money as promised selling their assets at big profits here and there to bolster income which was supposed to be the key to them making more than the average BDC, and in fact has misrepresented their assets as explained in this article. Honestly, I just don't trust what they say. Their fees that they pay themselves are very high too. If they had used their money wisely, they might be justified. But, they haven't. I was in and out of this stock several times, and managed to make a little in the end by timing it. But, unless they get some new management and lower their fees, I'm not going back.
I think that most high or very high yield stocks have high yields for a reason. However, a small percentage are overlooked, misunderstood, or bashed by incorrect logic or previous history. If you find one of them, ignoring it because of a general rule about ignoring high yield stocks can be a mistake. However, it does suggest that you do a ton of homework if you think you've found one. They are out there. They are usually under the radar of articles on sites like this or the yield would not be so high. There are exceptions to even that though. Some high yield stocks like NYMT or MAIN or O have done extremely well over time. You just have to be very picky.
For high income, these are the ones I am comfortable with:
ARI
CODI
GAIN
NRF
NYMT
PMT
STON
I have to go with NYMT management on this one. When all the other REITs were sinking over the last six years, this one just kept pumping out the dividends. I believe this is because the management has made good judgement calls at almost every turn. That is no guarantee that they will in the future, but nothing has changed to make me think they won't continue to make better decisions than the average mREIT. If all REITs a problem that effects them, it would be a setback which I would welcome as a buying opportunity. I have it in a DRIP and plan on undripping it in about a year for retirement unless management changes substantially.
I have some NRZ too. It looks like interest rates will be on a long very slow rise or steady for a number of years. If so, NRZ should theoretically do well longer term.
Thanks Charlie,
That's some great information. Have to cogitate about that a bit! For my situation where I am looking for long term holdings, I'm not very concerned about how the market reacts. I am very concerned, however, about how increasing rates (short and longer term treasury rates) will effect the bottom line for these companies. Eventually, that is what will float to the top (or sink). You have some great info there.
Hi Brad,
I am preparing for retirement in about a year, and so I have been focusing on sorting out stocks that are relatively safer but provide dividend income over 5% (I can live with 4.8% on O or really high quality candidates). To meet that goal, I have been reshuffling my portfolio to stocks with substantial records of increasing dividends (WPC, HCP, and OHI being examples), and with better than average short term prospects. For perspective, I also own a few riskier higher dividend REITs that I feel good about such as STWD, NRF, and even mortgage REIT NYMT. My REIT research has been from multiple sources, and I can truly say that your articles have been by far and away the most enlightening in the non mortgage REIT sector. Some of your speculation doesn't alway turn out to be right, but you couch it as speculation, and given how many unknowns are always out there, you are at the top of your classs. Thank you.
Up until two years ago, I was mostly short term trading in high risk/high reward dividend stocks and wrote a few articles about them on here. My idea was simply that most very high dividend stocks are very high for a reason (huge risks), but not all. So, why not look for them. Overall, I beat the market using that strategy, but there were huge gains and huge losses and I am not at a stage of life where I want to take those risks anymore.
So, here's what I'm thinking about and would love to hear more of your thinking about. Here we go - Some not really unexpected news comes out suggesting interest rates might go up a little at some time over the next 6 months. There has been some panic selling from those who think REITs are going to take a hit from this as their borrowing costs will go up or those who know better, but think REITs will sink because other people think that and are looking for a lower buyback opportunity.
There are certainly some REITs that will be more impacted by rates (positively or negatively) and you mention some of them here and there in your articles. So, in your opinion, which REITs are likely to be most effected in a negative way from an interest rate increase, and which ones are most likely to be effected in a positive way from interest rate increases. You have mentioned O and WPC as being a couple that are less likely to be effected. How about your top and bottom five?
I can't thank you enough for all the information you provide
Don
Thanks so much for your articles.
To me, this begs the question. If a lot of similar properties have performed better, another possibility is that HPT is simply underpriced and will make up the difference. Another one is that it was overpriced relative to the others a years ago.
So, I'm not sure that previous outperformance has much meaning?
