is high in any market. In today's market, it's stratospheric. The
S&P 500 is only yielding 2% and a three-year CD currently pays
about 1.77% on average.
Is a 10% yield too good to be true?
Often it is. A yield that high usually just means that the stock
price has plummeted because of deteriorating
and fundamentals. But, could there be 10% yields out there with
strong earnings and fundamentals behind them? If so, they are a
tremendous find in today's flat markets. After all, a 10% yield not
only provides an income but also gives investors a +10% return per
year, even if the stock price does nothing. That beats the S&P
500's return during the past 10 years by about 11% per year.
There are special risks and opportunities associated with these
payers. But, here are three high yielders worth a second look.
PennantPark Investment Corp (Nasdaq: PNNT)
is an interesting high yield play from the world of business
development companies (BDCs). This company makes money by finding
promising medium-sized private companies in need of capital and
loaning them money at high rates of interest.
BDCs are strong dividend payers because they do not pay income
taxes at the corporate level. PennantPark has paid steadily rising
quarterly dividends since its
in 2007 and the last payment increased in April to $0.26 per share.
At the current rate, the stock yields a not-too-shabby 10%.
Can the company keep it up?
Lately, PennantPark has been raising money to grow earnings in
. A recent offering of 4.6 million shares diluted existing
shareholding by about 14.6%. That means the
has to pay out 14.6% more in dividends just to maintain the current
But the company might be able to pull it off. Prior to this
latest offering, PennantPark has issued stock in the past year that
had diluted shareholdings to the tune of 50%. But the BDC has
managed to use the money raised to generate returns sufficient to
pay the extra dividend. In the third fiscal quarter (June), net
investment income (from which dividends are paid) increased +56%
from the year ago quarter to $8.9 million.
Pennant Park should be able to earn sufficient income to
maintain the dividend if demand for new loans remains fairly strong
in a decent recovery. However, if the
falters, the dividend may well be cut. The stock and its
mouthwatering dividend is primarily a play on recovery at this
IncrediMail Ltd. (Nasdaq: MAIL)
is an Israel-based company that develops software for customized
email and other personal desktop applications used to generate
Internet search-related revenue. The company pays two dividends a
year. The last dividend, paid in April, was $0.43 a share, and the
next dividend, to be paid in October, has been declared at $0.45.
The two dividends of $0.98 give the stock a huge trailing yield of
nearly 15.0% at current prices.
IncrediMail sells personal desktop software in more than 100
countries and has contracts with
Google (Nasdaq: GOOG)
InfoSpace (Nasdaq: INSP)
to share in Internet search revenue. The company has been having
solid success. Revenue increased +8.3% ($14.2 million) in the first
half of 2010 compared to last year's half, and net profit was
higher by +15% over the same period.
While IncrediMail has a policy of paying out at least half of
in dividends, it's been paying out nearly all of it. In the first
half of the year, the company paid $0.45 based on net income of
$0.46 a share. However, the company has a cash cushion of about
$11.3 million (the second half's dividends totaled $4.4 million)
and has no debt.
Annaly Capital Management (
is a New York City based
real estate investment trust (REIT)
that invests in a portfolio of
securities backed by government sponsored entities (GSE) like
Fannie Mae and
. The company borrows funds at lower short term rates and invests
those funds in higher paying mortgage backed securities, thus
making profit on the spread.
In the second quarter, Annaly's earnings took a hit. Core
earnings were $0.59 a share, compared to $0.66 a share in the year
ago quarter. The primary reason for lower earnings was higher
prepayment caused by the government's program to buy back loans
more than 90 days delinquent. Annualized prepayment rates at Annaly
rose to 32% from 19% a year ago. Annaly was unable to invest the
money at comparable interest rates and, as a result, average yield
on assets dropped as did the REIT's spread and profits.
Including the July dividend of $0.68, the last four quarterly
dividends have totaled $2.76 a share, which translates to a
remarkable 15% yield at current prices. The company did pay
slightly more in dividends than it earned in the second quarter,
but the government program ended in June, and results are likely to
The main danger to this dividend is rising interest rates. The
company makes profits on the spread, which is directly affected by
its cost of borrowing. However, higher interest rates don't appear
on the horizon at this point.
Action To Take -->
Any stock yielding as high as 10% will carry a fair degree of risk.
For the more aggressive part of an income portfolio, investors can
consider Annaly in the short term and IncrediMail and PennantPark
for longer term.
-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications... Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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