3 Stocks To Buy Now For Big Dividend Profits

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Includes: BAC, DB, MS, WFC
by: Investment Underground

By Roger Choudhury

Edward Deicke, an advisor for JHS Capital Advisors, oversees more than $2 billion in assets. His recent recommendations to investors were to consider buying bank's trust preferreds. His thinking is that the new regulations under Dodd-Frank will not any longer count such instruments toward a bank's tier 1 capital.

Consequently, the banks have incentives to call these away over the next few years. At IPO, the yield was high to find buyers, so the banks would be glad to clear them off their balance sheets. For example, US Bank (NYSE:USB) will call away the USB Capital XI 6.60% Trust Preferred Securities and USB Capital XII 6.30% Trust Preferred Securities on May 10, 2012. Due to its lower yield, the bank's only series that has not been called is the USB Capital IX 6.189% Fixed-to-Floating Rate Normal Income Trust Securities.

I would look for shares trading below par value, so that you will have capital appreciation. Along the way, you will collect modest after-tax dividend yields. The following are what I found.

Countrywide Financial - Owned by Bank of America (NYSE:BAC) (Capital V, 7% Capital Securities)

Recent Price

$23.80 per share

Callable?

Yes, at $25 per share, since Nov 2011

Dividends

$0.4375 per quarter

Next dividend payment is on Aug 1

Record date is on Jul 31

Current yield (after-tax yield)

7.3% (4.7%)

S&P Rating

BB+

Ticker symbol (Yahoo! / Google / Fidelity)

CFC-PB / CFC-B / CFC/PB

In January 2008, Bank of America purchased Countrywide Financial for $4.1 billion. The ratio of earnings to fixed charges and preferred dividends is 0.89. This ratio has deteriorated since 2007. Yet, it is important to consider that Bank of America has slashed fixed charges by 57.6% to $22.7 billion by 2011. Additionally, earnings have an upward trajectory as well. The firm had a smaller loss of $230 million in 2011, after being in the red for $1.323 billion in 2010. The profit in the first quarter results was $653 million, after a debit valuation adjustment. So, I believe that the Bank should continue to make dividend payments over the next two years. As such, anything beyond that time frame depends on global macroeconomic conditions.

You have an opportunity to make 4.1% in capital appreciation when this is called away. Over the next couple of weeks, the share price should continue on a downward trend as the general market falls due to the political and fiscal messes across the pond in Europe. I expect this to fall below $23.70. Yet, I recommend that you buy in now because you would be beating inflation by a few percentage points. Collect the dividends, and you will thank me when you make a several hundred basis points in returns over the next few years. Modestly aggressive income investors should consider this only due to the BB+ rating.

Morgan Stanley (NYSE:MS) (Capital Trust IV, 6 1/4% Capital Securities)

Recent Price

$24.28 per share

Callable?

Yes, at $25 per share, since Apr 2008

Dividends

$0.390625 per quarter

Next dividend payment is on Jul 1

Record date is on Jun 15

Current yield (after-tax yield)

6.4% (4.1%)

S&P Rating

BB+

Ticker symbol (Yahoo! / Google / Fidelity)

MWG

The ratio of earnings to fixed charges and preferred stock dividends is 1.8. This is an improvement from 1.0 in 2008. The debt to equity ratio of is 38. This is high, but it is tolerable if considering that, in 2007, this figure was 6.32. Fixed charges have also fallen by 87% to $7.5 billion.

Profitability has nearly returned to 2006 levels. So, I believe that the shares would be called sometime between the next three and four years. On April 19, the company reported first quarter results. The debit valuation adjustment (NYSE:DVA) cost the firm $2 billion, and so technically a loss of $119 million was incurred. Excluding this accounting rule, the firm made $1.4 billion or $0.71 in EPS, comparing to $736 million or $0.50 per share from a year ago. Also, excluding DVA, net revenue was $8.9 billion, which is up from $7.8 billion from the same quarter in 2011. This is a continuation of the positive earnings trajectory. Thus, I can say that the company should continue to make dividend payments at least over the next two years. This is the lowest yielding of Morgan Stanley's trust preferred securities, and should be among the last to be called.

This has been appreciating slowly over the past two weeks despite the turmoil in the equity markets. Generally, preferreds have fallen somewhat as the markets have done so. Therefore, the share price seems a bit high, and I expect this to fall down to earth to below $24 in the next couple of weeks. I would watch this in that time span, and then strike. This way, you can lock in a higher yield. I suggest this for investors looking to close out positions in equities, and seeking to buy preferreds for the long run. This is only for sophisticated investors with a modest risk profile because of the sub-investment grade rating.

Deutsche Bank (NYSE:DB) (Capital Funding Trust VIII, 6.375% Non-cumulative Trust Preferred Security)

Recent Price

$23.52 per share

Callable?

Yes, at $25 per share, since Oct 2011

Dividends

$0.3984375 per quarter

Next dividend payment is on Jul 18

Record date is on Jul 17

Current yield (after-tax yield)

6.7% (4.4%)

S&P Rating

BBB

Ticker symbol (Yahoo! / Google / Fidelity)

DUA

The company's net income surged by 85.6% to $5.7 billion in 2011. Deutsche Bank has $16.2 billion worth of trust preferred securities in its liabilities side of the balance sheet. In 2011, it paid out $1.07 billion in dividend distributions on these instruments. Consider that the net interest income was $22.9 billion and that total interest expense is also $22.9 billion. So, I conclude that the preferred dividends should be covered for the next couple of years.

While the turmoil goes on in Europe, this is a good opportunity to snatch up this German bank's preferred. I understand that fiscal and political problems are rife in Europe, but Germany continues to be the least scathed over the past four years. Within the next two months, I expect this to dip below $23, and you may be tempted to buy the shares then. You are welcome to do so, but this is an investment grade instrument, and you cannot go wrong by buying it, collecting dividends, and cashing in on 5.2% capital appreciation when it is called away. I still would not recommend this for retirees due to the exposure to Europe, but those in their mid- to late-fifties should consider purchasing this.

What I do recommend for retirees is the Wells Fargo (NYSE:WFC) Capital VIII, 5.625% Trust Preferred Securities. It is rated BBB+, and the company's ratio of earnings to fixed charges and preferred dividends is a healthy 4.69. The after-tax yield is 3.5%. The next dividend payment is on August 1. This is also one of the firm's lower yielding preferreds, so you should be able to collect dividends for the next three to four years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.