Thank you. I need to put my glasses on. Was looking at the 62% payout ration on IRC!
Hi Brad,
I had some heart issues a few years back that limited my activity on SA for awhile. Now, I am in a situation where I have made a 100% recovery, and am one year away from retirement. I have been juggling things for a couple of years and will need income more than growth, but income with moderately safe growth (even if slow) would be a good goal.
I had a nice run with mortgage REITs a few years back and was lucky enough to get out at the right time on almost all. I did keep NYMT and PMT for the long haul and (till now at least) I'm glad I did. My more recently my experimenting with BDCs was less fruitful, although I do still own and plan to hold MAIN, TCAP, and PNNT into retirement.
The lesson learned from the BDCs was to turn over every stone on every investment with an understanding that things can always go wrong, and that I need to pay attention on a regular basis. With that in mind, I was looking at your charts above and IRT sticks out to me. They have a very low relative payout ratio in spite of sizeable dividend increases and their P/FFO is one of the lowest. So, in my investigation which involves turning over stones, I thought getting your input could be a good place to start. I didn't see any articles you had written on it, and it is only about 18 months old. It does pay a whopping 7.66% monthly dividend. I currrently own WPC, OHI, HPT, STWD, NRF. Do you think IRT is worth considering and what stone(s) can you turn over in my quest for retirement?
Thanks - Don
If you take a look at the dividend chart at - http://bit.ly/11GPrq6
you will see that the divided was 5¢ in 2007, 6¢ in 2008, and is 27¢ now. There have been a few bumps up and down in the dividend, but on average it has been a very steady climb.
My opinion - I don't believe any other REIT has even come close to increasing dividends (on average) as much as NYMT since the 2008 fiasco. This is one of my largest and longest holdings and I plan on dripping it till I need the income. Just added some more at $7.75. What a bargain.
How does the "Overstatement" you are referring to compare to other BDCs, and how much would it effect NII in the best and worst and average case scenarios? The way I am reading this article, you are presenting the worst case scenario.
I agree. However, one concern I have is that short rates may not go up much, if at all. Over the last few years, Bill Gross, who runs PIMCO has called interest rates pretty well at times. He believes we may be in for a long run of low interest rates for years and that after the fed stops tapering, there may be minimal or no increases for a long long time. He thinks inflation will stay very low for literally years to come. Stagflation. I am starting to buy into that myself.
PSEC has bet that interest rates are going up. If they don't, I (who have been a PSEC bull for a long time), think they will have to cut the dividend. I sold my position completely the other day right before earnings because I didn't like the way they stalled around putting the numbers out. My gut check said that they should have been in more of a hurry if they had good news. That may have been a stroke of luck, but I think I'm going to put my money elsewhere till it all becomes a little more clear.
That's a good point about the dividend cut. I clearly did the math wrong. Thank you for that correction. They did, however, continue to increase dividends though the great recession, and perhaps the one major mistake they made was that they waited too long to cut appropriately. They still fared better than most other BDCs. Their dividend coverage is not far off, and they do have assets they can sell profitably to cover. That is what they have been doing and will likely continue to do if necessary. I would be a lot more concerned if their dividend coverage was 80% as opposed to 96. They aren't that far off. I don't think that you or I can figure out their gains and losses or what they mean. Since their gains are hidden until the assets are sold, it is possible that they are way ahead, and it appears they have a loss as you mentioned. To me the greatest risk is uncertainty about the value of their assets, but I'm willing to live with that risk, and it will remain a long term hold for me.
My opinion - PSEC never lost it's form. It has been paying a very slowly increasing dividend since 2004. Yes, they even increased it 2008 - 2009. The dividend charts on this stock look deceiving because they changed from quarterly to monthly distributions in 2010. It looks like there was a cut, but there was not. Further, you can't calculate dividend coverage on PSEC accurately. They have a number of investments that they have had for a long time that are worth a lot more than they show for on the books when they divest them. They use them as a cushion. They simply sell one every so often to get extra money to cover dividends. The accounting value of them doesn't go up till they sell them. They have been doing this for years and it works. They always appear to have lack of dividend coverage, but they never have trouble covering the dividend for that reason.
