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Adam Galas
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I am a 27 year old who has been passionate about investing since my dad introduced me to this way of life at the age of 12. As I grew as an adolescent I used my life savings to try to earn my fortune in the thrilling world of high finance. Along the way I've made and lost several small fortunes... More
  • Show Vs Grow Part 2: High Yield Vs Dividend Growth; An Experiment To Determine Which Approach Is Best 4 comments
    Feb 13, 2014 4:02 PM | about stocks: CCG, NNN, EQR, VTR, WPC, SNH, SDLP, ESV, MLPL, TCAP, TCPC, ROIC, DLR, GLNG, BIP, O, MAIN, OHI, TGP, KMP, WPZ, EPB, VNR, ARCC, SFL, CPLP, BBEP, CLMT, NMM, SDRL, MEMP, NADL, PSEC, LRE, OXLC, BDCL

    In part 1 of my series on high yield vs dividend growth I presented a portfolio of 25 dividend growth stocks that represented the best of the best when it comes to dividend growth champions. Each one of them was a dividend achiever, meaning they had grown dividends 10+ consecutive years. In addition they had grown their dividends an average annual rate of 22% over an average period of 23 years and over 17% over the last 5 years. Today I am presenting the flip side of the Yield vs Growth debate, the high yield portfolio.

    I must point out that putting together a high yielding portfolio that is of similar caliber in terms of quality as the Dividend Growth Portfolio,is much harder. Whereas the starting point for that list of companies is a list of dividend achievers, who by definition have spent years proving they can grow and manage investor's wealth responsibly, a list of highest yielding companies is a completely different beast. By its very nature is full of troubled companies and asset classes that I don't consider suitable for those seeking a stable, consistent, long term, high income portfolio. For example, mortgage Reits are structurally likely to face declining dividends and share prices as interest rates rise. Trusts are predestined to expire at some point, meaning that buy and hold isn't an option, as the trust shares necessarily lose value over time. Similarly a screen of highest yielding funds reveals a world of Closed End Funds, (CEFs) that are littered with managed distribution funds whose managers pay out outrageously high dividends by raiding the investing pool and using destructive Returns of Capital, which results in Net Asset Value, (NYSE:NAV) or the portfolio of investment assets, that steadily declines over time, dragging the dividend and share price down with it.

     

    Typically when it comes to very high yield, slow growing dividend portfolios there are certain classes that fit the bill. Master Limited Partnerships, (MLPs) that typically consist of energy related companies, with steady cash flows that are for tax reasons, required to pay out over 90% of their income as distributions. Similarly Business Development Corporations, (BDCs) and Real Estate Investment Trusts, (REITs) operate under similar tax rules and many of these companies are very well managed and their dividends and distributions are safe long term. Finally, certain Closed End Funds, that have spare undistributed net interest income, (UNII) per share, (to support and grow stable dividends) and don't use Return of Capital can make good investments as well and offer the chance to invest in more exotic ways, such as with leveraged offerings, bond portfolios and even Collateralized Loan Obligations, (CLOs).

    Certain sectors support strong dividends, usually steady, long contract industrial stocks such as oil drillers and shipping companies, firms with contracts that can stretch up to 25 years that have very predictable cash flows.

    What follows is a portfolio of what I believe to be a portfolio of high quality, well run, high yielding companies whose management has proven they are committed to sustainable and slowly growing shareholder income and who have the skills to survive ebbs and flows in the economic cycle. Rather than just go for the highest possible sustainable yield, I have used some discretion to select companies to increase diversification and to take advantage of certain macro economic trends.

    As in part one I present this portfolio as a countdown, in order of increasing yield. In a series of follow up articles I will go into greater detail about each company and why I think they make good, long term investments in a high income portfolio.

    As in part one, I use basic technical indicators to determine whether or not to immediately purchase a stock into my portfolio or whether to place them on a wait list.

