“Favorite High-Yield Stocks for 2011” part one

Sniffing out picks from the Dick Davis Dividend Digest

By Travis Johnson, Stock Gumshoe, February 17, 2011

I haven’t sniffed out much in the way of dividend-paying stocks or income strategies in recent weeks, so this latest teaser from the folks at Cabot caught my eye. It’s not really a tease for Cabot picks, but for the digested picks of the Dick Davis folks (Dick Davis Digest is a regular digest of newsletter picks from a variety of publishers, but it’s now published and owned by Cabot). The Dick Davis universe is now split, with the Dick Davis Investment Digest being the traditional stock-pickers abstracts, and the Dick Davis Dividend Digest being the excerpts of income-focused picks.

And this week I got a few questions about a teaser ad for the Dividend Digest, which throws out hints about a few of the picks that made the digest’s special report called The Top 29 Cash Cows for 2011.

I don’t know what all 29 are, but I can at least try to identify the favorites that are hinted at in the ad. And I know that a lot of my readers are income-focused (and I have no objection to getting a nice fat dividend, if I’m being honest with you), so maybe there will be something interesting in the pile. Let’s get started, shall we? Each set of clues also identifies which newsletter supplied the pick, though I hadn’t heard of a couple of these:

“This mortgage REIT sailed through the financial meltdown, while Countrywide, Washington Mutual, and dozens of other big players in the mortgage business crashed and burned. And it paid a fabulous dividend throughout, now standing at 14%. Neil Macneale, 2 for 1 stock Split Newsletter.

There are a solid half-dozen or so mortgage REITs that have been around for more than a couple years and could therefore claim to have “sailed through” the financial meltdown. And of that list, there are two of the relatively major players that yield roughly 14% right now — Annaly (NLY) and Hatteras (HTS). The yields on almost all mortgage REITs are very large, though some that are perceived as less risky or more sustainable are down below 10%, like Redwood Trust (RWT) or MFA Financial (MFA), and some that are seen as chancier (for example, they might hold something other than government-secured mortgages, like commercial or private mortgages, though there are other risk factors as well) have yields that approach 20%, like American Capital Agency (AGNC) or Chimera (CIM).

Annaly has been covered many times in this space — it is by far the largest player, and very well respected in the sector, and the management team has proven that they can manage at least relatively well through changing interest rate environments. What mortgage REITs effectively do is raise equity capital (sell stock), then leverage that with short term debt up to maybe 8 or 10X in some cases, and use that expanded asset base to buy mortgages (in most cases, they buy only government-guaranteed mortgages, processed by the likes of Fannie Mae). Or in investor terms, they borrow short and lend long — so as long as they can manage the risks of their mortgage portfolio (including interest rate adjustments and prepayments), they can essentially pocket the difference between the mortgage income they get and the short-term interest they have to pay on the money they’ve borrowed. That difference is often in the neighborhood of 1.5-2.5% these days, so you get the huge returns of 12-20% because you’re leveraging up that difference with borrowed money.

So you can probably see the risks — the major headache for their business model is a change in the yield curve, if 10-year rates got much closer to 1-year rates, they’d have much less opportunity to make money, so to different degrees the management teams of these REITs try to plan for and hedge the impact of interest rate changes. Whether or not you’re interested in one of these specific names, Annaly probably has the best website for doing some research on the basics of the industry, including very helpful regular commentaries on the mortgage market.

And it’s worth noting that although Annaly has also had two big downdrafts in the last several years, largely from the inverted interest rate curve of 2005 and the financial crisis of 2008, but if you avoided buying at the highest levels, in the $20 range (I don’t know how you would have, but if you did), it would have certainly been a great hold for the past decade despite the fact that the dividend has almost always been well above 10% and therefore a fairly high perceived risk.

I know a great many of my readers have invested in NLY and their competitors over the years, so perhaps some of them will share their updated thoughts with a comment below — the stock, like most of their competitors, has been quite steady of late, holding right around the $18 level since last Spring. In the end, it’s about big picture interest-rate changes, any wholesale changes you see coming for the mortgage market (short rates going up is bad because it increases their borrowing costs, especially if short rates go up but mortgage rates stay the same. Long rates going down is generally bad, not only because their income drops as the difference between short and long rates shrinks but because lots of folks refinance and prepay their old mortgages — but if they go up too sharply that’s bad, too, because their portfolio loses value compared to new mortgages). I’ve been tempted by both NLY and HTS over the past year or two but, other than a bit of speculating in their options, have not owned them, and I currently have nothing invested in any of the mortgage REITs. Do keep in mind that if you like the prospects for these businesses, high-yield mortgage REITs can be great assets to hold in tax-advantaged accounts — high distributions that can compound without a tax bite.

