America’s “Dividend Detective” Shares His Secrets
Finding attractive yields on investments today has become more of a treacherous scavenger hunt than a routine financial exercise. US Treasury notes that mature in 10 years pay a measly 1.9%. Even many bonds issued by corporations pay less than 4%. But if you are willing to take some risks, you can find yields topping 7%.
Bottom Line/Personal asked investment experts about their favorite ways to boost an investment portfolio’s yields to 7% or better. In the first part of this two-part series, “Dividend Detective” Harry Domash suggests stocks ranging from phone companies to real estate investment trusts as sources for an income boost. In part two, in the March 1, 2012 issue, additional investments offering extra income include bonds from such countries as Peru and Turkey and Canadian oil and gas stocks.
How to boost your yields now…
LOCAL PHONE PROVIDERS
Companies that provide landline phone service in less populated areas of the US seem like dinosaurs in a world of dazzling smartphones and superfast Internet. Their revenues are contracting by about 3% a year overall, but they have significant strengths that many investors overlook—fairly stable stock prices…enormous annual cash flows…low overhead and expansion costs because most of the infrastructure to run their services already is in place…minimal competition from cable companies in rural markets that they serve…and best of all, annual dividend yields of 7% to 9%.
Biggest risk: Limited opportunity for stock price gains. These companies won’t offer the kind of growth that will push up their stock prices very much in the coming years, but for many investors, the dividends make up for that.
My favorites now…
CenturyLink (CTL) is the third-largest landline phone company in the US, providing local phone service to 15 million customers and high-speed Internet access to more than 5 million customers across 37 states. Its recent acquisition of Qwest Communications substantially increased its customer base. Recent share price: $36.64 Recent yield: 7.9%.
Windstream Corp. (WIN) provides landlines to 3 million customers and Internet access to 1.3 million in the Southeast and Midwest. It has supplemented its declining core business with acquisitions that enable it to deliver high-speed Internet, digital phone and high-definition TV services. Recent share price: $11.97. Recent yield: 8.3%.
With banks and other traditional lenders still reluctant to extend most forms of credit, many midsized businesses that are too small to go public are desperate for financing. That’s a lucrative environment for Business Development Companies (BDCs), which are able to borrow money cheaply and then lend it to firms at higher rates and/or take an equity stake and provide managerial expertise.
Because BDCs enjoy a tax-advantaged status, they are able to pay annual yields typically in the range of 8% to 12%.
Biggest risk: Another recession. A BDC’s stock price and the stability of its dividends depend on making shrewd investments in smaller companies. The financial crisis of 2008 hurt BDCs severely. Credit markets froze, and BDCs were forced to cut their dividend distributions as many of the companies that they invested in went out of business. I think the possibility of slipping back into a recession is now remote, but it is wise to buy only the most stable and well-financed BDCs.
My favorites now…
Ares Capital (ARCC) is one of the nation’s largest BDCs, with a $5 billion portfolio invested in about 150 companies. Recent share price: $15.88. Recent yield: 9%.
Triangle Capital Corporation (TCAP) is a well-managed BDC that focuses on companies with annual revenues under $100 million in the Southeast and mid-Atlantic regions. Recent share price: $19.32. Recent yield: 9.7%.
There is a special type of corporation that invests in government-issued securities backed by bundles of thousands of residential mortgages. These so-called mortgage real estate investment trusts (REITs) use short-term borrowed money to fund these investments. Interest rates on short-term loans now are so low that these mortgage REITs can make big profits on the difference between the interest they earn on their investments and the interest they pay on the borrowed money. As a result, mortgage REITs—which pay no federal income tax because they pay out most of their income as dividends to shareholders—are generating yields as high as 20% on those dividends.
Biggest risks: The Securities and Exchange Commission has begun a review on whether to tighten regulation of mortgage REITs, which could limit their ability to use large amounts of borrowed money to make investments. This caused mortgage REIT stock prices to plunge in September and could continue to stir up trouble. Another risk is that if higher interest rates push up the cost of borrowed money, mortgage REITs would have to cut their dividend payouts, although it is unlikely that interest rates will jump anytime soon, given that the Federal Reserve is intent on keeping them low to bolster the economy.
My favorites now…
American Capital Agency (AGNC), with $57 billion in assets under management, is one of the highest-yielding mortgage REITs. Recent share price: $28.23. Recent yield: 19.9%.
Annaly Capital Management (NLY), which is the largest mortgage REIT, has more than $110 billion in assets under management and a strong 14-year track record. Recent share price: $16.37. Recent yield: 13.9%.