    35. Retail Opportunity Investments Corp. (NASDAQ:ROIC)

    Industry: Commercial REIT

    Market Cap: $1.04 Billion

    Yield: 4.2%

    5 Year Annualized Dividend Growth Rate: 29.93%

    Technical Indicator Summary: Buy Now

    34. Equity Residential (NYSE:EQR)

    Industry: Commercial REIT

    Market Cap: $21.08 Billion

    Yield: 4.4%

    5 Year Annualized Dividend Growth Rate: 6.1%

    Technical Indicator Summary: Buy Now

    33. Golar LNG Ltd. (NASDAQ:GLNG)

    Industry: Specialized Shipping

    Market Cap: $2.81 Billion

    Yield: 4.5%

    5 Year Annualized Dividend Growth Rate: 12.47%

    Technical Indicator Summary: Buy Now

    32. National Retail Properties, Inc. (NYSE:NNN)

    Industry: REIT

    Market Cap: $4.34 Billion

    Yield: 4.7%

    5 Year Annualized Dividend Growth Rate: 1.55%

    Technical Indicator Summary: buy now

    31. Ventas, Inc. (NYSE:VTR)

    Industry: Senior Living REIT

    Market Cap: $18.37 Billion

    Yield: 4.8%

    5 Year Annualized Dividend Growth Rate: 7.2%

    Technical Indicator Summary: wait list

    31. Brookfield Infrastructure Partners L.P. (NYSE:BIP)

    Industry: Infrastructure/Utilities

    Market Cap: $5.68 Billion

    Yield: 5.2%

    5 Year Annualized Dividend Growth Rate: 10.17%

    Technical Indicator Summary: Wait List

    30. Realty Income Corp. (NYSE:O)

    Industry: Retail Reit

    Market Cap: $8.08 Billion

    Yield: 5.3%

    5 Year Annualized Dividend Growth Rate: 5.09%

    Technical Indicator Summary: Wait List

    29. Seadrill Partners LLC (NYSE:SDLP)

    Industry: Offshore oil driller

    Market Cap: $1.31 Billion

    Yield: 5.6%

    1 Year Annualized Dividend Growth Rate: 52.9%

    Technical Indicator Summary: buy now

    28. W. P. Carey Inc. (NYSE:WPC)

    Industry: REIT

    Market Cap: $4.3 Billion

    Yield: 5.6%

    1 Year Annualized Dividend Growth Rate: 14.7%

    Technical Indicator Summary: buy now

    27. Ensco plc (NYSE:ESV)

    Industry: offshore oil driller

    Market Cap: $12.26 Billion

    Yield: 5.9%

    5 Year Annualized Dividend Growth Rate: 97.4%

    Technical Indicator Summary: wait list

    26. Main Street Capital Corporation (NYSE:MAIN)

    Industry: BDC/finance

    Market Cap: $1.37 Billion

    Yield: 5.9%

    5 Year Annualized Dividend Growth Rate: 5.71%

    Technical Indicator Summary: Buy Now

    25. Digital Realty Trust Inc. (NYSE:DLR)

    Industry: Tech REIT

    Market Cap: $6.83 Billion

    Yield: 6.4%

    5 Year Annualized Dividend Growth Rate: 18.77%

    Technical Indicator Summary: Wait list

    24. Omega Healthcare Investors Inc. (NYSE:OHI)

    Industry: Healthcare Reit

    Market Cap: $3.85 Billion

    Yield: 6.4%

    5 Year Annualized Dividend Growth Rate: 10.31%

    Technical Indicator Summary: Buy Now

    23. Teekay LNG Partners LP. (NYSE:TGP)

    Industry: Specialty Shipping

    Market Cap: $2.91 Billion

    Yield: 6.7%

    5 Year Annualized Dividend Growth Rate: 3.96%

    Technical Indicator Summary: Wait List

    22. Kinder Morgan Energy Partners, L.P. (NYSE:KMP)

    Industry: Pipeline MLP

    Market Cap: $35.15 Billion

    Yield: 6.8%

    5 Year Annualized Dividend Growth Rate: 5.31%

    Technical Indicator Summary: Buy Now

    21. Campus Crest Communities, Inc. (NYSE:CCG)

    Industry: REIT

    Market Cap: $.534 Billion

    Yield: 7.2%

    5 Year Annualized Dividend Growth Rate: 1.1%

    Technical Indicator Summary: Wait List

    20. Williams Partners L.P. (NYSE:WPZ)

    Industry: Pipeline MLP

    Market Cap: $21.99 Billion

    Yield: 7.2%

    5 Year Annualized Dividend Growth Rate: 7.06%

    Technical Indicator Summary: Wait List

    19. Senior Housing Properties Trust (NYSE:SNH)

    Industry: Assisted Living REIT

    Market Cap: $4.02 Billion

    Yield: 7.4%

    5 Year Annualized Dividend Growth Rate: 2.19%

    Technical Indicator Summary: buy now

    18.Triangle Capital Corporation (NYSE:TCAP)