Well … I blathered on about that one for longer than I intended. Let me get into one other of the teased stocks, and then I’ll try to follow up next week on a couple others.

“This integrated media company broadcasts in 30 languages to 145 countries, providing television, live events and pay-per-view specials. It also licenses more than 200 consumer products and has partnerships with Walmart, Target, GameStop and Toys ‘R’ Us. If next year’s earnings come in as estimated, we’re looking at a 12-18 month gain of 50% on this one. Add in the 10.3% dividend and it’s a 60%-plus total returner. Eric Dany, Stock Prospector.”

Sounds exciting, right? Like Viacom or Time Warner or Disney or something? Nope, this is something a bit more niche-y, this tease is for …

WWE, Inc — better known as World Wrestling Entertainment and previously known as the World Wrestling Federation, and home of Wrestlemania (ticker WWE)

And yes, it is always surprising to me what a big multimedia company WWE has become — professional wrestling is arguably less of a hit than it was ten or 20 years ago, but it is certainly a more efficiently run business, and an increasingly global one. They’ve even been producing more Hollywood movies, some of them successful, and they continue to churn out a nice profit.

The company is designed to pay out a huge dividend, and in fact it pays out a dividend right now that is probably unsustainably high unless their revenue growth picks up in the near future — the shares are also down sharply from their highs of last Spring, with the most recent bad news being lowered guidance by the company for last quarter, followed by the actual just-as-bad-as-expected results that formally came out about a week ago.

It’s not surprising that WWE has been a favorite of dividend aficionados for years now, that’s what happens when a stock pays out most of it’s cash flow and carries a near-double-digit yield, but when your stock appeals primarily to dividend investors, it’s wise to be prepared to see it sell of sharply if there’s any hint of a dividend cut — so that’s what happened over the past couple months. So far the company says that they’ll continue the high dividend, which does equal a yield of about 12% still, but also that they’ll re-evaluate every quarter.

WWE is depending on foreign markets for growth — particularly Mexico, China, Turkey, Brazil, and Russia — many of which are places that have a strong wrestling tradition (not that this is “real” wrestling, but perhaps there’s some innate appeal). According to this take by a Motley Fool writer following the last earnings, one of the real disappointments in the quarter was weak international growth. They haven’t generated enough cash to cover the dividend for the last couple quarters, though they did generally do so before that (earnings haven’t ever covered the dividend in recent history, but cash flow has — in the last few quarters they’ve been cutting costs but have still had to use their cash hoard to keep the dividend up).

The stock has usually traded at a bit of a premium to the S&P average, though it’s hard to really identify peers that can tell us anything, and it does still trade at a slight premium based on PE ratios. I find it amazing that they have built such a substantial business on pro wrestling personalities, even bringing back Dwayne Johnson (The Rock) from Hollywood for some “performances” lately — they make their money by turning these performers into stars, getting fans involved enough to pay for live performances or pay per view events, licensing their performers and name for toys, video games and other doodads, and giving their performers a lifeline to post-wrestling stardom by producing relatively low-budget family movies (WWE in general remembers that their strongest market is kids and adolescents, they keep everything “PG”).

The competition becomes more challenging every day, I’m sure — not just because there are other non-WWE wrestling events, but because there are so many demands for entertainment time and dollars. Since I haven’t paid much attention to pro wrestling since Andre the Giant and I have a hard time believing that wrestling is still a profitable business and a hit, I’m probably not the best person to judge whether they’ll be able to get their growth re-started, particularly overseas, and cover that juicy dividend in the years to come. They are still creating stars, and still trying to build the brand and still trying to innovate — even possibly introducing a WWE TV network at some point … and who knows, now that Linda McMahon (wife of founder and CEO Vince McMahon) has had her political aspirations shelved (she lost in the Connecticut Senate race), maybe the McMahon focus will bring them back to the strong performance they’ve sometimes shown in past years.

