Going for High Yield Stocks

by: Tim Plaehn November 19, 2008 | about stocks: AGD / AHD / APL / MNRTA / NAT / PWE    
Tim Plaehn

Tim Plaehn

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On my site I run a hypothetical Income Portfolio populated by high yield stocks. The portfolio is currently populated by 9 stocks from energy, financial, shipping, a REIT and a CEF holding high yield international stocks. I took an average yield of the 9 stocks and they have an average annual yield of 19.98% based on the most recent distribution. 20% yield!

The individual yields range from 10% for the Monmouth Real Estate Investment Corp. (MNRTA) to 34.3% for Atlas Pipeline Partners (APL). Obviously, the biggest reason for the high yield is that the value of the portfolio has fallen by 35% during the current market downturn. It seems apparent to me that if these stocks can maintain their dividend payouts, share prices will start to recover as the market realizes the shares have sold off too far.

Of the 9 securities in the portfolio, I strongly believe 5 will be able to maintain or increase their payouts for the foreseeable future. Of those 5, Penn West Energy (PWE) has been problematic because even though it is maintaining its payout level, the distributions are in Canadian currency and the results have declined over 20% when converted to U.S. dollars. Yet, even after the exchange rate haircut, PWE is yielding over 21% for U.S. investors.

The security most likely for a dividend cut is Atlas Pipeline Partners. Low oil prices could have a significant impact on APL’s cash flow. Yet at the current share price a 20% cut in the payout would still leave APL with a yield over 25%. And any distribution cut has double benefits on cash flow because the general partner incentives would be reduced by an equal amount. (for distributions above 60¢). On the recent conference call management announced they are looking for ways to reduce debt by strategic sales of assets or a possible combination of APL and Atlas Pipeline Holdings (AHD), the general partner holding company.

Nordic American Tanker (NAT) has been the best performing stock in the portfolio, down less than 10% since July 1. NAT has paid excellent dividends for the last two quarters, yet is the most unpredictable as far as future distributions go. I love this stock, but would not be surprised to see lower dividends for the next few quarters as lower oil demand could reduce the spot rates for oil tankers.

I am most curious about future distributions for the CEF Alpine Global Dynamic Dividend Fund (AGD). AGD has confirmed its monthly payout of 17¢ per share through the end of the year, keeping the yield at over 27%. AGD has been paying the 17¢ per month for at least a year and I believe since the CEF’s inception in 2006. NAV and share price have eroded sharply since trading well above $20 at the end of 2007. AGD’s objective is to obtain high dividends through international stocks and a dividend capture strategy to collect extra income during the year. It will be interesting to see at what level they can maintain the distribution into 2009. Has their trading strategy undermined the capital base of the fund, or are they still earning the same income from much cheaper stocks? We should know in the next 7 to 8 weeks.

My current outlook on this portfolio is that the stocks will be throwing off enough income to bring the value back to my July 1 start point in 18 to 20 months even if the stock market remains in its bear cave. If most of the securities in the portfolio do continue their current levels of payout into the next few quarters, I expect some share price appreciation.

Disclosure: The securities discussed are components of my site’s hypothetical Income Portfolio.

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This article has 11 comments:

  •  
    Nov 19 07:00 AM
    With a dive of value of aprox 33% since 4/08, your divs, nothwithstanding haven't kept your balance sheet above water. CD's would have given a better result--good hindsight!!!
    Reply | Link to Comment
  •  
    Nov 19 08:15 AM
    This site and my blog are about stock market investing. If you are a CD investor, no reason to even look at stocks like these.
    Reply | Link to Comment
  •  
    Nov 19 08:18 AM
    seems confused. you're only receiving a 20% yield on your portfolio if you bought all the stocks now at today's prices. your actual yield is probably less, based on the higher stock price when you selected the position, although still a fine idea and portfolio.
    Reply | Link to Comment
  •  
    Nov 19 08:53 AM
    Your income portfolio is in sectors that have been really beaten down, not a bad idea if you can hold on for the long term. I would have like to see your portfolio have a little more diversification. thanks for sharing.
    Reply | Link to Comment
  •  
    Nov 19 09:23 AM
    AOD is the most interesting CEF out there right now. It is not leveraged at all and buying back shares like crazy.

    More information on AOD would be appreciated.
    Reply | Link to Comment
  •  
    Nov 19 11:11 AM
    Tim,

    Your stocks high dividends are worth mentioning ONLY if they are sustainable. An analysis of why some stocks have more sustainable yields is far more interesting than a listing of high yields --- something I can get out of a investment database.

    For example, you mentioned that PWE "has been problematic because even though it is maintaining its payout level, the distributions are in Canadian currency and the results have declined over 20% when converted to U.S. dollars.". What you missed is that PWE revenues are in USD, and the decline actually helped INCREASE their recognized revenues in Canadian dollars. Given the low oil prices, this has given PWE the ability to sustain their payout while maintaining a conservative payout ratio.

    macsmart has a more interesting comment --- He says that AOD is not leveraged and buying back their shares. That kind of information is valuable to investors interested in capital preservation.
    Reply | Link to Comment
  •  
    Nov 19 02:33 PM
    I strongly doubt that the stocks with the highest dividends have sustainable dividend rates. Typically they fluctuate up and down. I believe that the best strategy is to include the high yielders only if they have a history of consistent dividend increases for at least a decade. Other than that you are speculating and giving in to greed..
    Reply | Link to Comment
  •  
    Nov 19 03:45 PM
    Help me out on your comments on Atlas Pipeline, the price of oil should not be a major factor since they are paid on volume shipped through the pipeline. Am I missing something.Thanks
    Reply | Link to Comment
  •  
    Nov 19 05:25 PM
    The yields on corporate bonds are even more juicy than stocks.
    Reply | Link to Comment
  •  
    Nov 20 01:43 PM
    APL is yielding 41.3% now, the unit price continues to get crushed, whatever the causes of the relentless selling Mr. Market says (as always) caveat emptor.
    Reply | Link to Comment
  •  
    Nov 22 05:48 AM
    kurt walter is correct. The yield on corporate bonds is even greater. Whats more its near impossible to cut the yield on a corporate bond without calling the bond or going into bankruptcy. Too many companies have suspended dividends on common stock at this time. Many of the bonds are traded as stock symbols.
    Reply | Link to Comment
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