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10 Stocks Yielding 10%-30%

Safe, consistently high-yielding stocks that underlie profitable, growing companies are always the goal in creating a portfolio that consistently generates wealth over time. This is especially true among do-it-yourself investors who are simply looking for a low-maintenance portfolio that will generate quality returns without racking up excessive commission fees.

Below I present ten stocks that provide shareholder yields of at least 10% and have consistently grown their profits and dividends over time. Most of these return around a 10% dividend yield on their own.

Note that a stock having a high dividend yield in its own right is not especially important. If a stock has a 10% dividend, that means it must produce the free cash flow equivalent paid out to shareholders of at least 10% of the company’s market capitalization per year. Naturally, this would be a relatively high cash generative business and demand for such shares would be high. If the company fails to perform to this level financially, this would expect to result in a capital depreciation.

For example, consider two companies.

If a company A does not issue a dividend but achieves (or expects to achieve) earnings growth of 6% per year, its stock would appreciate by about 6%. On the other hand, if company B maintains a dividend of 10% but grows (or expects to grow) at 6% per year, its stock would depreciate by 4% in equilibrium to reflect this. The yield would be the same either way.

Consequently, it truly doesn’t matter if a stock possesses a dividend or not in terms of absolute returns. Usually dividend stocks are a bit less volatile than non-dividend paying stocks given the former are cash flow positive and expect to generate profits regularly.

Hence their cash flows are more predictable and there is less of a dispersion in opinion regarding valuation matters.

But without further delay, here are the ten investment opportunities available at the moment. None of these should be taken as explicit recommendations, but rather as “general information.”

MFA Financial (MFA) – 9%-10% dividend yield

In any post regarding high-yielding stocks, there will very likely be a REIT or two (or many) listed. By virtue of their legal status, REITs are statutorily required to pay out 90% of their earnings to shareholders.

As a whole, REITs currently yield around 4%-5%, though many come in the upper-singles to lower-double digits. Over time, you can expect many of these to be pure-yield entities, and are generally sought after by long-term “buy-and-hold” investors. They also offer the advantage of trending in a largely uncorrelated manner to the overall market.

Nonetheless, REITs can also make strong candidates for those making bets on certain verticals of the real estate industry. These vehicles are often specialized; however, some may span multiple verticals (multi-family, single-family, industrial and retail properties, storage units, hospitals, hotels, etc.).

MFA Financial owns and manages a portfolio of mortgage-backed securities (MBS). These securities are largely backed by adjustable-rate mortgages and single-family residences. With MFA, there is interest-rate risk and the company also has a vested interest in how GSE reform involving Fannie Mae (FNMA) and Freddie Mac (FMCC) will play out. The Trump administration will likely attempt to tend to this before 2020.

Over its time as a public company, MFA has trended between $6 and $10 per share. It is currently just above that general mid-point at $8.40.

Annaly Capital Management (NLY) – ~10% dividend yield

Annaly tends to yield around 10% is well-known as one of the better managed REITs having significantly outperformed the market over time.

Similar to MFA, NLY is a mortgage REIT that largely invests in low-risk agency-backed MBS funded by repo agreements. The company manages interest rate risk with swaps and other derivatives.

NLY works by borrowing short and lending long, much like a bank, wherein a steeper yield curve and steeper mortgage spreads are beneficial for returns, which are augmented by leverage. In other words, like a lot of mREITs, returns are highly dependent on where we happen to be in the economic cycle.

The stock is trading slightly above book value.

InfraCap MLP ETF (AMZA) – 20%+ dividend yield

AMZA is fairly heavily tied to the price of oil as a managed master limited partnership (MLP) fund. The two share a correlation of +0.41.

Oil’s trek into the $40s per barrel has been especially hard on many upstream oil companies, many of whom have difficulty making a profit at these price levels. Yet with the development of fracking and other technological developments that have made extraction less costly, “lower for longer” oil prices could become common.

Given these types of funds are leveraged and dependent on the underlying commodity cycle, they must grow earnings substantially year-to-year to maintain such dividends and avoid the prospect of capital depreciation if it fails to do so.

However, for those bullish on oil, going with MLPs and other energy stocks could be worth consideration. Those who are more neutral on oil or at least want some exposure to it might prefer to consider integrated oil firms (i.e., companies with both upstream and downstream operations and perhaps diversification into non-oil revenues).

For more on where various commodities are in their cycles and where they project to be over the next two years, I did a write-up on this matter here.

New Residential Investment Corp (NRZ) – 11%-12% dividend yield

NRZ is an mREIT, which, as with examples abovementioned, is a standard “borrow short/lend long” business model that benefits from a steeper yield curve. The prospect of higher rates was a beneficial development for the mREIT model upon predictions of tax cuts and deregulation in the financial sector, but these are likely to be delayed and may not come to the levels of reduction expected.

The Federal Reserve is also unlikely to be able to raise rates as significantly as it might believe without excessively flattening or inverting the yield curve, as described more fully in this post.

As such, mREITs are generally business models that are best to invest in coming out of recessions, even more so than other types.

CVR Energy (CVI) – ~10% dividend yield

CVR is a Texas-based petroleum refining company, with additional operations in the production of nitrogen-based fertilizer. Famed investor Carl Icahn is currently chairman of the board. Being refining, distribution, and marketing are all downstream operations, along with its integration of a fertilizer segment, CVR’s business operations are less dependent on the price of oil as companies with more an exploration and production focus.

CVR has a +0.35 correlation with the price of oil. An upstream firm generally hovers around +0.40 to +0.60.

