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Are dividends the best buying opportunity on the market today?

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September 21, 2009 – Comments (18)

In all of the manic crash and partial rebound of the last 2 years, ... with banks, insurers, casinos, commodity names, and more making spectacular crashes and almost as spectacular recoveries in share price, dividend stocks definitely haven't been a focus of mine or the best potential returns since the bottoms.

But I wonder if, today, with the S&P reasonably near 1100 (my 2009 target posted many times on these blogs here and there), ... I wonder if today some of the best buys on the market aren't high yielding stocks?  As in going forward, I wonder if the high yielders won't give above average returns.

Several names really stand out for me, including:

High yielding BDCs.  ARCC, AINV, HTGC, FSC, PNNT, PSEC are names I own in real life and I think I have rec'd all those on the CAPs game as well. 

ARCC is one of the biggest BDCs by market cap, has made a few moves recently that should be accretive to earnings including a big management deal with Wells and a share offering that is, per Stifel's analyst, accretive to earnings after investment.  Current yield 13%, current price/book is 0.9 with some room left for mark-ups.  Historically, BDCs have traded at a premium to book value, and book value should move upward from here, so some room to run in the share price should still exist.  After being a high beta name for much of the last 18 months ARCC seems to be settling down.

AINV is maybe the biggest BDC by market cap at $1.5B.  10% current yield.  Currently trading at book.  A share issuance is likely anytime price reaches book I'd guess as investment opportunities for these kind of companies are plentiful and potentially very profitable right now.  AINV, per stifel, isn't in as good of shape as ARCC but they have had a couple of good quarters in a row.

HTGC =  12% yield, p/b=0.97, per Stifels assessment they have the best credit quality in the industry.  FSC has made some moves recently that should allow them to grow earnings in coming years and trades at .9 of book with a 9% yield.  PNNT has a lower valuation than the others mentioned here at 0.76 of book, with a 11% yield.  PSEC has insider buying, a price/book of 0.7, a yield of 16%, and recently aquired PCAP (a competing BDC) in a deal that will ultimately be highly accretive to PSEC in my estimation.

ARCC and PSEC are my favorite names here, followed by HTGC.  I own all the rest and would consider buying them today.  With yields (mostly) into and (sometimes) well into double digits a fairly good return is built in provided that the yields are maintainable.

These cmopanies are BDCs and as a result of this structure, the dividends must be paid of they can be.  90% of income must be paid to shareholders and in exchange the company itself is not taxed.  I believe that we pay income tax, not dividend tax, on the dividends we recieve.  Thats a downside...  that makes the dividends recieved potentially much less valuable than equal conventional dividends.

 

Beyond them I like NLY.  Pretty low beta name trading at 1.2x book and offering a 13% yield right now.  Big cap at $10B.  NLY invests in mortgages.  NLY is a REIT and I believe that the same tax rules I mentioned above for BDCs apply to it as well, correct me if i'm wrong. 

Smaller but similar is AGNC and CMO.  CMO trades at 1.2x book with a 15% yield and AGNC trades at 1.2x book with a 21% yield.  I don't own NLY, AGNC, or CMO in real life but I may soon as I move out of higher beta positions.

 

I like MO.  Tobacco may die a long slow death as my childrens generation hopefully smokes less than we do.  But MO todayis a super low beta, big-cap name with an 8% yield.  It must have been one of the biggest paying stocks on the last 10 years (when the marekt overall has not been up).  Similar situation for RAI.

I like VZ and T.  Completely left behind in the recent really, these two pillars of all things phone related pay 6% and I can't see any reason why the shares (stable, low-beta shares) can't move up as well.  

I don't own any of MO, VZ, or T.   But they will be on my list of things to watch as I move out of higher beta names.

 

And last but definitely not least:  MLPs.  typically companies in the energy spaces, and typically offering good yields.  I only own CEP (no current yield) but i'm interested in learning more about the space.  There arevast numbers of companies in the oil/gas space with good yields, many of them are MLPs, and checklist doesn't know spit about any of them.

 

What am I missing here?  Anybody else have a favorite high yielder?   I think the vast numbers of very high yields (many in double digits with likely sustainable yields) left in the marketplace may - and I am often wrong - represent one of the last great buying opportunities in this stage of what is now an almost 10 year old secular bear.  (unless history proves that a new secular bull began in march, but I don't see that as likely).

