Ask most income-seeking investors what they like best about dividend stocks, and they'll tell you the obvious answer: their current yield. But if you want to be a smarter long-term dividend investor, you have to go beyond current yields to learn the secret of dividend longevity — in order to make sure those payouts will keep coming year after year, decade after decade. That is why it is essential to evaluate each company's dividend history, payout ratio and business stability.
It's easy to let those high yields tempt you into being short-sighted with your dividend investing. But for most investors, it's just as important to keep dividends coming far into the future as it is to reap rewards right now.
I created a portfolio that yields 11.2% by investing equal weight in each of the top-yielding stocks from five superb value Gurus.
1) Andreas Halvorsen Top Dividend Pick: Penn West Petroleum Ltd. (PWE, Financial) 19.2% Yield
PWE has had a rough year. The stock is down 35% compared to the overall stock market and energy sector that are down fractionally for the year to date. PWE is a great story, but one that has a history of disappointment. PWE is well positioned to capitalize on the current land rush associated with horizontal drilling, as it owns property that can be drilled today. PWE’s strategy is to focus on high return exploration of high quality oil assets, and away from its oil sands and natural gas assets. Additionally, PWE has changed from an income trust model to a more standard exploration and production company.
These moves have made the company more sensitive to the price of oil, which is part of the reason for the stock’s performance this year. PWE has the quality assets, but investors don’t seemed convinced that this management can deliver. Going for it is its high dividend yield of almost 19% that has helped to offset price declines. I am bullish on energy generally, and believe that quality energy resource companies will benefit from a world of tight energy supply. PWE is at a crossroads, and could be timely for investors that give management the benefit of the doubt.
I am quite concerned about recent performance, but will be watching PWE closely for signs of successful execution that could make this company a long-term winner.
2) David Swensen Top Dividend Pick: iShares Trust MSCI EAFE Index Fund (EFA, Financial) 4.7% Yield
David invested with an emerging markets bullish long-term view in EFA. Basically this ETF seeks to replicate, net of expenses, the MSCI EAFE index. The fund generally invests at least 90% of its assets in the securities comprising the index. The index has been developed by MSCI as an equity benchmark for its international stock performance. It is a capitalization-weighted index that aims to capture 85% of the total market capitalization. The fund is non-diversified.
David thinks that future growth will come from companies exposed to an emerging middle class that benefits from growing emerging countries with less debt loads than developed ones.
3) Steve Mandel Top Dividend Pick: CocaCola Co. (KO, Financial) 3 % Yield
Coca-Cola is close to the $70 per share mark. Generally, shares which are near or at all-time highs have fundamentals that support the new price levels. KO is trading at a P/E of 12.70, a very fair price considering the safety of the earnings and the quality of this company brand, moat and overall fundamentals. On top of that it yields a solid 3% dividend which has been increased for the last 49 consecutive years.Coca-Cola has had accelerating revenue growth in 2010 and the first half of 2011, indicating that markets have been increasingly thirsty lately. Having been in the industry for 125 years, KO also has a huge edge over smaller competitors through brand recognition and extremely refined marketing campaigns that have been able to penetrate the beverage industry in everything from social networking sites to billboards. It even works to appease environmentalists with slimmer bottle design and more recyclable goods. Talk about good PR. Earnings have been a little more confusing, as KO does have some liabilities which affect its performance. Interest on debt has increased significantly in the last few years, and depreciation has also been a factor. Nonetheless these costs will not hinder the underlying growth behind Coca-Cola's consumer market. It's huge spike in earnings in Q4 of 2010 helped to push the stock into the $60+ dollar range, where it has been trading for all of 2011. Another strong earnings performance in the upcoming Q3 or Q4 report could finally push KO shares above $70 where it should stay unless the market heads south. This is truly a safe Dividend pick but that offer a good but not great current yield.
3) John Griffin Top Dividend Pick: American Capital Agency Corp. (AGNC, Financial) 20.1% Yield
American Capital is an agency mortgage REIT, which means its portfolio is based in mortgage-backed securities comprised of federally insured mortgages, so there is no credit risk. However, as with any mortgage-based investment, the risk of prepayments and adverse interest rate movements are always present.
