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Seek Quality Dividends

|Includes:LPHI, MDLZ, NLY, The Procter & Gamble Company (PG)
In their quest for dividend income, many investors naturally seek high yield. Whether this involves stocks or fixed income investments, or some combination of both, it's often an attempt to garner better returns than either low-paying money markets, CDs or Treasurys. There's nothing wrong with that quest, especially if you've looked at the yields of those ordinary income vehicles lately.

Many investors shun the low-interest bearing bonds and the like, and simply invest in dividend paying stocks or ETFs, which can be a good, solid income strategy. A portfolio might be made up of such Dow stalwarts as Procter & Gamble (NYSE: PG), Kraft Foods (NYSE: KFT) and others, time-honored stocks which currently yield just over 3%. As we said, that's not a bad strategy, and not a bad yield in today's environment.

But many investors want more. They desire higher yields to overcome the real rate of inflation, as we wrote about in a recent Global Profits Alert article, and to simply increase income at a better rate. This, too, can be a good strategy. To seek higher payouts, which in today's market run from 5% to 10% or more, is the objective here.

These stocks often come from groups as diverse as REITs, utilities, master limited partnerships, royalty trusts, and so on. Most investors can do well with a little diligence if they're willing to step beyond the lower or medium yielding dividend payers.

Ultra High-Yield

Then there's the group that seeks even more. When you get into the range of investments yielding 10% to 15% in today's market place, you're in the rarefied air of high yield. Let's call these investments ultra-high yielders. If you benchmark high-yield investments via a comparison with Treasurys, the US 10-year note recently yielded just over 3%, so a 10% to 15% yield represents a soaring premium. With bond investing, this category includes high-yield bonds, commonly called junk bonds. There are some stocks with similar payouts, also. These tend to come from categories such as mortgage and other REITs, shipping stocks, and some foreign companies. Many of these in the ultra-high category are found in similar groups, you'll note, as what we're designating as the high yielders.

Screens, Lists And Methods

A simple search for ultra high-yield dividend stocks will often produce a list with impressive-looking yields.

Here's a recent look at the 20 highest yielding dividend paying stocks:

Stock Symbol Company Name Dividend Yield
CYS Cypress Sharpridge Investments, Inc. 18.90%
AGNC American Capital Agency 18.69%
IVR Invesco Mortgage Capital 17.43%
LPHI Life Partners Holdings 17.09%
RSO Resource Capital 15.31%
CIM Chimera Investment 14.21%
HTS Hatteras Financial Corp 13.89%
ANH Anworth Mortgage 13.89%
NLY Annaly Capital 13.78%
CMO Capstead Mortgage 12.55%
CEL Cellcom Israel 11.69%
MFA MFA Mortgage Investments 11.55%
DX Dynex Capital 11.00%
TNK Teekay Tankers 10.88%
BKCC BlackRock Kelso Capital Corporation 10.68%
PSEC Prospect Capital Corporation 10.67%
OZM Och-Ziff Capital Management 10.61%
FSC Fifth Street Finance 10.30%
FRO Frontline Ltd. 10.28%
AINV Apollo Investment Corporation 10.01%


A quick glance shows some impressive yields, well over 15%. These yields seem so appealing as in "too good to be true." So what's the catch, you ask? If you were to build an automatic portfolio simply from this list of the highest yielders, you might be in for a rude surprise. The reason, of course, that many of these companies pay such rich dividends is that there are risks, either perceived, real or both. So an automatic embrace of this group as a portfolio could lead to a very unhappy investment experience. But neither does it mean automatically that all these stocks are not good investments or that they're too risky. Let's examine a couple of them.

Risk And More

One of the highest yielders, Life Partners Holdings, Inc. (Nasdaq: LPHI), which recently was yielding over 17%, is a perfect illustration of risk investors may be undertaking. The company deals in life insurance settlements, buying policies from holders at a discount to their face value then re-selling them to investors. The company was informed in January it was the subject of an SEC investigation as to the method of how the company calculates the expectancies on the polices it purchases. As you might expect, this calculation is critical for investors to determine the value of the policies they are buying from Life Partners. This sort of thing defines risk and is a red light warning most investors.

Not So Clear Cut

We also look at Annaly Capital (NYSE: NLY), which yields 13.8%. The case for or against Annaly as an investment is not so clear. Annaly is a mortgage REIT, which invests primarily in government agency mortgage backed securities, or MBS. Annaly leverages this portfolio, as is commonly done by mortgage REITs, so this enhances the fat spreads and the favorable returns. A spike in short-term interest rates would raise borrowing costs of Annaly and the MBS REITs, which would cut the profits. Just such a thing has happened before: In 2005, when the Fed suddenly ramped up rates, Annaly went from a $250 million profit to a loss.

You might wonder how professional investors assess the risks on Annaly. More than 40% of its shares were held by institutions. Still, caution here seems in order, as Life Partners Holdings also has 39% of its shares held by institutions.

Top Institutional Holders

Holder Shares % Out Value
Allianz Global Investors of America L.P. 26,213,570 3.26 461,358,832
BlackRock Institutional Trust Company, N.A. 13,818,717 1.72 247,631,408
STATE STREET CORPORATION 11,649,740 1.45 208,763,340
Clearbridge Advisors, LLC 11,058,122 1.37 198,161,546
BlackRock Fund Advisors 10,438,112 1.30 187,050,967
VANGUARD GROUP, INC. (THE) 10,058,432 1.25 180,247,101
ACADIAN ASSET MANAGEMENT 9,322,713 1.16 167,063,016
BANK OF AMERICA CORPORATION 9,086,464 1.13 162,829,434
ANCHOR CAPITAL ADVISORS, INC. 8,789,415 1.09 157,506,316
Bank of New York Mellon Corporation 8,134,081 1.01 145,762,731

Courtesy: Yahoo Finance

Individual Cases

One of the things our quick examination of these ultra high-yielding stocks shows is that they are each different, and it's not so simple to say yea or nay on them. It's one reason investors should examine them on an individual basis, and use stock screens, lists, or even the yield only as the barest of a starting point. Much more needs to be researched after that. If investors don't have the time or inclination to do this, we do that for subscribers in our Dividend Genius newsletter, where we are constantly digging to find safe, high-yield investments. You might want to try us out.

Click HERE to learn more about the Dividend Genius - Smart Research on High-Yield Stocks
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