Bryan Perry is pitching his Cash Machine newsletter, which has been recommending high-yield investments for many years, by using the tempting prospect of monthly dividends.
If you haven’t caught the “monthly” bug, these are stocks (or funds) that simply pay their dividend twelve times a year instead of the traditional four. Some income-hungry investors really like that, though the actual income provided isn’t necessarily different (monthly payers typically have yields comparable to similar companies that are quarterly payers, they just divide up that annual dividend into smaller chunks).
It does help slightly if you’re a compounder — compounding your dividends by reinvesting them monthly instead of quarterly gives a small boost, all else being equal, but that’s probably not enough to give a strong conviction that “Monthly” is better than “Quarterly” — what appeals, I assume, is that the dividends come in as regularly and often as the bills do, which feels safe and secure and more like a “paycheck.”
Do note that the dividends of monthly dividend payers are no more “guaranteed” than are quarterly dividends. Companies and funds can and do halt or cut dividends if results change — though they are usually very resistant to doing so unless the situation is truly dire, because they know that investors own their stock because of the yield and will sell it if the expected yield falls.
Here’s how Perry introduces his teased picks:
“In this report, I reveal the very best monthly dividend payers for 2015 — stocks and other investments with yields of 9.17%, 9.7%, 10.3%, even 16.6%.
“Plus, I also I show you can how to put together a portfolio of the very best monthly dividend payers that will give you a guaranteed income for life….”
I hate to see anyone throw around that “guaranteed” word for these kinds of investments, but a diversified portfolio of dividend-paying stocks is hard to argue with (other than the fact that if interest rate expectations change abruptly, all the stocks will probably move en masse — income stocks are pretty much all sensitive to interest rate fluctuations, and we’ve never had rates this low for this long before so there’s a heavy dollop of uncertainty to be aware of with anything that yields more than 3-4%).
What, then, are the stocks?
He gives away the first one…
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“My first pick for your portfolio for 2015 is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG).
“I believe that this fund, which is composed of world-class stocks and also utilizes a sophisticated options strategy that professionals employ for extra income (covered calls), will deliver the total return of 10% or more that I’m shooting for in the year ahead.
“Top holdings include Royal Dutch Shell (RDS.A), Nestle, Vodafone Group (VOD) and Unilever (UN), as well as U.S. household names like Google (GOOG) and Wells Fargo (WFC).
“… the shares trade at a very attractive 9.05% discount to net asset value (NAV).
“The fund has a managed dividend policy that is set at the end of every year.
“It currently pays out $0.081 per share per month, which translates to a current annual yield of 10.34%.”
That’s one important consideration for investors who are really seeking income from their stocks: If you want substantial income returns, dividends well above the normal company, you have to accept that almost all the time the stock will trail the broader index in bull markets, and that most of your return will come from that unusually large dividend.
Aiming for a 10% return sounds fairly reasonable for a managed closed end fund with a covered-call strategy, since you could probably generate that kind of return by buying blue chips and selling covered calls yourself if you have a portfolio large enough to minimize transaction costs and diversify… it’s just that when the market does well, you’ll trail the market substantially. EXG has been about flat (actually down a little) over the past five years, providing a return of a bit over 50% entirely because of the dividends, while the S&P 500 has gone up 108% during that time including dividends (or 88% if you ignore the dividends).
The discount to NAV is down to about 5% on EXG now, so this data in the tease is a bit stale — but with that continuing monthly payout of just over eight cents/share it still yields almost 10%. I like the Closed-End Fund Association for data on CEFs like this, you can see the current info for EXG here if you’re curious.
And we’ll reveal the first “secret” one for you (the other two I won’t get to today are closed-end funds — we can do those in the future if folks are interested)…
“Monthly Payer #2 for 2015:
“A REIT Handing Shareholders a Monthly Check with an Annual Yield of 16.6%!
“As you probably know, some of the fattest, juiciest dividend payers around are Real Estate Investment Trusts (REITs)…
“But what you might not know is that some of these income investments pay MONTHLY.
“For example, there’s a specialty finance company that manages a portfolio of securities made up of residential mortgages.
“It’s making money hand over fist — and passing it on to its shareholders!
“In the third quarter last year, it earned net income of $6.8 million, or $0.63 per share.
“Third-quarter dividends totaled $0.54 per share, and book value was $13.27 per share, a $0.22 per share increase. Revenues are forecast to rise by 52% in 2015 to $35 million — which explains why insiders own 11% of the stock.
“Another reason: It pays a monthly dividend of around 18 cents per share with an eye-popping annual yield of 16.6%!
“Someone with $50,000 to invest will collect a nice check of $691 a month… month after month after month.”
That “month after month after month” makes it sound a bit like an annuity, so be careful about how much safety you assume from these kinds of high-yielding investments. Thinkolator sez that here we’re being teased about Orchid Capital (ORC), a mortgage REIT (they’re sometimes called mREITs) that I’ve never heard of before — probably partly because I’ve been avoiding the whole mortgage REIT sector because of the often extreme interest rate sensitivity.
Mortgage REITs primarily invest in portfolios of mortgage bonds — so how can they have such crazy-high yields? 16% is high even for a mREIT, but yields of over 10-12% are commonplace in this group. You obviously can’t invest your own capital into bonds that yield 3-4% and expect to make 16%, so they have to borrow money. They borrow short-term money at relatively low rates to lever their portfolio, and use that larger portfolio to buy relatively longer-term mortgage bonds. If they can borrow at 1.5%, for example, and buy a lot of stuff that yields 4%, that’s a nice spread — and they borrow far more than their equity, often 6-10X their equity, so that’s how these small spreads of one or two percent turn into 10-16% yields for equity holders.
The biggest risk is that they lose access to short-term borrowing, which is what happened to a lot of these mREITs during the financial crisis… and the most likely risk is that changing interest rates (and a changing yield curve, with a different gap between short-term and long-term rates) will change their profitability. On the operating side, they spend most of their time dealing with interest rate risks, with hedging and management of the portfolio — and though rising rates have the biggest impact on their book value (bonds lose value as rates rise — which is particularly important if you borrowed money to buy those bonds), falling rates are not necessarily great either — lower long-term rates cut into profitability if short-term rates stay where they are (and short-term rates can’t fall much more)… and lower long-term rates also lead homeowners to refinance, which might mean that bonds are “matured” early at less than what the mREIT might have paid. They don’t have any meaningful default risk because they’re focused on agency bonds, the mortgage bonds that are guaranteed by Fannie Mae and other government arms and agencies.
Can’t say that I know this one at all, but they are premium-priced relative to many mREITs (at least on a price/book value basis), they do have a huge yield, and they’re quite small and are externally managed (meaning, they don’t run their own portfolio and have their own administrative operations like some larger REITs do — the mREIT is really just a portfolio, and the management is done by an outside investment management company… in this case, Bimini Capital Management, which itself is a publicly traded REIT at BMNM… BMNM is also quite levered and doesn’t pay a dividend at this point, don’t know much else about them).
Sound exciting? Have other monthly (or other) dividend payers that interest you? Feel free to share your thoughts or ideas with a comment below. Thanks!