1. Why is the yield higher? and
2. Are these higher yields sustainable?
Structure Driven YieldsOne variation in yields can be attributed to the entity's tax structure. For example, Master Limited Partnerships and REITs do not pay income taxes. Instead, earnings are passed to investors who pay the taxes. Yields on these types of investments tend to be higher. One reason is that the entity doesn't have to pay income taxes. That means there is more cash to distribute. Also, since earnings from these investments don't qualify for preferential dividend tax rates, the market adjusts the price of the investment down, which increases the yield, to compensate for the additional taxes owed.
Risk Driven YieldsThe most significant determinant of yield is risk. In a world where risk is equal across all investments, yields within the same industry and investment vehicle would tend to be homogeneous with very little variation. When yields dramatically increase compared to the company's peers, this is a sign that there is increased risk with that investment. Before investing, you need to understand this risk to determine if you are willing to accept it.
This week week, I screened my dividend growth stocks database for the highest yielding stocks, not considering any other factors. The results are presented below:
Investors Real Estate Trust (IRET) | Yield: 6.8%
Investors Real Estate Trust engages in the ownership and operation of income-producing real estate properties in the United States. IRET cut its quarterly dividend in September 2011 to $0.13 from $0.172. REIT's tend to carry high levels of debt, thus making them susceptible to increases in interest rates. IRET has a debt to total capital rate of 67%.
Getty Realty Corp. (GTY) | Yield: 7.1%
Getty Realty Corp. is a real estate investment trust that specializes in the ownership and leasing of retail motor fuel and convenience store properties and petroleum distribution terminals in the U.S. Almost 80% of its portfolio revenues are attributable to Getty Petroleum Marketing. The latter was spun off by Getty in 1997 and bought in 2000 by Lukoil, the largest integrated oil company in Russia. On December 6th Lukoil, filed for Chapter 11 bankruptcy protection. In September 2011 GTY cut its quarterly dividend from $0.48 per share to $0.25 per share.
Corporate Office Properties (OFC) | Yield: 7.7%
Corporate Office Properties is a real estate investment trust that owns, manages, leases, acquires and develops suburban office properties located in Mid-Atlantic region of the U.S. and other select markets. The vast majority of OFC's square footage is in the greater D.C./Baltimore area, with the US government and related Defense IT Contractors accounting for more than half of its 2010 revenue. In the past, this was a strength, but this could be a detriment in the future given the government's financial situation and potential defense cuts. OFC has not raised its dividend since September 2010. Its earnings have declined since 2008, and Free Cash Flow peaked in 2009.
Pitney Bowes Inc. (PBI) | Yield: 8.1%
Pitney Bowes Inc. is the world's largest maker of mailing systems, and also provides production and document management equipment and facilities management services. The U.S. Post Office is in trouble. PBI's revenue stream from its mailing business will continue to shrink. To offset this, the company has focused on less profitable business segments which will likely yield lower returns than its core postage-meter business. PBI's last two quarterly dividend increases have been an anemic $0.005 per share.
Omega Healthcare Investors Inc. (OHI) | Yield: 8.2%
Omega Healthcare Investors Inc. is a real estate investment trust (REIT) that invests in and provides financing to the long-term care industry. Its portfolio includes health care facilities in 27 states. OHI has fared well to this point and has grown free cash flow each year since 2004. As a REIT, OHI is not subject to federal income tax and must distribute at least 90% of its taxable income to shareholders. As with all Healthcare related companies, Obama's healthcare plan creates a degree of uncertainty.
CenturyLink, Inc. (CTL) | Yield: 8.2%
CenturyLink, Inc. acquired larger telecom peer Qwest Communications in a stock deal in April 2011. Combined, the company provides voice service to 15 million customers and Internet service to 5 million customers in rural towns as well as larger cities. After 37 years of dividend increases CTL failed to raise its dividend in 2011. As a result, CTL lost its status as a Dividend Aristocrat. Its failure to raise its dividend and a rising Free Cash Flow Payout led me to significantly reduce my position in the stock. Reductions in land-lines and alternatives to its DSL service will continue to provide operating challenges for the company.
Vector Group Ltd. (VGR) | Yield: 9.2%
Vector Group, Ltd. manufactures and sells cigarettes in the United States. It produces cigarettes in approximately 245 combination of length, style, and packaging under various brands. Given the health risks associated with tobacco products, catastrophic lawsuits are always a risk along with declining consumption as populations become more educated.
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long CTL in my Dividend Growth Portfolio and OHI in my High-Yield Portfolio. See a list of all my dividend growth holdings here.
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- 7 Small-Cap Dividend Stocks For Yield And Growth
Tags: [OFC] [PBI] [OHI] [CTL] [IRET] [VGR] [GTY]