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20 Dividend Stars Among the Mid-Cap Crowd - views
NEW YORK (Stockpickr) -- Big vs. Small. That’s the debate investors often face as they try to figure if large-cap stocks or small-cap stocks represent the best opportunity to make money.
For some, the debate is moot. Instead, they seek out good investments in the “tweener” crowd: mid-cap stocks. The logic is pretty straightforward. Large-cap stocks tend to have a high degree of foreign exposure -- especially in Europe. And small-caps can prove to be a dangerous group if the markets get choppy. Investors tend to flee these smaller company stocks whenever fresh economic concerns arise.
Mid-cap stocks, on the other hand, have less international exposure than large-cap stocks but less volatility than small-cap stocks. Conveniently, the folks at Standard & Poors make it easy for us. They lump the top large-cap stocks into the S&P 500, the most mature small-cap stocks into the S&P 600, and the “Goldlilocks” of the group, mid-caps, into the S&P 400.
Running through all of the members of the mid-cap index, a clear theme emerges: Many high-quality companies offer very juicy dividend yields. That’s a real virtue in an era when traditional fixed investments like government bonds offer miniscule payouts.
From the table above, there are four high-yielders that may prove especially attractive in these uncertain times.
Any time you see a 14.9% dividend yield, it is likely too good to be true. If that dividend was stable and growing, then a horde of investors would buy shares, pushing the price up and the dividend yield down.
Sure enough, high-yielder Apollo Investment (AINV) sports an unsustainably high dividend. From fiscal (March) 2007 through 2009, this investment fund, which must pay out 90% of its income to avoid taxes, offered up a roughly $2 annual dividend. That dividend has fallen to around $1 more recently, and in coming quarters, the annualized payout may slip closer to 75 cents or 80 cents. That’s because the firm’s current slate of holdings aren’t generating the returns to keep the payout above $1.
Let’s assume the dividend falls to just 75 cents a share. That still equates to a 10% dividend yield. In response to a potential drop in the payout, investors have been selling, pushing AINV down from $12 last spring to a recent $7.50.
That’s below the $8.12 a share in book value, implying tangible downside support at current levels.
Electronics retailer RadioShack (RSH), one of 10 Retail Stock Losers of 2011, has been slumping for quite some time, as sales are actually lower than they were back in 2002. Yet even without any signs of sales improvements, RadioShack has still tossed off lots of profits. Operating cash flow has been above $300 million for each of the last five years.
The current annual payout of 50 cents was hiked this fall from 25 cents, where it stood for eight straight years, securing RadioShack's spot as one of the highest-yielding retail stocks. Still, the company also has enough money left over to maintain a longstanding stock buyback program as well. Shares outstanding have fallen for eight straight years, from 173 million back in 2002 to a recent 100 million.
Yet this retailer has seen sales drop even further in recent months. As a result, the company earned just 11 cents to 13 cents in the fourth quarter, well below the 37 cents a share that analysts had been expecting. Shares were crushed down to around $7, a level not seen since the early 1990’s.
The question for investors: What does the quarterly shortfall mean for the dividends and the buybacks? It’s worth tracking what management has to say about the topic. If the dividend will be maintained at current levels, then the effective yield is now a hefty 6.9%. Management may choose to cut the dividend and focus on the buybacks. Either way, this is shaping up to be an intriguing value play, and you can look for rumors to resurface that the board will look to sell the company or take it private.
Media firm Meredith (MDP), one of the highest-yielding media stocks, has been steadily boosting its dividend over the last decade and just announced another hike that equates to $1.53 on an annualized basis. That’s good for a 5% yield.
To be sure, this magazine publisher and TV network affiliate operator has suffered from the ongoing pressures seen by many media companies. Sales grew just 1% in 2011 to $1.4 billion. Still, EBITDA remains quite healthy at nearly $250 million, which provides solid support for the current dividend.
To goose the top line, management is boosting Meredith’s media presence on the Internet, as highlighted by a just-announced $175 million purchase of allrecipes.com. That stiff purchase price raised eyebrows, but management insists that the deal will add to EPS by 2013.
If the U.S. economy improves in 2012, ad spending should get a real boost, helping Meredith’s print, broadcast and web properties to gain better sales traction.
Back then, we said that MDC Holdings may be the safest stock in the sector, simply because its market value of $860 million is below the conservatively-assessed $880 million value of its real estate holdings. Well, the stock has rallied roughly 10% since then and is worth roughly $80 million more than that stated book value figure.
Yet the recent upward move may be a sign of even better trading action ahead. That’s because tentative signs are emerging that the much-anticipated, long-delayed upturn in new home construction may finally, finally, be at hand. Economists now think we’ll see roughly 700,000 housing starts in 2012, roughly 5% ahead of 2011 levels. It’s worth noting that for the 50-year stretch from 1957 to 2007, that figure was above 1 million on 45 occasions.
The recent drop in new-home construction has enabled supply to drop and if demand perks up just a bit, that 700,000 forecast for 2012 would just be a baseline for years to come.
Omega Hospitality Trust
Health care real estate investment trust Omega Hospitality Trust (OHI) has developed a proven knack for rising dividend payouts. The dividend has grown at least 10% for six of the last seven years, from 72 sets a share back in 2004 to $1.37 in 2010 and $1.64 in 2011. And despite uncertainties in the broader health care space, Omega is likely to preserve its impressive payout.
“Based on the company’s relatively modest level of debt and a payout ratio (based on 2011 estimates) on par with the industry average, we believe that the dividend is very secure,” note analysts at Hilliard Lyons.
Any time you come across a 7.8% dividend yield that appears to be protected from a possible cut in the payout, you should take note. These kinds of bargains don’t tend to last long.
To see these stocks in action, visit the are High-Yielding Mid-Caps portfolio.
At the time of publication, author had no positions in stocks mentioned.