Displaying items by tag: income

(New York)

The yield environment is a terrible one for anyone who is seeking income from their investments, especially those in retirement who may be living on a fixed income. So where can investors seek strong domestic yields? Check out mortgage REITs. Mortgage REITs have long offered some of the highest yields in markets because of the leverage they utilize. Most of the group have yields over 10%. Look at the following names as an example: AGNC Investment Corp. (AGNC, yield 10.2%), Annaly Capital Management, Inc (NLY, 12.9%), Anworth Mortgage Asset Corporation (NH, 14%), and Armour Residential REIT (ARR, 12.3%).

FINSUM: So obviously mortgage REITs have significant interest rate risk, but can you imagine a period where interests rates seem less likely to rise?

(New York)

Dividend stocks have gotten a whole lot harder to choose this year. It used to be that you could pick a wide selection of stable decent-yielding stocks and hold them for the long haul. However, COVID has disrupted that in many ways, as it has disproportionately weakened some sectors and disrupted many business models. With that in mind, here are three key lessons to remember when choosing dividend stocks in 2020: expect lower payouts, be wary of financing, don’t chase after yields. The first one is simple—many companies have had to cut dividends and many more will. The second is highly related to the first: be wary when companies have to use debt in order to maintain a dividend. In that sense, simply maintaining the dividend is not necessarily a sign of strength. Finally, and most interestingly, is the lesson about not chasing yields. Because yields are so low, dividend stocks are likely to see gains anyway, so it is more important to focus on the sustainability of dividends than chase yields that might collapse.

FINSUM: All of these lessons make a great deal of sense in the current environment. We particularly like the idea that stocks which don’t have the very highest dividends might actually produce the best combined returns.

(New York)

High yield stocks have been wounded during the pandemic. The 100 worst performing S&P 500 stocks since the pandemic began have returned minus 39% and yield an average of 3.07%; the top 100 have returned over 35% and yield just 0.85%. However, now might be the time to buy in as there are some exceptional values. The core idea is that many of these wounded names are going to be bid up over the next several months as yield-starved investors try to find some income.

FINSUM: Right now it is very important to be selective about dividend stocks, as their returns are all over the map. For example, the Vanguard Dividend Appreciation ETF (VIG) has returned 4% this year, while the iShares Select Dividend ETF has returned minus 18%! The reason why is that the latter was weighted towards utilities and financials, which have suffered. Be careful what you choose!

(New York)

It might seem a bit counterintuitive right now, but that may be exactly why it is a good bet. REITs have been beaten up pretty badly, and on the surface they seem likely to stay that way. Offices, retail, and other parts of the commercial real estate world look to remain weak, but Citi’s private bank thinks there is value in the sector. As to their role in a portfolio, Citi says REITs “are a way to play the U.S. economic recovery and global economic recovery without being too concentrated in the Microsofts of the world, and to add to portfolio yield on top of that while we wait for that recovery”. REITs are yielding about 7% on average and the market has been so beat up that they look underpriced relative to the value of their underlying assets.

FINSUM: The key here is either broad long-term exposure, or shorter tactical exposure to sectors that don’t look likely to be hurt (e.g. industrials, which benefit from growth in ecommerce).

(New York)

The market is split over dividend stocks. On the one hand, about half the market thinks the huge wave of dividend cuts are over and that most of the damage has been done. One the other, many worry that not all the deleterious effects of COVID have manifested themselves on corporate behavior and that further cuts may still be in the works. The overall picture seems to be one where caution is due given the big jump in valuations and the continued possibility of further cuts. For instance, bank and credit card companies look likely to cut further as high unemployment leads to worsening credit quality and more delinquency. Wells Fargo just announced a dividend cut, for instance.

FINSUM: Our thinking here is to be careful. Even if the economy does not have another lockdown, the full effects of this recession may take a little time to fully show themselves in dividend cuts.