I think it’s fair to say that most investors have one simple goal: to find stable income in an unstable market, which is not always easy because of the yield traps out there. You never want to be in a situation where you’re buying solely based on a mouthwatering dividend only to find that the yield is skewed by a one-time payout or by a plummeting share price.
One way to enjoy some peace of mind is to purchase stocks with an excellent dividend history. That’s a great sign that the company is committed to rewarding its investors and that maintaining its status as a trusted source of dividend income is an important goal.
Your next step should always be to make sure it can justify the high yield — whether it can support future payouts at the same (or higher) level based on what I would call high-quality business fundamentals. In other words, there’s a lot of trust in the management team and plenty of confidence in their strategy, which is absolutely essential.
Here are two such stocks that have a 20-plus year dividend history AND are able to support the high payout with strong earnings and organic growth.
AllianceBernstein Holding (AB)
One nice gauge of the market’s health is capital inflows into asset managers. There’s been an enormous amount of mergers and acquisitions lately, and I expect that “urge to merge” will remain prevalent as long as capital is so cheap and plentiful for those who can access it. As long as it does, stocks like AllianceBernstein Holding (AB) should continue to outperform.
AB started to pop higher in mid-August after posting second-quarter earnings that beat Wall Street estimates by 4 cents, coming in at 45 cents versus 41 cents consensus. AB has strong exposure to fixed income that paid off handsomely during the quarter: This seasoned asset manager saw revenues climb 5% year-over-year to $754 million and operating income increase by 10% to $143 million…all while declaring a 15% increase in its distribution to 45 cents its forty-second consecutive quarterly payout.
A couple of weeks later, AB followed this up with more good news, reporting that preliminary assets under management gained 1.9% in just the month of August “due to market appreciation and firm-wide net inflows.” That news boosted shares of AB to within a half-point of a new 52-week high.
Since then, AB stock price has come down a bit along with the broad-market decline, which makes this an opportune time to get in on this premier private-equity play. AB manages three times more in fixed income than it does in equities and has been on the right side of the bond rally all year long.
Capstead Mortgage (CMO)
As the financial sector recoups much of its declines from earlier this year, it may prove timely to up your weighting in the mortgage real estate investment trust market via a company that has good exposure to adjustable-rate loans.
Capstead Mortgage (CMO) is an REIT that invests exclusively in adjustable-rate mortgages, most of which are of the jumbo category. Management has 85 combined years of experience managing this space of the REIT universe. So, it should come as no surprise that its investors have enjoyed more than 24 years of quarterly dividends.
For the second quarter, Capstead’s $13.7 billion portfolio of Agency-guaranteed jumbo ARMs saw its spread narrow by eight basis points (to 1.22%) due to the flattening yield curve, while respective leverage was reported at 8.52 times long-term investment capital. Earnings came in at 35 cents, and Capstead paid a common dividend of 34 cents per share. Book value increased 10 cents to $12.69 per share for the quarter, and these fundamentals support Capstead’s ability to sustain or raise dividend payouts in future.
With the Fed tapering and talk of higher interest rates, I believe fund managers searching for higher degrees of “certainty” in the form of income-generating returns — and an inflation hedge — will flock to CMO and its 10% yield.
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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.