Put Your Money to Work: 3 Cheap But High-Yield Dividend Stocks
Investors are always hungry for yield, and in a low-rate environment, supplies are short. At 2.44 percent, the yield on the benchmark 10-year Treasury note is as low as it’s been all year and is well below pre-crisis levels closer to 4 percent. The yield on the 10-year T-note has, in fact, come down dramatically since hitting highs above 15 percent in 1981, and since the late ’80s it has declined fairly steadily to its current level, which is near historic lows set in 2012.
The current low-rate environment is largely the product of quantitative easing (QE), the ongoing monetary stimulus program conducted by the Federal Reserve in the wake of the financial crisis. QE put additional downward pressure on interest rates and effectively drove investors out of traditional debt securities like the 10-year T-note. There’s just not enough yield to go around at 2.4 percent; investors want their money to work harder than that.
The hunt for yield has led many investors to the equity market and, in particular, to high-yield dividend stocks. These stocks traditionally represent companies like Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), and Exxon-Mobil (NYSE:XOM): stable companies with well-established cash flows and a history of dividend increases. In short, cash machines.
While these companies have a place in many portfolios, an investor may want to shy away from their stock in search of better value. Companies with more esoteric cash flows may offer a higher dividend yield to lure and retain investors, which is an attractive opportunity for an investor who can tolerate the risk. Some companies also hike the dividend to attract investors after a period of weak financial performance that drove shares down. Here are a couple of examples of companies that have aggressively hiked the dividend yield in order to lure and retain investors.
1. MFA Financial (NYSE:MFA)
Residential mortgage-backed securities (MBS) earned themselves a bad reputation during the financial crisis. The security is a kind of like a financial sausage — some of it is great, some of it you’re better off not knowing how it’s made, and a bad batch can do a lot of harm. As financial engineers industrialized production and began cutting corners in the buildup to the crisis, more and more bad sausages came off the line. Unfortunately, you can’t recall an MBS, and even identifying which one is toxic can be enormously difficult. This difficulty allowed toxic MBSs to integrate into the financial system undetected until it was too late.
But not all MBSs are rotten, and companies like MFA Financial have built strong businesses around the ones that are good. MFA Financial is a real estate investment trust (REIT) that invests in residential agency and non-agency mortgage-backed securities. This fact can be unappealing to many investors, but at about $8.20 per share on May 28, MFA Financial has a forward annual dividend yield of 9.8 percent, or 80 cents.
Credit Suisse analyst Douglas Harter recently reiterated a Neutral rating on the stock but bumped his price target to $8.50. “The first part of 2014 has been favorable to the mortgage REIT sector, both in terms of rates and spreads,” Harter wrote in a note seen by Bezinga. “While we expect the environment to turn less favorable over the next 12 months with rising rates and widening Agency spreads we think the discounts to book value reflect this expectation. The majority of the expected return from the sector will come from the 11% dividend yield, which we find attractive in the persistent low rate environment.”
MFA Financial stock has a consensus Buy rating from the Analyst Rating Network.
2. Banco Santander S.A. (NYSE:SAN)
Santander is one of the largest banks in the world, but like Bank of America (NYSE:BAC), its stock has a low price because there’s just so much of it. As of the most recent quarter, Santander had 11.5 billion shares outstanding and a float of 11.3 billion. However, also like Bank of America and many other financial institutions, Santander stock is currently at just a fraction of its pre-crisis high. As of May 28, shares of the Spanish bank were trading at about $10.20, up more than 40 percent on the year but below pre-crisis highs about $20 per share.
Still, with a forward annual dividend yield of 6.4 percent for a rate of 64 cents, Santander stock packs a lot of value for its price. Going against tradition, the bank jacked up its dividend in the wake of the financial crisis as earnings declined. The slide was curbed in the most recent quarter, and the trend is expected to stay positive as the European economy heals and Santander solidifies its position in markets around the world, particularly in South America.
Data compiled by TNS, a consultancy firm, shows that Santander is the only major European bank to experience net customer gains in the past few years, largely thanks to rewards programs associated with its accounts. If all goes well with the bank, investors who came for the dividend could find themselves comfortable staying for the growth.
3. Inland Real Estate Corp. (NYSE:IRC)
Inland Real Estate is another REIT, but instead of investing in MBS, this company is actually involved in the development and operation of real estate. The company manages 138 properties with more than 15 million square feet between them, a total of more than $2 billion in asset value. Based in Illinois, most of Inland Real Estate’s assets are in the central United States.
At about $10.70, Inland Real Estate stock boasts an annual dividend yield of 5.4 percent, or 57 cents per share. One of the interesting things about this stock is that its price has been relatively stable over the past year. Shares are off about 4.6 percent year over year as of May 28, but this is largely the result of an unfavorable comparison. In May 2013, shares were just coming off a short-term spike that sent them toward $12. In the six months before that, shares advanced steadily up from about $8 to over $10, and they have pretty much held their ground ever since.