When investors seek-out high-yieldstocks , most of them end up
finding high-profile large-cap names.
I'm talking about companies like natural gas middleman
SandRidge Mississippian Trust (
, with its current payout rate of 17.3%, or amortgage real estate
investment trust (REIT) company such
Capstead Mortgage (NYSE:
, which currently boasts a 10%yield . Even a more
conventionalequity like Dow component
, with its 5% yield, is sought by many investors for its
However, there's a downside to owning large-cap stocks that were
built largely on the premise of paying dividends: There's little
opportunity for major growth in thedividend . There's also scant
opportunity for significantappreciation in the share price.
Income investors looking for overall growth that has a shot at
outpacinginflation may want to consider these small caps, which
have room to grow but stilloffer solid (and reliable) dividend
OneBeacon Insurance Group
With a trailingdividend yield of 5.9%, it's not like
OneBeacon Insurance Group (
is knocking the socks off bigger dividend payers. Throw in the
fact that thestock 's regular quarterly dividend hasn't budged
from 21 cents a share since the insurance company began paying it
in 2007 (after its 2006IPO ), and the company becomes even less
impressive. Still, the yield beats themarket average of 2.4%.
There's a little detail, however, that more than makes up for
OneBeacon's stalled regular dividend payout. Sometimes, OneBeacon
pays a whopper of aspecial dividend .
In 2010, the special dividend reached $2.71, translating to
aneffective yield of 24%. In 2011, the special dividend of $1.21
meant a yield of about 16%. That's huge.
OneBeacon didn't pay a big one-time dividend in 2012, largely
because it's been shrinking by divesting some of its businesses.
As the divestitures stabilize, odds are good the companywill
resume the special payouts.Analysts expect OneBeacon to turn
2012's loss of 59 cents a share around to aprofit of $1.07 a
share in 2013 and $1.13 in 2014. That leaves plenty of room to
distribute more to shareholders.
At $4.76 billion,
Windstream (Nasdaq: WIN)
isn't technically a small cap, but the telecommunications company
is hardly a household name. Either way, its current dividend
yield of 12.5% is attractive enough to merit a closer look.
That being said, the frothy dividend yield has been subject to
much debate of late. Some investors don't think it can be
maintained, given the company's recent and plannedcapital
expenditures. They need not worry. Windstream has said it's going
to reduce its capital expenditures from 2012's $1.1 billion to
less than $850 million thisyear .
Meanwhile, although Windstream continues to bleed
voice-relatedrevenue , the company is more than offsetting that
with data-driven revenue. Although analysts are still expecting a
mild dip in revenue this year and flat revenue growth for 2014,
those outlooks don't respect the fact that Windstream has finally
started to figure out its optimal collection of video, voice and
If Windstream is under the radar and OneBeacon Insurance is
obscure, then insurer
Donegal Group (Nasdaq: DGICA)
is an outright unknown. But that doesn't make it any less
Donegalshares currently boast a dividend yield of 3.4%. It's
better than the market average, but investors can certainly find
stronger payers. So what makes Donegal attractive?
One reason is the company's long history of rising quarterly
dividends, from 6 cents a share in the middle of 2003 to 13 cents
a share last quarter. The increase in the payout simply reflects
growth in Donegal's revenue andearnings -- even if that growth
has been erratic at times.
However, there's an Xfactor now working in favor of Donegal
shares: a potential bidding war. Institutional-level private
investor Gregory Mark Shepard has offered $30 per Class B share
for enough shares to give him control of nearly 23% of the
company. That was a 42% premium over the pre-offer price.
Theboard of directors , however, advised shareholders to not take
Although it's unlikely Shepard will increase his offer, it's not
off the table, either. Even if he doesn't counter with more than
$30 per share, he's long argued that the company'sB shares -- and
by extension, itsA shares -- "trade at a substantial discount to
their realizable value if combined with another mutual insurer."
He's also clamored "to explore strategic alternatives to maximize
shareholder value." If Shepard sees something untapped about the
company, one way or another, it will eventually come to the
Risks to consider:
Some investors will have noticed that shares of many of
themarket 's favorite dividend payers have suffered of late, due
in part to the rising yields on the 10-yearTreasury note .
Dividend stocks are highly rate-sensitive. Though it's
unlikelybond yields have room to move much higher anytime soon,
Action to take -->
First and foremost, investors may want to consider whether a
particular industry is overrepresented or underrepresented in
their current portfolio before entering any of these names. If
that's not anissue with your particular portfolio, however, then
Donegal may be the top choice among the three. Though it has a
trailing yield of only 3.4%, it's the best positioned of the
three to beef up itsbottom line and increase its payout rate in
the foreseeable future.
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