Europe is opening the easy-money spigot — the European Central Bank announced last week that it was putting together plans for a quantitative easing program — and that is fantastic news for high-yielding American dividend-paying stocks and REITs.
That may not make sense at first glance, but hear me out. Capital markets are global, and liquidity sloshes across borders almost instantly. We certainly saw this last year when the Fed’s initial comments about tapering caused a severe correction in U.S. bonds and “bond-like” income investments as well as emerging-market stocks, bonds and currencies.
Most of these asset classes, both in the U.S. and in emerging markets, have enjoyed a rally in the first half of 2014 as investors have come to realize that, even with Fed tapering going ahead at full steam, there remains a remarkable amount of liquidity chasing after a finite supply of income-yielding assets.
As ECB President Mario Draghi takes the stimulus torch from Fed Chairman Janet Yellen, record-low eurozone yields will make U.S. Treasuries look appealing by comparison, which will in turn keep continued pressure on U.S. yields.
Have trouble following all of that? Let me sum it up like this: A new round of eurozone stimulus promises to make U.S. income investments attractive. And today, I’m going to offer four solid American income stocks that should do very well in a low-yielding world.
Annaly Capital Management (NLY)
I’ll start with mortgage REIT Annaly Capital Management (NLY), which, despite its strong performance in 2014, is still down by about 16% over the past 12 months.
Mortgage REITs were in a class of their own, taking a post-taper beating. Annaly lost about 40% of its market share between May and December of last year. The reason? Mortgage REITs are highly leveraged, and the market feared that rising yields would take a bite out of net asset values, which could in turn force the REITs to liquidate their holdings at unfavorable prices.
It’s a valid concern. But most of the sector now trades at a discount to NAV, and Annaly trades for just 94% of book value. Buying a dollar’s worth of assets for 94 cents gives you a decent margin of safety.
And it would appear that I’m not the only person who sees value in Annaly at current prices. Company insiders bought aggressively throughout last year’s decline, with several making purchases at prices significantly higher than today’s.
Annaly currently yields about 10.4%, and I highly expect total returns of 20-30% over the next 12 months.
American Realty Capital (ARCP)
Next on the list is triple-net retail REIT American Capital Realty Properties (ARCP), which — uniquely among its industry peers — is trading near 52-week lows.
What gives? Why the recent underperformance? Two words: “Red” and “Lobster.”
ARCP’s recent $1.5 billion acquisition of Red Lobster real estate assets did not go over well with investors. For a stock with a $9 billion market cap, the Red Lobster purchase represents a large investment in a tenant of, shall we say … questionable quality. Investors have also been agitating for CEO Nick Schorsch to slow down his breakneck speed of acquisitions and focus on stabilizing what he has. ARCP emerged from virtually nowhere to become the largest triple-net retail REIT in the world in less than three years.
I take a balanced view here. Sure, the Red Lobster acquisition adds a fair amount of risk. Red Lobster will account for about 7.3% of ARCP’s assets and 10% of its revenues. Some percentage of these restaurants may close, potentially leaving ARCP tenantless for some period of time. But how many and when? Let’s say things get bad and 25% of the restaurants close five years from now. That would be just 2.5% of today’s revenues, not taking into account any new property acquisitions between now and then. So there’s no reason to panic at the moment.
ARCP trades at book value and pays 8.3% in dividends. At this price ARCP is too cheap to ignore, and as investors scramble for high-yielding assets, I’m betting the Red Lobster deal is forgotten in a hurry.
Realty Income (O)
Realty Income paid its first dividend in 1970, before it was publicly traded, and hasn’t slowed down since. It has paid 526 consecutive monthly dividends and raised its dividend 75 times — and in 66 consecutive quarters.
Since 1994, when Realty Income started trading on the NYSE, the REIT’s annualized dividend has risen from 90 cents per share to $2.19 per share. At its current price, that amounts to a dividend yield of 5%.
Realty Income is one of those rare stocks that I believe you can truly buy, put in a drawer, and forget about for years at a time. As a conservative, triple-net REIT, It’s what I would call an “Armageddon-proof” investment. It owns a diversified portfolio of 3,800 properties spread across 49 states that are rented under long-term leases, primarily to high-quality tenants. The “typical” property for Realty Income would be your local Walgreens or CVS pharmacy — a high-traffic, highly visible location that you pass on your daily commute.
Under a triple-net lease, it is the tenants responsibility to take care of the property and to pay the taxes and expenses. The landlord’s only role is to collect the rent check. Not bad work, if you can find it.
In a global scramble for yield, a bond-like solid performer like Realty Income should perform well.
DoubleLine Opportunistic Credit Fund (DBL)
My final recommendation is not a stock but rather a bond fund managed by one of the best minds in the business, DoubleLine Capital’s Jeff Gundlach: the DoubleLine Opportunistic Credit Fund (DBL).
Gundlach made a splash last month by suggesting that U.S. Treasuries were on the verge of “one of the biggest short-covering scrambles of all time.” And it appeared that he was correct, as bond yields quickly dipped after he made his comment, though they have since recovered.
We may or may not see the short squeeze Gundlach envisions. But I do believe that, at a minimum, we will continue to see long-term yields near their historic lows. That bodes well for DBL, which yields 8.3% at current prices.
DBL is very much a bet on Gundlach himself, as the fund has a very open mandate: It may invest in “income-producing securities of any kind.”
I’m OK with that. Gundlach is one of the sharpest bond managers in the game, and he’s been very prescient over the past several years of volatile swings.
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Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long O and ARCP. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.