Agency REITs have portfolios made of mortgages insured by federal agencies that originate or back mortgages and then issue mortgage-backed securities (MBS) made up of multiple mortgages to investors. An agency MBS, as opposed to an MBS issued by a non-agency lender, comes with a federal agency guarantee and an implied U.S. government guarantee. Given the challenges ahead for the government-backed mortgage market, it would be important to have solid management and expertise in place. The management of American Capital has demonstrated its ability to manage risk and maximize returns during periods of volatility as their record of steady dividend payments would indicate.
At the end of the day, the company is yielding a 20% dividend yield. The book value per share increased, albeit slightly compared to prior quarters. Management has taken a very aggressive approach to minimize the constant prepayment rate, which directly impacts the bottom line.
Despite industry challenges, I am sure that mREITs high yields are still more than enough to compensate for a possible rough ride. Still, mREIT investors may want to hunker down with the stronger performers in the sector, such as American Capital Agency Corp which has been able to outperform most of its peers through rough waters.
John Griffin picked AGNC for its yield, management and conservative balance sheet over peers.
4)Lee Ainslie Top Dividend Pick: Medley Capital Corp. (MCC, Financial) 8.9% Yield
Medley Capital focuses on direct lending, generally senior secured, in amounts from $10 million-$50 million to North American borrowers. From both yield and equity investments in private companies, MCC is targeting a “total return to investors on average of 15% over time.”
Medley is externally managed by MCC Advisors, which is affiliated with Medley Capital LLC, with offices in New York and San Francisco. The principals have worked together for seven years and have managed private loan funds (not BDCs) that have lent out $1.2 billion in two limited partnerships.
MCC began with a small portfolio (just six loans) purchased from its sister companies, with a yield of 14.6% (a portion in Pay In Kind interest). In addition, the new company has applied for a Small Business Investment Company (SBIC) license, through a new subsidiary. (If successful, MCC will be able to borrow $2 of debt capacity from the SBIC for every $1 of equity invested in the special subsidiary. Theoretically a borrower can access up to $150 million in SBIC financing from Uncle Sam).
My guess is that in the current difficult economic environment, MCC will struggle to find “stable or growing businesses” which will pay the target rates of return and with such relatively low levels of debt. MCC may have to fish for new business in “special situations, including bankruptcies and restructurings.” Sectors which the company is targeting include “oil and gas services, exploration and production” and “real estate hard money transactions, first mortgage lending and distressed opportunities” among others. Clearly MCC’s management is comfortable in these high-risk areas and they have “direct experience in bankruptcy situations on both the creditor and debtor sides.”
It's easy to let those high yields tempt you into being short-sighted with your dividend investing. But for most investors, it's just as important to keep dividends coming far into the future as it is to reap rewards right now.
I created a portfolio that yields 11.2% by investing equal weight in each of the top-yielding stocks from five superb value Gurus.
1) Andreas Halvorsen Top Dividend Pick: Penn West Petroleum Ltd. (PWE, Financial) 19.2% Yield
PWE has had a rough year. The stock is down 35% compared to the overall stock market and energy sector that are down fractionally for the year to date. PWE is a great story, but one that has a history of disappointment. PWE is well positioned to capitalize on the current land rush associated with horizontal drilling, as it owns property that can be drilled today. PWE’s strategy is to focus on high return exploration of high quality oil assets, and away from its oil sands and natural gas assets. Additionally, PWE has changed from an income trust model to a more standard exploration and production company.
These moves have made the company more sensitive to the price of oil, which is part of the reason for the stock’s performance this year. PWE has the quality assets, but investors don’t seemed convinced that this management can deliver. Going for it is its high dividend yield of almost 19% that has helped to offset price declines. I am bullish on energy generally, and believe that quality energy resource companies will benefit from a world of tight energy supply. PWE is at a crossroads, and could be timely for investors that give management the benefit of the doubt.
I am quite concerned about recent performance, but will be watching PWE closely for signs of successful execution that could make this company a long-term winner.
2) David Swensen Top Dividend Pick: iShares Trust MSCI EAFE Index Fund (EFA, Financial) 4.7% Yield
David invested with an emerging markets bullish long-term view in EFA. Basically this ETF seeks to replicate, net of expenses, the MSCI EAFE index. The fund generally invests at least 90% of its assets in the securities comprising the index. The index has been developed by MSCI as an equity benchmark for its international stock performance. It is a capitalization-weighted index that aims to capture 85% of the total market capitalization. The fund is non-diversified.
David thinks that future growth will come from companies exposed to an emerging middle class that benefits from growing emerging countries with less debt loads than developed ones.