CVR is subject to the regulatory environment over gasoline, as more “environmentally-friendly” administrations will require refiners to purchase Renewable Identification Number credits (RINs) whenever they produce gasoline. RINs stipulate that a certain amount of gasoline in the US is made up of ethanol. This is negative for refiners’ financials.

However, CVR’s fertilizer business benefits from government ethanol mandates as fertilizer is required to grow corn. So even though the refining business is larger than the fertilizer business and CVR would hence prefer a repeal of the RIN mandates, the two are relatively hedged.

So while CVI (i.e., the stock) returns about a 10% dividend, and has positive earnings and cash flow, its performance is still quite dependent on oil prices and any further pain in oil can adversely affect both its price and dividend.

Prospect Capital Corporation (PSEC) – ~12% dividend yield

PSEC is the most popular public business development company (BDC). This business model works by providing financing to smaller- and mid-sized businesses. The higher dividends associated with BDCs reflects the risk associated with the model of providing capital to early-stage firms. Many startup firms fail, defaulting on loans and not providing any returns to other stakeholders.

The key for PSEC and other BDCs is that net investment income needs to be higher than the dividends provided. When this is not the case, the dividend is subject to being cut and/or depreciation in the share price. NII in excess of the dividend, and if expected to persist into the future, can be positive for share prices.

While PSEC has been safe on this front over recent history, it is no guarantee that this holds up in the future. PSEC also has bonds to consider for those uncomfortable with the risk associated with the equity. These yield in the mid-single percentages.

The Blackstone Group, LP (BX) – 7%-8% dividend yield

Blackstone offers just a 7%-8% dividend, but following from the introduction to this post, quality of earnings is most important over dividend yield.

With Blackstone you have a highly liquid alternative asset manager with a long-term focus relative to other managers (capital is generally locked up for 8-10 years).

BX offers diversification over real estate, private equity, and credit, and the performance of the stock will naturally trade off macroeconomic data. Consequently, it will trade similarly to big banks and is best to bet on coming out of down-cycles.

Alternative asset managers are mostly out of favor as many investors perceive the current business cycle to be long-in-the-tooth. With forward nominal returns on US equities currently estimated at 6%-7% – about 200 bps below the long-run average when converted to real (inflation-adjusted) returns – those with equity exposure are more inclined to go the safe route. This means more investments in utilities or consumer staples, or investors increasing risk (for higher returns) by going with more innovative growth companies, such as those seen within tech or biotech.

Nonetheless, for those who believe the economy is likely to stay recession-free for the next 1-2 years, Blackstone can be an idea to pursue further as a financial stock holding.

Shareholders can benefit from the company’s capital-light structure, strong brand name value, scale (i.e., can enter into deals irrespective of size), long lock-up periods which create higher switching costs and disallows disruptions in investment strategy from investors’ pulling funds, and offers a clean balance sheet which is imperative for cheap financing.

AGNC Investment Corp (AGNC) – ~10% dividend yield

AGNC is one of the more popular pure income stocks on the market and is very popular among the retail crowd. The allure of a 10%+ yielder ratchets down the need for organic growth. Over the past 3-1/2 years, it has also experienced very little volatility, not materially rising above $24 and not falling below $16.50.

Like MFA mentioned above, AGNC operates through the active management of agency-back mortgage-backed securities, investing on a leveraged basis.

AGNC also provides preferred shares with dividend yields of 8.00% and 7.75%. While the dividend is lower, the shares are more secure and would better weather any deterioration in the company’s financial or operational profile.

Apollo Commercial Real Estate (ARI) – ~10% dividend yield

ARI is a subsidiary of well-known private equity firm Apollo Global Management (APO), which on its own yields 6.2% and has doubled off its January 2016 lows.

The company operates by investing in commercial real estate, either via mortgage loans, CRE debt, and commercial mortgage-backed securities.

ARI may not be cheap given its year-to-date appreciation. Moreover, real estate cap rates are among historical lows, which cuts down on the prospect of further upside.

Washington Prime Group (WPG) – 10%-14% dividend yield

WPG is a REIT that predominantly specializes in regional malls and commercial shopping centers.

The business description may scare some right off the bat given how mid-retail is being shaken out throughout the industry as e-commerce takes off due to its simplicity and convenience. As many brick-and-mortar outlets see their businesses challenged by the shift, investors in these properties are seeing their prospects challenged as well.

WPG’s stock price has dropped in conjunction. In May 2014, it traded above $20; in September 2016, nearly $14. Since the beginning of 2017, it’s hovered between $7-$11 with the general directional tilt still pointing down – despite good overall economic conditions.

So one might think, why would anyone invest in this then if it’s the worst, or expected to be the worst, performing sector in the economy?

Well, one has to take into account that a certain level of bearishness is already accounted for in the stock and the implicit assumption is already such that commercial physical retail will continue to decline. If WPG can outperform these embedded expectations, the stock has a chance of finding a floor and recovering.

But like any other high-yielding stock with a dividend double that of forward returns expectations, there is inherently some risk involved that one needs to remain mindful of.

And… a #11…

Nustar Energy, LP (NS) – ~10% dividend yield

NuStar is an MLP that is one of the largest pipeline operators in the US (9,000+ miles), with additional specialization in the storage of crude oil and refined products.

Over the past few years, NuStar has transformed its business into something higher-margined and less volatile, mainly by charging a flat fee in its storage business.

With drilling on the way up from North American exploration and production companies, this creates a greater need for NuStar’s pipeline and storage services. However, if oil were to drop further, this could cut down on drilling activity as it will increasingly become a less profitable or outright unprofitable venture for many E&P firms. NuStar’s stock will, as a consequence, naturally trade on fluctuations in crude oil prices.

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