Believe it or not, in today’s “inefficient” world, there are again 845 stocks with a 3% dividend yield. And 34 who pay more than 10%!
You still have options
Big returns can make a big difference. A 3% payout on a million dollar portfolio equals $ 30,000 per year in dividends. That’s fine, but we can “oversize” it to $ 100,000 per year with the 10% payers.
Yes one of these returns is sure, of course.
In the high yield world, security is tricky. There are more dividend traps than genuine investments. But, hidden gems are there for those who don’t mind doing the research.
Let’s do an income survey today. We’ll highlight a five-pack of almost hilarious returns between 9.7% and 15.3%.
That huge average return of 12.3% will turn that million dollars into $ 123,000 in annual income. But can we keep the principle intact?
The Indian Fund (IFN)
Dividend yield: 10.6%
Let’s start with The Indian Fund (IFN), this is what its name suggests: a closed fund (CEF) which invests in Indian stocks.
The bull’s case is as simple as it gets. India is one of the world’s largest emerging markets – a potential powerhouse, thanks to a young population nearly a decade younger than China on average, an increasingly digital culture and promising reforms which include labor, land, agriculture and infrastructure.
And IFN hopes to capitalize on that growth through a tight, actively managed portfolio of around 40 stocks. And in many ways he excelled …
… And yet, it still can’t beat the US large caps!
Part of this concerns India itself, which has experienced medium to high single-digit growth for most of the past decade. But many of its companies have not been able to use the gains in GDP to increase their profits. And higher stock prices require higher profits.
IFN also has some issues. For starters, the portfolio is very concentrated. More than a third of its assets are grouped into just five actions.
The 10.6% yield is also a bit of a mirage. Yes, we do receive quarterly payments from the IFN, but the vast majority of these are long term capital gains and return of capital, not dividend income.
Invesco Mortgage Capital (RVI)
Dividend yield: 9.7%
Invesco Mortgage Capital (RVI) is a Mortgage Real Estate Investment Trust (mREIT), which means that it does not own or operate any real estate. Instead, it deals with “paper” – in the case of IVR, agency and non-agency mortgage backed securities (MBS), commercial MBS, residential and commercial loans, and so on.
I mentioned back in february that Invesco Mortgage Capital at least tried to take advantage of a recent crisis by announcing a plan to offer 2 million shares to raise funds. Shareholders weren’t happy with this, and spent the next few months grinding their teeth as the market climbed 13%.
IVR continues to limp. Book value fell 5.5% and its average net interest margin declined 14 basis points in the first quarter. Plus, its dividend has been everywhere – it was recently cut, and without significant earnings growth, the current payout remains in jeopardy.
Core Strategic Value (CLM)
Dividend yield: 16.3%
Core Strategic Value (CLM) is another CEF, but looks like our top notch mutual fund.
CLM owns both US and non-US stocks with a balanced value and growth approach. But there is nothing balanced about the size of its holdings, with the average market cap currently standing at $ 216 billion. Amazon.com (AMZN), Apple (AAPL), Alphabet (GOOGL) and Microsoft (MSFT) accumulate for nearly a quarter of the assets on their solitaire. It looks like a regular large cap Vanguard or Fidelity offering.
The similarities continue: CLM does not use leverage to achieve its goals. And the fund charges 1.14%, which while high compared to any core index ETF, is downright paltry compared to actively managed mutual funds with similar fees.
This money is largely spent for nothing, as CLM fails to beat the S&P 500 Core Index!
Cornerstone has been lagging behind the broader market this year and over the past decade. And like IFN, its performance comes almost entirely from its distributions – which are mostly made up of long-term capital gains and returns of capital, not dividend income.
In addition, its current premium to NAV of 13% is close to its five-year average, which presents us with no real reason to buy.
Oxford Lane Capital Company (OXLC)
Dividend yield: 10.7%
Oxford Lane Capital (OXLC) is another CEF that deals with Secured Loan Bonds, or CLOs, an asset that most retail investors will never deal with.
CLOs are similar to mortgage backed securities in that they are pooled investments. But rather than bundled mortgages, CLOs are generally bundled business loans.
Another way to put it: Oxford Lane holdings tend to be backed by a lot of commercial debt.
This is an opaque market that your average investor will have a hard time getting enough information, let alone understanding. You trust OXLC’s management to do it, and you pay them richly to do it: an annual fee of 2.87%, not to mention a host of other costs that drive its annual expense. up to over 9%!
To its credit, OXLC has performed well over the past few months, but the music could end quickly.
The technical image of OXLC shows that this is a setback. And the same high leverage (almost 35%) that helps increase returns is the same force that can help accelerate losses once the worm turns. The potential trigger? A ridiculously high price. Over the past five years, Oxford Lane has averaged a steep premium of 17% to net asset value, and is well above that now, at almost 29%.
Granted, the outlook for CLOs remains strong, but when you pay an extra 29 cents on the dollar and a steep annual fee to start up, you’re not playing the odds.
Icahn Enterprises LP (IEP)
Dividend yield: 14.2%
What better way to raise over 14% in annual revenue than to hitch our wagon to one of Wall Street’s best-known activist investors?
We can do this via Icahn Enterprises LP (IEP), a holding company that operates in eight main business segments: investment, energy, automotive, food packaging, metals, real estate, pharma and home fashion. Its subsidiaries and holdings include petroleum refiners CVR Energy (CVI), auto parts suppliers AAMCO and Pep Boys, and pharmaceutical company Vivus, not to mention investment firm Icahn Capital LP.
So why is such a diverse portfolio controlled by a famous stock picker unable to consistently dominate the market, even with double-digit returns?
Because despite all Icahn’s wealth and fame, he possesses made mistakes. Performance was hampered by untimely choices, such as long bets in the energy sector and short bets against the entire market.
The income statement says it all. IEP apparently swings from vine to vine like Tarzan, losing $ 8.07 in 2016, making monster profits of $ 14.94 and $ 11.33 per share in 2017 and 2018, then suffering losses of $ 5.38 and 7 , $ 33 per share in 2019 and 2020.
No wonder, then, that dividends have been doing the heavy lifting for years.
Brett Owens is Chief Investment Strategist for Contrary perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.