The market has looked for a reason to knock them down since inception. Every so often, they get knocked down. This has been going on for years. This is a business development company with an incredible run of very slow dividend growth for 9 straight years that goes unrecognized as such. They have a different way of doing things that you will never find in the numbers. I keep hearing about how risky the investments in PSEC are. Well, apparently they know how to handle that, or they know how to hedge it. They are one of the only BDCs to increase dividends right through the great recession. I own PSEC and have for quite awhile. It is a long long long term hold for me.
If you believe this industry is undervalued, it might be worth taking a look at LMLP which is a UBS double leveraged ETN that holds non gas and oil rated MLPs. It is very diversified, but a large percentage of their holdings are in the above industry (well over 50% if I did the math in my head right). The top ten holdings are Icahn, Blackstone, KKR, Oaktree, Apollo Carlyle, Lazard, Och-Ziff, Brookfield,and ARES.
This is a very new ETN that has an index yield of a whopping 15.24% at the price it started at a couple of months ago which was $25. It's now $24.75. If this industry is undervalued and takes off, between the distribution and the capital gain, this ETN has the potential for spectacular returns.
I don't think anyone should write a story recommending a stock unless they believe in it enough to own it.
Thanks for the article. My opinion -
Your article opened with speculation that you stated as fact. - "Getting excited about MORL's dividend is a mistake. It will not last." I think that a lot of people will not take the information you wrote seriously because of the way this is worded. While that is one of two possibilities, the truth is that it may or may not last.
In my opinion, it would have been more useful to delineate under what circumstances the dividend would not last, and under what circumstances it would last, and offering up probabilities of different scenarios. Telling me that UBS almost, but did not sink, during the great recession is a common story that happened to many companies. The bottom line is that it did not sink during the worst of times, and hopefully they learned from the experience. Telling me that it is a foreign company that you consider a hassle to deal with because Schwab won't reinvest the dividends for you tells me nothing about the stock or the company.
Liquidity has not been an issue even when REITs tanked a little awhile back as the underlying assets have real value. Liquidity could be an issue if the whole REIT market totally tanked and headed for the bottom. Of course, it would be for every other stock too.
UBS states that if the underlying assets lose 60% within a month, the stock will liquidate immediately when it hits 60% down at a price they can't define (because they don't know what they can get for those assets in that kind of market). There is a risk here that you don't talk about that I see above. If MORL dropped 60% suddenly, the assets would liquidate at market prices. If that happened during a given month due to some crazy short term news events, you would probably get around 40% of your money and the underlying stocks might recover quickly. That would be a worst case scenario. It seems very unlikely, but is not impossible.
For the few people who didn't already realize this is a leveraged product, it is a good warning for them that leveraged products go up and down faster than their non-leveraged counterparts. The same goes for the fact that MORL is not guaranteed by any third party. For the few people who didn't realize that, this is good information.
Your note pointing out how the price swung more than twice the underlying stocks on the downside shows a lack of understanding of how this works. MORL is like a closed end fund in that people can bid above or below the NAV for the stock. If you put in an order without a limit, you might be buying at a price that is a lot different than what you think the price of the stock is. For the most part the price has stayed very close to NAV. You pointed out an exception.
I also think that anyone who buys these leveraged products needs to understand what they are buying and how they work. While you don't need to be a trader, you do need to know to get out if REITs look like they are going to have a problem that would knock MORL down 60% or more
I completely agree that given your understanding of the product, you should buy something you think is safer. For me, I will keep it as a small percentage of my portfolio with an eye on it. I like it, but I will have to see what happens when interest rates start to rise. Most REITs are positioned for increasing rates now, but it's not about reality. It's about perception. If people think they are going down in value when interest rates get raised by the fed, it could temporarily put a ding in the price. If earnings come in decent due to the portfolio repositioning most REITs have already done, they would rebound. But if the fed would raise interest rates steadily for an extended period, I would not want to be in these stocks. That looks out there on the horizon a ways, so I'm not real concerned for the next year or two.
