I will soon be publishing an ebook probably called “Income From Stocks”, subject to change. Since most of us are looking for ways to make money online I want to include information on doing so with the stock market.
To begin my explanation of my niche in the stock market I want to reprint an article from The Street Authority and specifically from one of my favorite authors there Carla Pasternak. I invest almost exclusively in income stocks, that is, stocks that pay dividends. High Yield income stocks differ for an investor from growth stocks in that with growth stocks you are looking primarily for a stocks’ capital gains and price appreciation. With Income stocks you are looking more towards the income side of things and stocks paying quarterly or monthly dividends.
With Income Stocks there are several factors that you want to consrider in addition to just a high dividend. The article which follows explains very well the multifaceted ways in which you analyze an income stock as being a good pick, including such things as capital gains and the dividend increasing quarter after quater. I hope you enjoy this article and use Carla Pasternak at Street Authority as a source to help you shape your portfolio.
I am receiving this report because I visited StreetAuthority.com and registered to receive their monthly income advisory, you can too, — High-Yield Investing. Please send any editorial comments or suggestions to editorial@streetauthority.com. This address is for editorial feedback only. For questions about your account or to speak with customer service, call (301) 216-2005 (US or international) or
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StreetAuthority, LLC
839-K Quince Orchard Blvd.
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http://www.StreetAuthority.com StreetAuthority, LLC is a financial newsletter publisher founded on the belief that individual investors can earn above-average returns if they are given access to the right information. We’d like to thank you for ordering this special research report, High-Yield Winners: Three Stocks with Hefty Dividends and the Cash to Keep Paying Them, and we sincerely hope that you benefit from the following investing ideas and analysis.
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High-Yield Winners:
Three Stocks with Hefty Dividends and the Cash to Keep Paying Them
In the uncertain world of stock investing, a regular stream of dividend payments is the closest thing investors have to a guaranteed return. We all buy common stocks in anticipation the shares will increase in value at some point. But dividend-paying stocks can provide us with a steady paycheck while we wait for our shares to increase in value.
It’s hard to know what has “real” value in the stock market, but dividends are undoubtedly real money. As such, stocks that distribute recurring dividend payments year after year should form the core of an income investor’s portfolio.
Dividend-Paying Stocks Outperform The Market
Today, speculators often look to make a quick fortune on the next Microsoft (Nasdaq: MSFT) or some other fast-growing company operating in an exciting new industry. But it would be misguided to focus entirely on volatile, unproven industries or companies while overlooking the numerous benefits offered by well established, dividend-paying companies.
While many investors in search of market-beating gains consider the current 2% yield offered by the S&P 500 to be trivial, it would be a huge mistake to dismiss dividends entirely. In fact, a look back at statistical data shows that nearly half of the market’s total returns have come in the form of dividends.
Between 1926 and 2004, dividends represented about 42% of the total return delivered by the S&P 500. During that same span, it’s been calculated that $1,000 invested in the S&P would have grown to $2.3 million if reinvested dividends are included, but to only $90,000 without the dividends!
If history is any guide, then dividend-paying stocks should perform better than their non-paying counterparts over the long haul. Contrary to conventional wisdom, studies have shown that dividend payers handily outperformed non-payers from 1970 to 2000. At the same time, those dividend-paying stocks experienced far less volatility. They could also be counted on to deliver stronger relative returns in difficult market environments.
Tax Changes Favor Dividends
Better still, investors now receive more bang for their buck from most dividend-paying stocks thanks to tax changes. Until 2003, dividends were taxed as ordinary income and were thus subject to an investor’s regular income tax rate. At the time, that was up to a staggeringly high 38.6% maximum.
Capital gains, by contrast, were taxed at a much lower 20% rate. That advantageous tax treatment, combined with a roaring bull market, led many investors to gravitate toward high-growth, non-dividend-paying stocks in the late 1990s.
But thanks to legislation that took effect in 2003, the playing field has now been leveled. A uniform 15% tax rate applies equally to dividends and long-term capital gains. The happy side effect to this has been that income-oriented investors now retain a much larger chunk of their gains. That’s a powerful change for investors who reinvest dividends and allow the miracle of compound interest to work its magic.