 

18 Comments – Post Your Own

#1) On September 21, 2009 at 1:11 AM, checklist34 (99.70) wrote:

or... and correct me if i'm wrong here... are there always double-digit yields to choose from on the marketplace?  where the companies are probably stable and the yields have a better shot of being raised than cut?

maybe this is normal?

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#2) On September 21, 2009 at 1:27 AM, ChrisGraley (29.75) wrote:

The yields will be raised, but only because we will hit another drop down.I would stay in cash a little while longer if i was a dividend investor.

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#3) On September 21, 2009 at 1:37 AM, streetflame (30.15) wrote:

I definitely should have bought HTGC back when I green thumbed it (4/13/09).  I agree it is still a good value now though.

ENP is an energy stock with a double digit yield that is catching my eye right now.

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#4) On September 21, 2009 at 1:56 AM, automaticaev (< 20) wrote:

aod, mpw

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#5) On September 21, 2009 at 3:58 AM, JibJabs (90.30) wrote:

I like MTB. The yield is no longer astronomical and in my opinion it's close to fairly valued, but it's still a great company expanding its marketshare. 

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#6) On September 21, 2009 at 10:06 AM, checklist34 (99.70) wrote:

thansk for the input folks.  MPW looks very interesting, ENP also.

MTB is one bank I haven't even heard of...  i'm so new to this stuff.

 

A nice thing about the high yielders, especially the thoroughly low beta names like NLY and MO and RIA is that...  say we buy them now and the market stays flat or migrates up.  In either of those cases you should see share price appreciation (although in an up market you aren't likely to see as much capital gains as you would in some other stocks)...  but in a down makret they should hold up much better than most other stocks...

which means that while you may lose some $$$ in a big downturn with them, you aren't likely to lose large $$$ and could later transfer out of the low beta high yielders into something that got beat down much more in the downturn for the ride back up.

 

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#7) On September 21, 2009 at 10:17 AM, ETFsRule (99.94) wrote:

Check out DEM. Emerging markets + dividends = $$$

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#8) On September 21, 2009 at 10:24 AM, checklist34 (99.70) wrote:

ok, i will check out DEM...

at a quick glance thats interesting.  6% yield, p/e of 12.  on the downside its trading near its all time highs.  that, of course, doesn't mean it can't go higher.

 

and on a side note, my CAPs rank is up (.02) in a down tape again, and is frequently down in an up tape.  CAPs seems to be pretty bullish right now.

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#9) On September 22, 2009 at 10:54 AM, jinchoice (99.67) wrote:

I used to be a long time NLY holder. I was used to be amused at the fact that NLY, with their guaranteed agency backed securities, yielded double digits while the treasuries and the mortgages themselves yielded half that.

Anyways, I'm here to say I'm not a huge fan of dividends. Let's think of it this way. Say a good company has the choice of paying out $1m in dividends, and that this happens to be 10% of the stock value. After taxes, it's more like 8.5%. But what if the company could be reasonably expected to maintain a 20% ROE? Then we can expect that $1m to turn into $1.2 a year from now - a 20% return. The catch is that the markets might not perfectly reflect the increase in equity, but this shouldn't be a problem if you're a longterm investor intent on sticking with the shares for many years.

 I agree that the stocks you mentioned are probably undervalued, as I think NLY is still undervalued. But I for one, am plowing my money into micro and nanocaps where I'm still seeing huge disparities in market valuation and reality.

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#10) On September 22, 2009 at 12:24 PM, checklist34 (99.70) wrote:

jin, whats your favoriate micro and nanocaps these dyas?

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#11) On September 22, 2009 at 11:11 PM, jinchoice (99.67) wrote:

well, I live in Canada so I've been a bit biased there geographically. I've been liking Aberdeen International (AAB) and Armada Data Corp. (ARD). I like AAB for straight up value play - it has reported NAV of $1.02 but is trading at a third of it. I really like ARD's business, so I buy it despite it not being too cheap when you look at its P/E. You? Been checking some nanos lately?

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#12) On September 22, 2009 at 11:55 PM, checklist34 (99.70) wrote:

i've been very limited on time lately jin, and spent more of it managing my existing holdings (taking out some hedges and trying my best to estimate what the best hedges are, etc.) than finding new stocks.

I really, really like RJET and I've bought a fair bit of natural gas lately.  

I have been thinking that theres probably several (or more) diamond-in-the-rough small or nano cap regional banks out there on the market that are probably priced very cheaply.  If there's one sector of stocks that still has some potentially hyper0cheap valuations, it may be the tiny nano banks.  I've loosely browed around and found many price/books of 0.1X and 0.2X and 0.4X etc.

