'Safe' Financial Dividend Dogs For February

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Includes: AI, AINV, BKCC, CMFN, EFC, FSIC, KCAP, MCC, OCSL, OXSQ, PNNT, PSEC
by: Fredrik Arnold

Summary

26 of 50 financial stocks show dividends backed by free cash flow yield exceeding dividend yield. AI by yield topped those 26 backed by sufficient cash to cover anticipated dividends.

Top 10 "safe" February financial sector yields from EFC; BKCC; MCC; PSEC; KCAP; FSC; PNNT; CMFN; TICC; AI ranged 11.4% to 16.62%. Cash flow yields ranged 18.56% to 69.99%.

Besides a safety cushion, financial sector dogs also reported payout ratios (lower is better), total annual returns, and dividend growth, as of 2/1/17 to better assess the risk.

Broker targets also revealed ten top yield "safe" financial sector stocks producing 11.29% less gain from $5k invested in the lowest priced five than from all ten.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs." More specifically, these are, in fact, best called, "underdogs".

Financial Industries Backed By Cash

Financial sector industries listing cash flow yield greater than annual dividend yield included: specialty finance, asset management; credit services; banks - regional; capital markets.

Top ten financial sector dogs showing the biggest dividend yields by this screen as of February 1 represented three industries: (1) specialty finance with two firms; (2) asset management with seven firms; (3) credit services had one firm.

26 Financial Firms Backed By Cash Margins Enough to Cover Dividends

Periodic Safety Check

A previous article discussed the attributes of these 50 financial sector stocks from which these twenty-six were sorted. You see below the list that passed the dividend "stress" test. These 26 reported sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the bold face "Safety Margin" column.

Financial guarantees however are subject to over-rulings by boards of directors or company policies canceling or varying the payout of dividends to shareholders. For example, Prospect Capital (NASDAQ:PSEC) on the list below cut its monthly dividend to $.083 from $0.111 as of January 2015. More recently Apollo Investment (NASDAQ:AINV) cut its quarterly dividend paid at $0.20 since February, 2012, to $0.15 as of September. In another case, FS Investment (NYSE:FSIC) paid a variable monthly dividend in 2014 and has since reverted to a regular quarterly schedule since March 2015.

Three additional columns of industrial data listed after the Safety Margin figures reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. This data is provided to reach beyond yield to select reliable payout stocks.

Dog Metrics Revealed No Bargains In "Safe" Dividend Financial Stocks

Ten "Safest" top Financial firms that showed the biggest yields February 1 per YCharts data ranked themselves by yield as follows:

Actionable Conclusions: (1) Analysts Asserted 5 Lowest Priced of Ten "Safe" Dividend High Yield Financial Sector Dogs To Deliver 14.31% VS. (2) 16.13% Net Gains from All Ten by February, 2018

$5000 invested as $1k in each of the five lowest priced stocks in the "safe" ten Financial kennel by yield were determined by analyst 1 year targets to deliver 11.29% less net gain than $5,000 invested as $.5k in all ten. The second lowest priced safe dividend Financial Sector dog, Fifth Street Finance (FSC) showed the best net gain of 30.41% per analyst targets.

Lowest priced five "safe" Financial dogs as of February 1 were: KCAP Financial (NASDAQ:KCAP); Fifth Street Finance; TICC Capital (TICC); BlackRock Capital (NASDAQ:BKCC); Medley Capital (NYSE:MCC), with prices ranging from $3.95 to $7.52.

Higher priced five Safe Dividend Financial dogs as of February 1 were: Pennant Park Investment (NASDAQ:PNNT); Prospect Capital; CM Finance (NASDAQ:CMFN); Arlington Asset Investment (NYSE:AI); Ellington Financial (NYSE:EFC), with prices ranging from $7.89 to $15.79.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The net gain estimates mentioned above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article and this instablog to aid your safe investing.

Note: Stocks listed above were suggested only as possible starting points for your safest Industrial dog dividend stock research process. These were not recommendations.

Author's note: Five of these basic materials sector dividend pups qualify as valuable catches! Find them as five of the now 52 Dogs of the Week found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

Get In On The Fun!

The next Dividend Dogcatcher Shindig webinar is February 15 at 2PM EST. Here's your link to register. If you registered online for the first shindig in November, you have a free pass to the next four. Otherwise, a $9.97 cover charge buys access to all four upcoming 2017 DDC Shindigs. (It's a boga4!)

Root for the Underdog.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Sources: Graphs and charts were compiled by Rydlun & Co., LLC from data derived from ycharts.com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Dogs photo from: theinspirationroom.com.

Disclosure: I am/we are long FSC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.