It may sound old to read that investors love dividends. That is something the public is just going to have to learn to deal with. There is a broad and general statement that dividends also account for one-third to half of all shareholder returns over time. With Treasury yields being handily under 2% on all but the longest maturities, many Americans rely on dividends to supplement their retirement and their daily lives.
There are many types of dividends for investors to choose from. There are real estate investment trusts (REITs), Dow Jones industrials stocks, the so-called aristocrats with 25 years of hikes, utilities, partnerships and business development companies, and there are even some closed-end mutual funds to consider.
24/7 Wall St. has tracked many dividend trends over time, but in a low interest rate environment some investors need to pay close attention to the companies and entities with dividend yields that would be considered high in any of the interest rate environments seen over the past 20 to 25 years. After screening out the companies with a market cap of less than $2 billion, roughly 60 traded primary-listed U.S. entities have a yield of 8% or more, and some yields even go well above 10%.
Investors need to do some serious homework before blindly trusting a high dividend yield of 8% or more. It’s hard enough to trust yields over 5% in very well-known and established companies, now that the bull market and economic recovery is more than a decade old. This is a time to put pencil to paper (or financial data into a spreadsheet) to weed out the potential losers from the winners.
First, not all dividends are created equal. Some dividend payers use extraordinary items such as asset sales, while some use cash flow. Some companies and entities use leveraged borrowing to fund their payouts, and some entities use their cash reserves on the balance sheet. There may be no way to know for sure if a company that is being overly generous in its payouts needs to be more modest and lower their payouts, but there are some strategies investors can focus on to make sure that they are not jumping into the next dividend trap.
We have evaluated roughly 60 different entities with high payouts. On top of a $2 billion market cap minimum, we have looked for companies with stable to steady payouts, and we have screened out some entities that looked questionable. We have also chosen a limited number of companies and entities from each sector to offer a broader view of the super-high dividend universe. Trading commentary and color also has been added on each, and each entity listed here was given preference over others if they had upside to the consensus analyst target price from Refinitiv, if they were not a fund or related entity.
Ares Capital Corp. (NASDAQ: ARCC) is a business development company (BDC) that specializes in working with middle-market companies in various industries and sectors. The BDC recently announced a $0.40 per share dividend, but that was two cents per share lower than the payout in prior quarters.
At around $19.10, Ares Capital shares recently put in a high of $19.33, and the consensus target price was $19.63. The new $1.60 annualized dividend would equate to a yield of nearly 8.4%, but the prior dividend notes had included an “additional dividend” of two cents per share in the prior quarters. Its portfolio ended 2019 with 354 investments (up 10 from a year earlier) with a weighted average yield of debt at 9.7% at fair value and a weighted average yield on all investments of 8.7%. Both of its weighted average yields were lower than the prior year. The fair value of its portfolio investments was $14.4 billion at year-end, and the company claimed to have expanded its net asset value per share while maintaining a stable credit quality and having strong dividend coverage.
The most recent analyst coverage was an initiation from RBC Capital Markets last November. The firm started it as Outperform with a $20 target price.
DoubleLine Income Solutions Fund (NYSE: DSL) is a closed-end bond mutual fund that invests in fixed income markets internationally in a broad category of fixed income instruments. Its shares have surged since September, and they seem to have ignored or been immune to any effects of the coronavirus so far. With a recent price of $21.00, it was last seen at a premium to its net value by about 4%, and it has close to a 40% turnover ratio, so its holdings change over in an average of two and a half years or so. The fund also comes with a current normalized dividend yield of roughly 8.6%. As with many closed-end funds, the returns have been juiced up with roughly 30% leverage in the fund’s portfolio.
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