To Norman, AKA Ralph, and CoBeeMan
I think it is refreshing to hear from an investor perspective. Especially one who has done due diligence. Very good job.
It has been my experience that some "experts" (not all) on here and every other finance site are short sited and do not look at (or ignore in some cases) many things. Often the articles are written from the perspective of what will happen next month. This is good information, but lacks long term perspective in many cases. Many investors are looking longer term. The "experts" often discount the history and long term success of companies (PSEC is a gem in this respect), and while long term results are far from guaranteeing the future, they need to be considered as part of the picture. The "experts" often pick and choose what managers have to say or ignore it completely (PSEC management has explained repeatedly that they have $ left from a sale of a company that does not show up as dividend coverage that will cover the dividend for some time, and still almost every "expert" says they do not have dividend coverage). The experts often get "risk" confused as their are many types. Prioritizing risk is important, but the "experts" need to understand that it comes in many many forms (e.g. PSEC lends to some companies that have high "financial" risk, but PSEC has the extra $ as mentioned previously which lessens the "overall" risk very substantially. Furthermore, they are very diversified, so if loan goes bad, it is a tiny part of the whole).
I think the biggest risk to PSEC is the "experts" opinions which have bounced this stock in every direction for several years actually. It just keeps chugging along and paying out dividends.
I applaud articles by independent investors. Thanks Norman
My opinion - I think both BDCs and REITs are high dividend stocks that are misunderstood by the market and the public in a very fundamental way. The expectation is that their dividends should remain stable or grow. O and MAIN are rare examples that have pulled that off.
They must pay out 90% of their income to maintain their tax status. If they make more, they pay you more. If they make less, they pay you less. So, yes, there is always a risk that the dividend or NAV will fall, but they will always pay you 90% of what they make as long as they are in business.
So, if you are looking for income, and are getting 10% on AGNC this year and 8% next year, you are still getting a lot more than from a CD or money in the bank. The following year, you may get 11%, and your NAV may vary wildly, but you will still get your quarterly or monthly income.
This is a great article in my opinion. There are many types of financial risks. I think specifically explaining the different types of risks involved in these stocks would add even more. For example, while there is a risk of losing your entire investment with any stock, I think a diversified group of REITs and BDCs also carry a risk that your income and NAV will go up. That may be very acceptable to many investors depending on your financial goals. Expecting REITs and BDCs to always maintain the same or higher dividends is totally unrealistic.
That is very helpful locutus. I guess the real question all this begs for me is whether any of this would effect the companies bottom line or whether they just need to account for their "subsidiaries" in separate financial statements. I don't really see how printing up separate financial statement for the "subsidiaries" to fulfill an SEC requirement would have any impact on PSECs bottom line except being a pain in the a..... for their accountants. The market is so negative on BDCs right now, it seems to be assuming something nefarious on the part of PSEC in all this. It's not clear to me at all that this is the case. Hopefully part 2 of this well written and thought out article can shed some light on that, and what, if any, impact this would have on anything except market perception or misperception.
I just check every few days, and if it has dropped 1% or more (it may be 4% at that time for example), I will throw another 2 grand at it unless there is news that confirms a serious long term problem. Whatever I buy it at, that is my new baseline. I go back and check a few days later and if it is 1% or more under that baseline, I throw another couple grand at it as long as there is nothing confirming a long term problem that will significantly effect dividend payments. Obviously, there are limits to how much one can spend, but I like the idea of cost averaging on the way down with stocks that I feel will rebound within several months.
In my opinion, the net impact of this is all very unclear. One could make a case that it's a yawn, or one could make a case that it may have negative impacts. There is not yet enough information to be clear. Time will tell, but in the meantime, uncertainty breeds doubt. I don't see any scenario in which PSEC will be knocked to the floor by this semantics issue, so, personally, I see it as a buying opportunity on further drops which may or may not occur. Personally, I use a one percent rule. If I see a solid stock dropping for reasons that are not likely to have a long term impact, I buy a little bit every time it drops 1% or so. That way I don't get in too deep.