    Industry: BDC

    Market Cap: $0.802 Billion

    Yield: 7.5%

    5 Year Annualized Dividend Growth Rate: 6.19%

    Technical Indicator Summary: Wait List

    17. TCP Capital Corp. (NASDAQ:TCPC)

    Industry: BDC

    Market Cap: $0.56 Billion

    Yield: 7.97%

    5 Year Annualized Dividend Growth Rate: 4.68%

    Technical Indicator Summary: buy now

    16. El Paso Pipeline Partners, L.P. (NYSE:EPB)

    Industry: Oil/Gas Pipeline MLP

    Market Cap: $6.73 Billion

    Yield: 8.2%

    5 Year Annualized Dividend Growth Rate: 15.23%

    Technical Indicator Summary: Buy Now

    15. Vanguard Natural Resources, LLC (NASDAQ:VNR)

    Industry: Oil/Gas Exploration MLP

    Market Cap: $2.32 Billion

    Yield: 8.3%

    5 Year Annualized Dividend Growth Rate: 4.53%

    Technical Indicator Summary: Wait List

    14. Ares Capital Corporation (NASDAQ:ARCC)

    Industry: BDC

    Market Cap: $5.2 Billion

    Yield: 8.34%

    5 Year Annualized Dividend Growth Rate: 0.47%

    Technical Indicator Summary: Wait List

    13. Ship Finance International Limited (NYSE:SFL)

    Industry: Shipping

    Market Cap: $1.58 Billion

    Yield: 9.3%

    5 Year Annualized Dividend Growth Rate: -8.45%

    Technical Indicator Summary: buy now

    12. Capital Product Partners L.P. (NASDAQ:CPLP)

    Industry: Shipping

    Market Cap: $.895 Billion

    Yield: 9.3%

    5 Year Annualized Dividend Growth Rate: -10.1%

    Technical Indicator Summary: buy now

    11. Breitburn Energy Partners L.P. (NASDAQ:BBEP)

    Industry: Oil/Gas Producer MLP

    Market Cap: $2.04 Billion

    Yield: 9.5%

    5 Year Annualized Dividend Growth Rate: -1.11%

    Technical Indicator Summary: Wait List

    10. UBS E-TRACS 2x Long Alerian MLP Infr ETN (NYSEARCA:MLPL)

    Industry: Leveraged Oil/Gas Producer MLP

    Market Cap: $.221 Billion

    Yield: 9.52%

    5 Year Annualized Dividend Growth Rate: 16.53%

    Technical Indicator Summary: Wait List

    9. Calumet Specialty Products Partners LP (NASDAQ:CLMT)

    Industry: Oil/Specialty Refiner MLP

    Market Cap: $1.92 Billion

    Yield: 9.8%

    5 Year Annualized Dividend Growth Rate: 8.77%

    Technical Indicator Summary: Wait List

    8. Navios Maritime Partners L.P. (NYSE:NMM)

    Industry: Oil/Gas Producer MLP

    Market Cap: $1.27 Billion

    Yield: 9.9%

    5 Year Annualized Dividend Growth Rate: 2.06%

    Technical Indicator Summary: Wait List

    7. SeaDrill Limited (NYSE:SDRL)

    Industry: Offshore Oil Driller

    Market Cap: $16.85 Billion

    Yield: 10.3%

    5 Year Annualized Dividend Growth Rate: 14.03%

    Technical Indicator Summary: Buy Now

    6. Memorial Production Partners LP (NASDAQ:MEMP)

    Industry: Oil/Gas Production MLP

    Market Cap: $1.35 Billion

    Yield: 10.4%

    5 Year Annualized Dividend Growth Rate: 8.09%

    Technical Indicator Summary: Wait List

    5. North Atlantic Drilling Limited (NYSE:NADL)

    Industry: Specialty Offshore Oil Driller

    Market Cap: $2.08 Billion

    Yield: 10.44%

    5 Year Annualized Dividend Growth Rate: 11.82%

    Technical Indicator Summary: buy now

    4. Prospect Capital Corporation (NASDAQ:PSEC)

    Industry: BDC

    Market Cap: $3.5 Billion

    Yield: 11.72%

    5 Year Annualized Dividend Growth Rate: 3.23%

    Technical Indicator Summary: Wait List

    3. LRR Energy, L.P. (NYSE:LRE)

    Industry: Oil/Gas Producer MLP

    Market Cap: $0.4419 Billion

    Yield: 11.8%

    5 Year Annualized Dividend Growth Rate: 1.79%

    Technical Indicator Summary: Buy Now

    2. Oxford Lane Capital Corp. (NASDAQ:OXLC)

    Industry: CLO CEF

    Market Cap: $0.1371 Billion

    Yield: 13.45%

    5 Year Annualized Dividend Growth Rate: 33.89%

    Technical Indicator Summary: Wait List

    1. UBS E-TRACS 2x Wells Fargo Bus Dv Cm ETN (NYSEARCA:BDCL)