3) Steve Mandel Top Dividend Pick: CocaCola Co. (KO, Financial) 3 % Yield
Coca-Cola is close to the $70 per share mark. Generally, shares which are near or at all-time highs have fundamentals that support the new price levels. KO is trading at a P/E of 12.70, a very fair price considering the safety of the earnings and the quality of this company brand, moat and overall fundamentals. On top of that it yields a solid 3% dividend which has been increased for the last 49 consecutive years.Coca-Cola has had accelerating revenue growth in 2010 and the first half of 2011, indicating that markets have been increasingly thirsty lately. Having been in the industry for 125 years, KO also has a huge edge over smaller competitors through brand recognition and extremely refined marketing campaigns that have been able to penetrate the beverage industry in everything from social networking sites to billboards. It even works to appease environmentalists with slimmer bottle design and more recyclable goods. Talk about good PR. Earnings have been a little more confusing, as KO does have some liabilities which affect its performance. Interest on debt has increased significantly in the last few years, and depreciation has also been a factor. Nonetheless these costs will not hinder the underlying growth behind Coca-Cola's consumer market. It's huge spike in earnings in Q4 of 2010 helped to push the stock into the $60+ dollar range, where it has been trading for all of 2011. Another strong earnings performance in the upcoming Q3 or Q4 report could finally push KO shares above $70 where it should stay unless the market heads south. This is truly a safe Dividend pick but that offer a good but not great current yield.
3) John Griffin Top Dividend Pick: American Capital Agency Corp. (AGNC, Financial) 20.1% Yield
American Capital is an agency mortgage REIT, which means its portfolio is based in mortgage-backed securities comprised of federally insured mortgages, so there is no credit risk. However, as with any mortgage-based investment, the risk of prepayments and adverse interest rate movements are always present.
Agency REITs have portfolios made of mortgages insured by federal agencies that originate or back mortgages and then issue mortgage-backed securities (MBS) made up of multiple mortgages to investors. An agency MBS, as opposed to an MBS issued by a non-agency lender, comes with a federal agency guarantee and an implied U.S. government guarantee. Given the challenges ahead for the government-backed mortgage market, it would be important to have solid management and expertise in place. The management of American Capital has demonstrated its ability to manage risk and maximize returns during periods of volatility as their record of steady dividend payments would indicate.
At the end of the day, the company is yielding a 20% dividend yield. The book value per share increased, albeit slightly compared to prior quarters. Management has taken a very aggressive approach to minimize the constant prepayment rate, which directly impacts the bottom line.
Despite industry challenges, I am sure that mREITs high yields are still more than enough to compensate for a possible rough ride. Still, mREIT investors may want to hunker down with the stronger performers in the sector, such as American Capital Agency Corp which has been able to outperform most of its peers through rough waters.
John Griffin picked AGNC for its yield, management and conservative balance sheet over peers.
4)Lee Ainslie Top Dividend Pick: Medley Capital Corp. (MCC, Financial) 8.9% Yield
Medley Capital focuses on direct lending, generally senior secured, in amounts from $10 million-$50 million to North American borrowers. From both yield and equity investments in private companies, MCC is targeting a “total return to investors on average of 15% over time.”
Medley is externally managed by MCC Advisors, which is affiliated with Medley Capital LLC, with offices in New York and San Francisco. The principals have worked together for seven years and have managed private loan funds (not BDCs) that have lent out $1.2 billion in two limited partnerships.
MCC began with a small portfolio (just six loans) purchased from its sister companies, with a yield of 14.6% (a portion in Pay In Kind interest). In addition, the new company has applied for a Small Business Investment Company (SBIC) license, through a new subsidiary. (If successful, MCC will be able to borrow $2 of debt capacity from the SBIC for every $1 of equity invested in the special subsidiary. Theoretically a borrower can access up to $150 million in SBIC financing from Uncle Sam).
My guess is that in the current difficult economic environment, MCC will struggle to find “stable or growing businesses” which will pay the target rates of return and with such relatively low levels of debt. MCC may have to fish for new business in “special situations, including bankruptcies and restructurings.” Sectors which the company is targeting include “oil and gas services, exploration and production” and “real estate hard money transactions, first mortgage lending and distressed opportunities” among others. Clearly MCC’s management is comfortable in these high-risk areas and they have “direct experience in bankruptcy situations on both the creditor and debtor sides.”
