Are dividends the best buying opportunity on the market today?
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).
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