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#13) On September 23, 2009 at 12:03 AM, topsecret09 (37.14) wrote:

#12) On September 22, 2009 at 11:55 PM, checklist34 (99.88) wrote:I really, really like RJET    Why do you like this stock so much ... ??  TS

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#14) On September 23, 2009 at 12:34 AM, JibJabs (90.30) wrote:

well Checklist- you said you've never heard of MTB- here are some relevant details if you are interested:

-It is a long-time component of Berkshire Hathaway's portfolio. Buffett owns 6 percent of the bank. 

-The bank is based in Western NY (Buffalo- where I live when I'm not in China) and is 150 years old.

-It has a very conservative culture. Correspondingly, it has very high levels of insider ownership. Interests are aligned for long-term performance.

-Management is highly respected (including by Buffett).

-It is expanding to the mid-Atlantic area, especially around Baltimore. Its expansion plans have existed for years- they bought 2 banks throughout the crisis. Furthermore, since its current management took over about two decades ago, it has made dozens of acquisitions that were well-executed and added value.  

-Since management took over, its ROE has been about 18% for nearly two decades.

-Dividend aristocrat (though that will probably end this year). The dividend held firm but was not raised.

-The bank is good at becoming a part of its community. I live in Buffalo where it sponsors immensely popular free concerts at the downtown square every Thursday during the summer (the highlight this year was a jam-packed show by George Clinton and Parliament), jazz concerts, Shakespeare in the park, and various other community events held for free. In Baltimore, it has the naming rights to the stadium of the Ravens. This success stems from management's decision that key personnel must live in the community they serve- a regional culture. 

All in all, not sexy, not flashy- but stable and lucrative. Very long term play.

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#15) On September 23, 2009 at 1:52 AM, checklist34 (99.70) wrote:

topsecret:  search "allstarportfolio" on caps and check their picks and look for RJET, then read my comments on it there.

this thing is at least doubling or i'll give my lamborghini to GMX as long as he agrres to something heinous in exchange.  :)

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#16) On September 23, 2009 at 2:16 AM, checklist34 (99.70) wrote:

jibjab, cool i'll take a closer look when time allows. 

a quick look though shows that the valuation clearly reflects the high quality of the bank.  p/e of 25 forward p/e of 20, price/book well over 1 (although, FWIW, lower than USB or WFC!!!!)

in its great favor its at a 7 year low.  multi-year lows are good in my book, really good.

i'll take a look, but...  i began buying stocks in late december/early january.  And i'm sort of addicting to DEEEEEEEEEEEEEEEEEEEEP value, lol.

its hard to pull the trigger on a stock above book.  Even up 4x from its lows the price/book of my portfolio is less than 1.  

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#17) On September 23, 2009 at 9:15 AM, jinchoice (99.67) wrote:

I'm also interested in why you like RJET so much. I haven't had the chance to look at it more closely, but from what I saw, all its operating cash flow is gobbled up by capital expenditures and regular debt payments. Problem with the airline industry is that a major portion of these capital expenditures are impossible to skip, making it virtually an operating expenditure in my books. Likewise for debt payments - despite the large repayments of debt, long term debt increased, not decreased. Also, I'm nervous about oil prices and what that would do to any airline.

 Airlines just seem like a no-win situation. If the economy is good, fuel price chokes off profits. If the economy is bad, there are less passengers. RJET has done a remarkable job so far, but what if the future holds both high oil prices and a stale economy? The stock is cheap relative to past earnings but I'd want a much bigger discount for me to buy in.

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#18) On September 26, 2009 at 7:36 PM, checklist34 (99.70) wrote:

hey choice, I missed your post here.

I gave a loose description, but also a decent one, in my rec for RJET in the "allstarportfolio" profile.  If you search "allstarportfolio" and read my rec for RJET you can get the jist of it.  

In essence they currently represent a deep valuation, in my view, because of their recent aquisitions of Frontier and Midwest making them a fairly big ($3bil+ in revenue) company with a small market cap.  Deep value in price/sales, price/book and price/potential earnings.

its not a question of past earnings but the potential for eanrings to be vastly higher in the future.

I do realize that airlines are nobodies thing to like, ... and that will probably always keep RJET at a lowish multiple, but from my cost average of about $6.50 i just don't think there's alot of downside (and even from $10) and I think there is potentially alot of upside.

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