So there you have it — two dividend ideas from two different folks, courtesy of the hints dropped by the Dick Davis Dividend Digest. There are a few more that look interesting too, so I’ll try to get to them soon for you. In the meantime, if you’ve got a thought on mortgage REITs or professional wrestling, well, feel free to toss it on the pile with a comment below.

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32 Comments on "“Favorite High-Yield Stocks for 2011” part one"

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hose hermanez
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hose hermanez
February 17, 2011 1:43 pm

sounds like a decent long term short hold

fireball
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fireball
February 17, 2011 1:43 pm

whad'da'ya mean wraslin aint real?
sorry sg, just couldn't resist.
i have said before on your pages i like cabot's free letter for the tone down on hype and occasionally they give away some decent picks. the last freebie i caught was a dividend payer that i own and like, mo. i had lost interest in wwe but may start keeping an eye on it.
when i was in high school i was on a wrestling team. at the risk of gettin' whooped i'll say wraslin aint real.

deb109
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deb109
February 17, 2011 2:04 pm

I have small stakes in Annaly and Chimera and reinvest the dividends.10 shares of NLY have become 13.28 and 35 shares of CIM have become 42.22 and the dividends get higher each quarter. I only wish I had been able to buy lots more.

advantedges
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advantedges
February 17, 2011 2:10 pm

Where is the list? Why not give us the extensive list, and then spend time on comments. NLY has been discussed far too often,,,,,,it is supported by so many newsletter writers because they want a consistent income. Some don't even care if they lose on the stock price if they can capture income. I don't believe that is the goal of most gummies.
SO, please give us the list, then we can give You feedback on which we would buy.
NLY,,,,,,NO,,,,,,,,,,,WWE,,,,,,,,,,PLEASE! Next????

BJP
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BJP
February 17, 2011 2:13 pm

Travis: I find high yield mortgage reits risky. However, I also find 3% low interest rates not feasible in todays market.. If you consder a 1 year reit investment in a 20% paying reit, it would take 1 year versus seven to make the same income. As an investor, 7 years is a long time to make the same income as a reit. The gamble is 1 year for 20% or 7years for 20%. See: AGNC ticker

Harrison Kornfield
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Harrison Kornfield
February 17, 2011 3:18 pm

Travis} NLY just announced a huge dilutuve offering, of 1.3 B, and the share price has gone UP! And CIM is owned by NLY, same formula except there are no government guarantees in its portfolio, hence the 19% yield. They sell their expertise. So far, so very good. REgards.

sad guest
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sad guest
February 17, 2011 3:34 pm

I had Thornburg Mortgage out of Santa Fe. Lost it all in Sept., 2008.

SHARON
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SHARON
February 17, 2011 4:01 pm

I hold most of the aforementioned , as well as the largest steel dividend stock> GNI Great Northern iron ore. 14% for years.

Garry
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Garry
February 17, 2011 4:08 pm

Have held both Chimera and Annaly for some years and they still rate as a recommendation by Stansberry and others. CIM is managed by Annaly management and is my favorite of the two. Both stocks are probably good for this year and until the spread narrows.

Mike
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Mike
February 17, 2011 6:12 pm

Another 9.5 div payer is REM. NLY and CIM 2 biggest holdings.

eddie036
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eddie036
February 17, 2011 7:05 pm

AGNC is paying a good dividend and the stock is rising every day. 19.2% at $29.36

RonH
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RonH
February 17, 2011 7:49 pm

I have held NLY for 10 years so my cost basis is getting very close to 0. Although I try not to get too concentrated in one stock, every time I buy a stock I have to force myself not to buy more NLY. I might reconsider if Mike Ferrel ever retires, but I would never sell NLY until then. And he is younger than I am..

Chuck
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Chuck
February 17, 2011 8:43 pm

AGNC holds ONLY agency paper. I have dooubled my money in it, not even counting the huge dividends. I have NLY too, but it has not appreciaed anywhere close to AGNC.

chuck
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chuck
February 18, 2011 11:22 am

Have owned ALY since 2009 when I bought at 18.57, which perhaps was a little high. But have enjoyed the good dividends since. Probably should have re-invested but did not. As the stock price has not done much since then, don't feel that I have make to bag a decsion

David
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David
February 18, 2011 1:33 pm

Any thoughts on Medical REIT's. Seems they would hold their value in any down market as medical care is always in high demand, even with the changes in health care coming.