    Industry: Leveraged BDC ETF

    Market Cap: $0.1589 Billion

    Yield: 13.72%

    5 Year Annualized Dividend Growth Rate: 13.5%

    Technical Indicator Summary: Buy Now

    The overall portfolio has a yield of 8.36% and an average 5 year annualized dividend growth rate of 24.38%. Note that the high growth rate of ESV and SDLP, which are not sustainable growth rates, is what is skewed high.

    Compared to the dividend growth portfolio presented in part 1, the yield is 5.5X higher (8.8% vs 1.6%) but the growth rate is 1.39x faster, (17.7% vs 24.57%).

    Because I am trying to wait for good prices for each holding, it may take several weeks or even months until each portfolio is complete. In the meantime I will be monitoring all 3 portfolios, (dividend growth, High yield and combination of both) through Morningstar and offering a monthly update as to the performance of each. In addition, I will be writing premium articles covering each of the 50 companies mentioned in parts 1 and 2.

     

    Disclosure: I am long PSEC, SDRL.

    Additional disclosure: No other positions in any mentioned company

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Comments (4)
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  • John Wilson
    , contributor
    Comments (1231) | Send Message
     
    Adam
    A good looking list. I just bought (SDRL), and bought (O) two months ago near bottom, and have owned (WPZ) and may buy it back. I will take a closes look at the others as I prefer the high yielding stocks, especially like SDRL that have gotten cheap and may now recover. I don't like some of those on your growth list, just because I don't like retail - well, Walmart is a good div/grth stock, but I don't like food or restaurant companies that produce or serve stuff I wouldn't want to eat, like Monsanto or McDonalds. Your dividend list looks good though. Especially (BDCL) I will be watching it for a future buy opportunity.

     

    Got to your blog through your link on IT's for all Commodities blog
    15 Feb, 08:58 PM Reply Like
  • River18
    , contributor
    Comments (1468) | Send Message
     
    Very nice looking list.
    Great job putting this together.
    17 Feb, 11:01 PM Reply Like
  • Bob Johnson
    , contributor
    Comments (3039) | Send Message
     
    Adam, An interesting list.

     

    I wonder about risks, that is, betas, debt coverage, current ratios, payout ratios, moats, leadership issues, etc.. I wonder if the amount of risk can be reasonable quantified, so that one could set realistic expectations over time?

     

    Certainly this is not your PG, JNJ, KO and XOM class of company, but it is indeed, a collection of high yield stocks.

     

    Best regards,
    Bob J
    21 Feb, 07:47 PM Reply Like
  • Adam Galas
    , contributor
    Comments (320) | Send Message
     
    Author’s reply » Its a multi-year project. Right now I am in the process of building out the portfolio and researching each company in depth. I started at 25 in each but found more that I was intrigued by. As I research and write on each company, I will indeed focus on those things you mentioned to make sure I don't fall into the high yield trap.

     

    Take QRE for example. It was my #3, until I learned about a managent bonus agreement that was about as unfriendly to shareholders as you can get. After analyzing management recent decisions I removed the company and will do so if I find that companies in the portfolio are ill-managed.

     

    Eventually I may have up to 50 in each portfolio, giving me a broad sea of companies to cover and monitor. It will be a challenge but also give a pretty good sample size in terms of answering my original question.
    21 Feb, 08:10 PM Reply Like
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