High Dividend REITs

Want to earn 10%?

While earning 10% on your investment, especially after the year we’ve had, may seem out of reach…it’s not as hard as you may think. While it’s difficult to predict the direction and magnitude a stock’s price will undertake over any particular period of time; doing the homework on dividends and whether or not they can be supported is much easier. We have two stocks for you to choose from that will give you a 10% dividend. That’s correct, you read it correctly. While you can’t even get a bank to give you 1% on your savings unless you lock it up for 5 years or more; we have two stocks that’ll pay you a 10% dividend just to own them.

Investment Profile: Annaly Capital Management (NLY)

Annaly Capital Management (NLY), is a mortgage REIT (Real Estate Investment Trust). This company invests in various mortgages that include: pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities. Annaly Capital also invests in “agency paper”. Agency paper is a term that refers to the mortgages insured or guaranteed by the Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association. NLY is taxed as a real estate investment trust (REIT). As a REIT, Annaly distribute at least 90% of its taxable income to its shareholders (that’s you if you own the stock). This is the reason for the large dividend payment (most REITs have great dividends). It doesn’t hurt that the management team for NLY is absolutely terrific. I have heard from many management teams from dozens of companies and few know their businesses as well as the NLY management team (except for maybe Jamie Dimon and his crew at JPMorgan Chase).

There is so much mortgage paper on the market these days after the world nearly blew up in 2008-2009 that NLY has their pick. They have plenty of opportunity in the marketplace and have done a marvelous job navigating the current rate environment without over exposing themselves to the risks of higher interest rates. They have avoided the extensive leverage seen in 2008 that destroyed several financial institutions. The company sports a single digit P/E in addition to it’s juicy dividend. The company pays about $2.314 Billion in dividends on $7.05 Billion in operating cash flow. The dividend is well covered and management is keeping a keen eye on the current rate environment. The dividend currently sits at $2.40/share or 14.2%.

Investment Profile: Calumet Specialty Products Partners LP (CLMT)

Callumet (CLMT) operates two divisions: specialty products and fuel products. The Specialty Products segment makes various customized lubricating oils, white mineral oils, solvents, petrolatums, gelled hydrocarbons, cable fillers, natural petroleum sulfonates, waxes, and compressor lubricants. These products are used in everything from metal working fluids, belts, & hoses, to pressure sensitive tapes, electrical transformers, refrigeration compressors, and drilling fluids. Calumet’s specialty petroleum products are also used in candles, petroleum jelly, and lotions; as well as coating on paper cups, chewing gum base, and automotive aftermarket car-care products like motor oils, greases, transmission fluid, and tires. Their Fuel Products segment processes crude oil into various fuel and fuel-related products, such as gasoline, diesel, and jet fuel. In construction application, the fuel segment also, the produces asphalt and other by-products processed or blended for coating and roofing applications.

I have owned CLMT for several years now and the dividend has paid every quarter. I even called into Mad Money on the Lightening Round in 2010 to ask stock master Jim Cramer himself if the dividend was safe. I stumped him and collected the dividend for over a year before he declared that it was safe just a few months ago on Mad Money. The company recently issued a secondary that provided a terrific opportunity to buy the stock under $17. The extra capital shores up the balance sheet and gave the company the funds it needed for an acquisition to grow its product base.

CLMT pays about $79.56 Million in dividends on $102 Million in free cash flow. The forward P/E on the stock is only 10.94. We are fans of stocks with a P/E under 14. They often present a great opportunity to own stocks at a discount to the market. Too far above 15-16 (P/E) and you’ll run the risk that the stock price declines until it trades in line with the overall market. The dividend on CLMT is 10.6%.

The Bottom Line

Both of these stocks have been good to me over the volatility of the last few years. Keep in mind that as stocks decline, the yield (the dividend expressed as a % instead of a $) actually rises, helping to compensate you for losses that you may experience in principal. As stocks with dividends decline, the yield rises, and buyers come in. There is a natural “floor” in dividend paying stocks referred to as “yield support. These two stocks have dividends and plenty of them. So, while you may not be able to game the market…you can still find a way to earn 10% in it.