Another upside: Thousands of companies have been quick to take advantage of the favorable new tax law over the past several years. Instead of buying back shares to boost stock prices, an increasing number of firms have opted to return excess cash to shareholders in the form of dividends. More than 1,700 companies announced dividend increases in 2004 alone (the first year after the legislation), and many firms, including a number of formerly tight-fisted technology companies, initiated new corporate dividend policies for the first time.
This trend has not only lifted the payouts that most income investors receive, but it has also expanded the pool of quality income-paying candidates to choose from.
TABLE OF CONTENTS:
1. Zeroing In On the Winners
2. First Republic Preferred Capital Corp., 7.25% Series D (Nasdaq: FRCCO)
3. Zions Bancorp., 9.50% Series C Preferred (NYSE: ZB-PC)
4. Realty Income Corp., Class D Preferred (NYSE: O-PD)
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(1.) Zeroing In On the Winners
The goal of this report is to introduce you to a few select income securities that are poised to deliver market-beating returns in the years ahead. All three of the high-quality investment ideas we’ll profile are established and have solid fundamentals. They also share certain key characteristics that should enable them to pay sizable dividends, plus deliver steady share price gains in the coming years.
These characteristics include the following:
High/Stable Dividend Yield — Because dividend yields are constantly changing and payments can be raised or lowered at any time, it’s important to look at historical performance to ensure that we invest in companies with stable dividend track records. The good news is that all three of the securities we’ll profile in today’s report have consistently delivered above-average yields over the past several years. In addition, each currently offers a yield at least double the S&P 500′s average yield.
Although some stocks offer even more tempting yields, keep in mind that the most promising stocks aren’t necessarily those that offer the highest yields. After all, dividends represent just part of the total return picture, and even 10% or 15% dividend yields can be more than offset by poor stock performance. Therefore, instead of blindly looking for the market’s highest-yielding stocks, investors should focus their search on solid companies with sustainable and/or growing dividend payments.
Long-Term Commitment to Shareholders — Unlike bond payments, corporate dividend payments aren’t legally required. And contrary to what many novice investors often think, they certainly aren’t guaranteed. In fact, companies can cut or even eliminate their dividend payments altogether at any time. With this in mind, we always look for firms that exhibit long track records of consistent dividend payments. We also prefer to invest in securities that have boosted their dividend payouts consistently over time. Both of these patterns are reflective of real financial strength.
The securities featured in today’s report have paid regular, uninterrupted dividends for many years and have consistently raised their dividend payouts along the way.
Strong Cash Flows — When searching for high-quality income stocks, we pay particularly close attention to each firm’s cash flow. After all, that is what a company uses to pay out dividends. Cash flow is the actual money that flows into a company’s bank account. This metric often provides a better picture of a firm’s profitability, especially when compared to earnings, which incorporate the impact of non-cash items such as depreciation and amortization. As cash flow grows, so does the pool of assets that is used to fund dividend payments.
Total Return — As we said earlier, although dividends are certainly an important part of the picture, they don’t represent the whole story. In the end, the total return that a stock delivers is really a combination of its dividend yield and share price appreciation. A stock may pay a decent annual dividend, but if its share price declines steadily year after year, then the net effect could be a flat or possibly even negative investment. Although income investors are typically willing to trade significant capital gains potential for the relative safety of predictable income, we prefer to look for stocks that offer the best of both worlds: rich dividend payments and solid long-term growth potential.
And The Winners Are…
In the end, our search for high-quality income stocks led us to three top picks: preferred shares of regional banker First Republic (NYSE: FRC), preferred shares of banker Zion Bancorp. (Nasdaq: ZION) and the preferred shares of real estate investment trust Realty Income (NYSE: O). We’ll devote the remainder of today’s report to in-depth analysis of these three securities.