Chloe Lutts
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February 18, 2011 4:58 pm

Hi Gumshoe,

Dick Davis Digest Editor Chloe Lutts here. Good detective work and nice analysis here. Not to steal any thunder, but I thought your interested readers might like to know that Eric Dany's (The Stock Prospector) WWE recommendation is available in full on our website. (It was chosen as an Editor's pick a while back.)

Keep up the good work, let's see if you can get the rest.

romath
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romath
February 19, 2011 2:24 am

Take a look at last at the results of last year's high-yield stocks, or some such list from Dick Davis. From memory, of the list, one at about 100% return and another 300%, with one stock down considerably. Take those out and the rest returned something like 2% total. When I questioned the Chloe Lutts about it, since the email had come under her name, she claimed ignorance and tossed it on the marketing department. Yeah, right.

Pegs
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February 19, 2011 12:09 pm

Any thoughts on Canadian oil sands (Alberta, Canada) TSX:COS or COSWF.PK
Large report from S & A Resource Report …Feb 2011

Mark
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Mark
February 19, 2011 7:18 pm

Today, Suncor is far more expensive than Canadian Oil Sands (COSWF.PK) at 16 times EBITA while COSWF.PK is at 10 times EBITA. Also, COSWF.PK has the smaller debt load at .4 (five months needed to pay off debt with cash flow) with Suncor at 1.3 (11 months to pay offs debt with cash flow).

Steamoil
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Steamoil
February 20, 2011 2:54 pm

Check out the most recent post on the Cenovus Energy website. If you don't think this is a company you should put money into, then you should'nt be investing in oilsands.

Jill
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February 20, 2011 7:09 pm

Yes, and I hel CNQ for years, but isn't there a new tax consequence with Canada as a foreign investor?

abf121
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abf121
February 21, 2011 2:35 pm

I am looking for a junior silver miner teased by Sean Broderick Red Hot Natural Resources. Plenty of hints: Vancouver based company, bought 400 square miles of Mexican property on the cheap a few years back, low cost miner who wants to profit on every dollar spent, etc.Guest

gw1400
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gw1400
February 21, 2011 5:10 pm

Your list got truncated, would you repost it? Thanks.

BJP
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BJP
February 17, 2011 2:29 pm

AGNC,CYS,IVR,CIM,TWO,NLY,HTS,RSO,ANH,CMO,MFA,WAC,DX,PMT,NRF,SUI,IRET,CWH,MPW,HPT,STWD,GTY,OHI,UHT,CSA. (19.5% -6.7%.) How's that for a 25 ticker list on highest-yielding reits.

Gravity Switch
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February 17, 2011 2:52 pm

Geez, picky picky! I don't actually have the list, I write as I research and I have to figure out each stock from the clues. I'll share more as I figure them out.

bmc
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bmc
February 17, 2011 3:28 pm

Good for you – and long may they run for you.
I too hold medium-sized positions in NLY & CIM, also reinvest the dividend, and they've been good to me so far. I intend to hold them as long as nothing major changes in the set up. There will probably be a bit of a panic sell when the Fed starts to raise interest rates (if ever!! :-)) but that doesn't have to mean the game is up.

Ron Myers
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Ron Myers
February 17, 2011 5:46 pm

It`s real but it is choreographed.

Mnkid2001
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Mnkid2001
February 18, 2011 12:50 am

What happens in 2015 when the trust disolves?

Steamoil
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Steamoil
February 19, 2011 2:01 pm

the best oilsands stocks are; Canadian Natural Resources (CNQ) Cenovus Energy (CVE) Imperial Oil (IMP) and Suncor (SU) . I have a large stake in CVE and it has been doing great up until Friday. If you look at the charts on each of them , they're all doing well

Feed1891
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Feed1891
February 21, 2011 7:00 pm

what about Great Panther Silver, it's Vancouver -based and has mines in Mexico, a teaser from the last year that's doing great lately. just a guess, btw it's GPL in Amex and GPR.TO in Toronto.

majdan
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majdan
February 28, 2011 11:03 am

Might be Impact Silver Corp (ISVLF). It seems to match most of his hints.

yoyoma
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yoyoma
March 3, 2011 10:33 am

you get about $10/share based on the info on their Web site

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