Investors love dividends and stock buybacks as the primary means for companies to return capital to shareholders. Dividends are actually easier to measure for an investor total returns calculation, and dividends account for about half of all long-term shareholder returns over time. Dividends are also supposed to express a company’s comfort with earnings expectations ahead.
What investors need to consider is that not all dividends are created equally. There are super-safe blue chip dividends. There are speculative dividends, and then are the high yield super-speculative dividends. These can be over 6%, 8% or even 10% in rare cases.
24/7 Wall St. wanted to screen for the 10% dividend yields to see which ones might be attractive for investors. After all, many are down handily from their highs. In an effort to avoid sector risk, the high payout master limited partnerships (MLPs) and other energy patch plays were avoided. Real estate investment trusts (REITs) are included here, along with the business development and the shipping sectors.
In our screen, we used a minimum of $1 billion in market cap — no reason to take chances on small cap and micro-cap stocks no one has heard of. We also set a minimum of 100,000 shares per day for an average trading volume, also to avoid small obscure stocks.
In order to qualify, each company had to have analyst coverage from at least four analysts. On the price versus analyst targets, the consensus analyst price target had to be within -5% under the current share price or had to be above the share price.
Profitability had to be here, but some companies have higher payouts than their classic earnings per share measurement. That is because some companies pay based on a distributable cash flow model. Our screen did force the issue that each company had to be profitable, and the screening of the dividend quality will have to be done further on a case-by-case basis.
On the risk side, investors need to understand that high yields come with higher risks than traditional stocks. There is also the notion that companies are not bound to maintain such a high dividend. Some dividends could be at risk, and most investors should expect a sharp sell-off if a dividend is cut or eliminated.
Annaly Capital Management
It may be far from the only mortgage-REIT for investors, but Annaly Capital Management Inc. (NYSE: NLY) has been a publicly traded entity since the 1990s, and its management team is considered to be among the best of the best. It has a dividend yield of 11.7%, based on a $10.20 share price. Annaly’s $1.20 per share trailing annualized dividend compares to earnings estimates of $1.15 per share for 2016.
Recent SEC data showed that Annaly has only about 60% institutional shareholders. This means that individuals have bought it for the dividend. Being tied to mortgage-backed securities comes with volatility, and the current $0.30 per share dividend is half of what it was at the peak in 2009 to 2011. Its dividend is of course subject to being dropped (or raised) based on its funds from operations and earnings per share, but that has been held steady for over two years now.
Annaly has a consensus analyst price target of $10.65 and a 52-week trading range of $8.25 to $10.93. Its market cap is $9.6 billion.