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.
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%|
|HTS||Hatteras Financial Corp||13.89%|
|MFA||MFA Mortgage Investments||11.55%|
|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%|
|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
|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
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.
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