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(2.) First Republic Preferred Capital Corp., 7.25% Series D (Nasdaq: FRCCO)
Snapshot: These are the preferred shares of First Republic Bank (NYSE: FRC). FRCCO is a 99.9% subsidiary of the regional bank which provides consumer and business banking, investment management, brokerage, and trust services in California, Nevada, and New York. First Republic Preferred Capital Corp. is classified as a real estate investment trust (REIT) for tax purposes.
Dividends: Dividends of $0.435 are paid quarterly, equating to $1.8125 per share a year. Since the shares are now trading around their par value, they offer a yield right around their coupon rate of 7.25%. Since FRCCO is a REIT, its preferred dividends are taxable as regular income and the shares are best held in a tax deferred account.
Outlook: The shares have been redeemable at $25 at the issuer’s option since June 27, 2008, but so far they have not been called. Since First Republic Bank set up the REIT in part to augment its own Tier I and Tier II capital ratios, it seems unlikely to redeem the preferreds in the near future. First Republic Preferred Capital Corp., 7.25% Series D
(Nasdaq: FRCCO)
Issuer: First Republic (NYSE: FRC)
Annual Payment: $1.8125
Yield: 7.3%
Credit Rating : BBB-
Frequency: Quarterly
Callable: June 27, 2008
The REIT focuses on making mortgage loans. The strategy emphasizes safety as it focuses on borrowers with high net worth who provide a significant downpayment, have excellent credit scores, and have substantial liquidity even after they have made the mortgage loan.
About 57% of its loans are written in the San Francisco Bay area, with another 12% coming from greater Los Angeles and 4% in San Diego. That means roughly 75% of its mortgage loans are based in the state of California, but with the focus on very high-quality borrowers, problem loans are few despite the geographic concentration in a state with a weak housing market.
For the first quarter of 2011, FRCCO had $381.8 million in mortgage loans outstanding, up 46% from a year earlier. This increased loan portfolio was purchased entirely from parent First Republic Bank. Interest income from the loan portfolio for the quarter was $4.5 million, a 31% increase from the year-ago period.
The increase was due to the high average loan volume. Increased volume was in part offset by lower average coupon rates, which dropped from 4.05% to 3.76% as mortgages were of the adjustable rate variety.
For the full year 2010, FRCCO’s net income of $9.3 million covered preferred share payouts of $5.1 million for a payout ratio of just 54%. As a REIT, FRCCO must pay out 90% of its earnings, leaving a substantial amount of money to be paid as dividends to First Republic Bank, which holds virtually 100% of FRCCO’s common shares.
Since November 2010, FRCCO has traded in an extremely narrow range of about $24 to $25, likely reflecting that the shares could be called at $25.00 at any time. The stock is unlikely to provide strong capital gains but if held in a tax-free account offers a reliable yield above 7%. The shares are rated an investment grade “Baa3″ by Moody’s and “BBB-” by S&P.
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(3.) Zions Bancorp., 9.50% Series C Preferred (NYSE: ZB-PC)
Snapshot: These are the preferred shares of Zions Bancorp (NYSE: ZION), a regional banker operating mainly in the western states through such names as Zions First National Bank in Utah and Idaho or California Bank & Trust.
Dividend: The shares pay $2.38 per share in dividends doled out quarterly, which give a mammoth yield above 9.0%. Dividends are taxable at the currently reduced dividend tax rate of up to 15%.
Outlook: They can’t be called until September 15, 2013. They are trading about a half dollar above their $25 call price, but that equates to less than half a year of dividends, so the premium price is not a great risk factor for new investors. Also, these are traditional preferred shares, which unlike trust preferred stock are not subject to early redemption. Zions Bancorp., 9.50%
Series C Preferred
(NYSE: ZB-PC)
Issuer: Zions Bancorp.
(Nasdaq: ZION)
Annual Payment: $2.38
Yield: 9.0%
Credit Rating : B
Frequency: Quarterly
Callable: September 15, 2013
Given Standard & Poor’s subinvestment grade “B” rating on these shares, they are not for the risk-averse. That said, the regional bank swung to a profit during the second quarter, from a loss last year. The Utah-based bank saw net earnings of $29.0 million, or $0.16 per share, compared with a loss of $135.2 million, or $0.04 per share, in the second quarter of 2010. Excluding non-cash items, net earnings were $82.4 million, or $0.45 per share.
