by Lawrence Meyers | January 8, 2014 2:42 pm
Everyone is on the hunt for yield — be it in dividend stocks or elsewhere — ever since the Fed’s QE program cratered bond yields and muni bonds have become toxic thanks to Detroit.
The problem is that many dividend stocks are also vastly overbought, so chasing a 4% or 5% yield doesn’t make sense if the underlying stock might fall by 30% or more.
Thus, I decided to find some lesser-known dividend stocks that have interesting and profitable underlying businesses and (ideally) aren’t terribly expensive.
Here are three dividend stocks to buy right now:
Dividend Yield: 6.9%
You have to be living under a rock not to know that the government makes for a great customer. It not only is a great source of recurring revenue, but once you land a contract with it, you can bet you’ll get paid on time and will probably be overpaid as well.
Government Properties Income Trust (GOV) is a real estate investment trust that actually leases real estate to the government. It owns about 82 properties in 31 states and the District of Columbia, and the government makes for a very good tenant. The fact that the government is good for the rent may be one reason why this dividend stock is able to secure huge amounts of unsecured financing at extremely low rates (Libor plus 150bps).
GOV has produced a total return of 30% over the past two years and paid out a yield hovering around 7% annually (6.9% at the moment). Meanwhile, while the dividend hasn’t screamed higher, it has improved, from 40 cents in 2010 to 43 cents currently.
Dividend Yield: 6.6%
The first selection is a fascinating company called Medallion Financial Corporation (TAXI).
Did you know that some cities restrict the number of taxi licenses permitted? As a result, the value of those licenses has only increased over the years. It’s like Prohibition — if you limit supply, prices rise. In New York City, a cabbie told me a medallion (license) goes for over a million bucks! (Turns out, he’s right.)
Well, Medallion Financial finances those licenses, and it’s a great secured loan to make — the company makes a net 6.96% spread on the deal. The company is well-financed, having just renewed its $150 million facility and sold equity to the tune of $45 million. TAXI is conservatively leveraged given the collateral, with short-term debt and the current portion of long-term debt at $338 million against principal of $463 million, or about 70% loan-to-value. Delinquencies are virtually non-existent. TAXI also has branched out into other forms of specialty finance, such as lending against fine art and for the purchase of luxury boats.
As a business development company (BDC), TAXI stock must pay out 90% of its profit, which it does, to the tune of a 6.6% yi9eld. There’s talk that Uber, with its mobile application of summoning private drivers, will provide significant competition because the cars don’t require a medallion. However, Uber is not as much of a threat as believed. The cars are not always available, and you might have to wait up to 12 minutes for one. It’s a lot easier to hail a cab. Uber also is 1.5 to 2.5 times more expensive. The point of Uber is to get a car when taxis are difficult to get. That will only appeal to a limited demographic.
I love specialty finance, and I love TAXI stock. I think it’s undervalued here at $14.
Dividend Yield: 8.4%
In fairness, Frontier Communications (FTR) isn’t much of a secret to those with an eye in the very-high-yield universe. In fact, it’s the second-highest-paying dividend stock in the S&P 500.
However, unlike bigger telecoms like AT&T (T) and Verizon (VZ), Frontier certainly isn’t as ballyhooed — partially because of its mostly land-based service, and also because it deals in more rural and otherwise sparsely populated areas.
It’s also a pretty risky play.
FTR, which operates in 28 states, hit the big time when it purchased almost 5 million landlines from Verizon (VZ) back in 2009 in a deal worth $8.6 billion. The acquisition resulted in a 150% increase in revenues over the next three years. However, FTR stock has never reflected this. In fact, thanks also to issuing more and more equity to make acquisitions, the stock has actually fallen — as has its dividend, from 25 cents per share quarterly in 2010 to a dime currently. Meanwhile, Frontier sits on $8.15 billion in debt, which is gigantic, and only about $650 million in cash.
However, telecom companies often carry large amounts of debt (AT&T has $76 billion vs. $1.4 billion in cash), and that’s because their cash flow is so robust. Indeed, cash flow is so strong, FTR stock can afford to yield a whopping 8.4%.
Plus, Frontier is just on the heels of another big deal late last year in which it acquired AT&T’s wireline business and fiber network in Connecticut. This deal includes AT&T’s U-verse video and satellite customers.
This and Frontier’s other moves have analysts expecting revenues and earnings to at least stabilize in fiscal 2014, and with a big dividend stock like FTR, all you really need is for things to stay level while you collect your monthly paycheck.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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