Before I get to this week’s picks, I’ll address the elephant in the room: Most high-yield sectors were caught up in the recent market selloff, thanks to an overwhelming “risk off” change in sentiment. Many of these stocks are less liquid. So, if large sellers show up when the bid side of the market is soft, they will endure sharp short-term declines.
Luckily, earnings season is just around the corner. Thus far, the numbers have been very encouraging for those high-profile, blue-chip companies that have reported in the pre-season, with forward guidance even more reassuring. So, I expect that once Wall Street is finally able to let go of its anxiety over Europe, China, the Middle East and Ebola, then the focus will return to what’s truly important for stock prices: earnings and cash flow.
Even in the current climate, certain sectors are holding up much better than others. As a group, real estate investment trusts are up more than 4% since Oct. 1, while the broader S&P 500 is down 4%. My top names in this area certainly have a lot going for them: strong analyst outlooks, nice fundamentals with room for growth, ownership by “the smartest guys in the room” — and hefty dividends.
Starwood Property Trust (STWD)
First up is Starwood Property Trust (STWD), the nation’s largest commercial-property mortgage REIT, managing over $29 billion in assets with a consistent history of delivering rising income and capital appreciation for shareholders. Starwood has been called a “one-stop shop” for borrowers seeking first mortgages, subordinated debt, mezzanine loans and business notes.
What’s more, the vast majority of Starwood’s lending activities are floating rate, which is music to my ears. Lately there’s been some chatter amongst the hedge-fund community that the Federal Reserve is going to look to take the short-term interest rates (Fed Funds) to 3% sooner than people expect, which has put pressure on other REITs that have more “vanilla,” fixed-income assets. I still think the Fed won’t raise rates for another six to nine months at the earliest — but when they do, STWD’s floating-rate focus will be a strong point in its favor.
In the past year, STWD raised its annual dividend from $1.76 to $1.92 per share, representing a current yield of 8.7%. Starwood’s 2015 top-line revenue is forecast to grow by 47%. Six analysts rate Starwood a “buy” — and I do, too.
NorthStar Realty Finance (NRF)
Northstar Realty Finance (NRF) is another of my favorite REITs, as I’ve mentioned before. NRF is a commercial REIT, like STWD, focusing mainly on hotels. In mid-September, Northstar announced plans “to acquire a $1.1 billion portfolio” of 52 upscale extended-stay properties. The purchase increases NRF’s total hotel portfolio to $3.2 billion, which includes 159 hotels and over 20,000 rooms, is primarily affiliated with Marriott (MAR) and Hilton (HLT) and spans 21 states.
Around the same time, Greenlight Capital’s David Einhorn established a new position in NRF, picking up 4.5 million shares at an average cost of $15.72, which makes it his fifth largest position. The old saying that it pays to follow the money applies here; being one of the sharpest hedge fund managers, it certainly pays to follow what Einhorn is doing — and usually it pays pretty well to be in his favorite high-yield plays as well.
NRF has consistently raised dividends since 2009, including a bump in the August payout to $0.50, for a whopping 11.7% forward yield. The share price has certainly come in of late, like those of other high-yield stocks…and I recommend you buy the dip while you can.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. And most recently, Bryan introduced Cash Machine Trader. With this service, he’s increasing the income stream potential even further by using covered call writing strategies to generate yield in the form of option premium — on top of capital appreciation income from well-known stocks.