Earnings rallied mainly on lower provisions for loan losses, from $228.7 million in the year-ago period to just $1.3 million for this year. The gain took analysts by surprise, as they were expecting to see a loss of $0.02 per share. For the full year, analysts now expect the bank to earn $0.81 per share, up from a projected $0.45 per share analysts estimated just two months earlier, and dramatically improved from a $2.48 per-share loss last year. (Analyst projections, however, typically exclude one-time items.)
In any case, the company has more than ample cash to cover its preferred-share dividend payments. Net income of $125.7 million for the first half of 2011 covered preferred share dividends of $81.9 million by more than 1.5 times.
Long-term debt at $2.7 billion is just 0.4 times equity, and is covered more than two times by $6.2 billion in cash reserves sitting on the balance sheet for the most recent quarter.
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(4.) Realty Income Corp., Class D Preferred (NYSE: O-PD)
Snapshot: These preferred shares are backed by real estate income trust (REIT) Realty Income (NYSE: O). You won’t easily find a more dividend-friendly firm — the corporate website even greets you with the slogan: “Welcome to the Monthly Dividend Company.”
Realty generates monthly dividends for both its common and preferred shares by leasing space to retail chains across the US, with a focus on the southeastern states. Tenants range from restaurants, convenience stores, childcare facilities, and automotive repair shops. Realty buys the property from retail chains then leases it back to them under long-term 15 or 20-year contracts, providing a steady income stream.
Dividend: The preferred shares pay a dividend of $1.84 per share annually, giving them a yield of 7.0% at recent prices. The payment is doled out in monthly installments and is cumulative, meaning eventually you should get any dividends that are suspended if the company hits a cash crunch and then recovers.
And these payments should be secure, with a rating of “BB+” from Standard & Poor’s. Realty Income Preferred
7 3/8% (NYSE: O-PD)
Issuer: Realty Income (NYSE: O)
Annual Payment: $1.836
Yield: 7.0%
Credit Rating: BB+
Frequency: Monthly
Callable : May 27, 2009
Although these preferreds are traditional equity, dividends from preferred shares issued by REITs are taxable as ordinary income.
Outlook: As you would expect from the company’s long-term contracts, earnings have remained at a consistent level for years. The company does get some upside from rental increases built into the contracts and from buying and selling properties.
Expected earnings should be more than ample to cover the $170 million in dividend payments on all the company’s outstanding share issues. Realty’s balance sheet is also strong, with debt accounting for less than half of the firm’s total capitalization.
Despite the company’s stable earnings profile, inflationary pressures could erode the value of the company’s long-term contracts. Still, the company has proven its ability to weather difficult economic cycles over its 39-year history and has held up well compared to the broader market.
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Note: The securities mentioned in this report are consistent with the editor’s investment strategy and philosophy. These investment ideas, however, should just be a starting point for your own research. For the editor’s timeliest investment suggestions, please consult the newsletter’s current portfolio additions and/or “Buy First” list.
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Thanks for reading this special report: High-Yield Winners.
Good Investing!
– Editorial Staff
StreetAuthority LLC
839-K Quince Orchard Blvd.
Gaithersburg, MD 20878-1614
StreetAuthority is not a registered investment firm or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. StreetAuthority does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. All users should always conduct their own research and due diligence and obtain professional advice before making any investment decision. StreetAuthority will not be liable for any loss or damage caused by a reader’s reliance on information obtained in this newsletter or on our web site. You are solely responsible for your own investment decisions.
The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. StreetAuthority receives no compensation of any kind from any companies that may be mentioned in our newsletters or on our web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities discussed in this newsletter or on our web site.
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Thanks Folks For reading these details from Carla Pasternak at Street Authority. I just want you to know that the information I give you at times for your portfolio comes from well balanced expertise and in depth analyses.
To Your Success,
Paul E. Steinberg
