If there has been one driving force of the markets in recent months, it would have to be the Federal Reserve and its stance toward interest rates. And while that stance (don’t move ’em!) has moved the entire market, dividend stocks — particularly high-dividend stocks — have really felt the effects.
At first glance, high-dividend stocks would seem to have beef with rising interest rates. After all, if you can get a higher (and safer) yield from Treasuries, why chase riskier stocks or other assets that pay big income?
Truth be told, a move up from 0.5% to 0.75%, if it were to happen, wouldn’t do much to dissuade investors who are looking for yields in the high single digits, anyway. But when the Fed announced it would maintain that same 0.5% rate for a little while longer, that might as well have been a wink and a nod to investors who were thinking about jumping into high-dividend stocks. And there’s a good chance the data will support the Fed keeping rates level through the end of the year.
It’s game on for high-yielding dividend stocks, folks. Here are seven that you should be looking right now:
High-Dividend Stocks to Buy ASAP: Annaly Capital Management (NLY)
NLY Dividend Yield: 9.8%
When it comes to high-dividend stocks, mortgage real estate investment trusts (mREITS) are always a top draw. Like REITs, mREITs must pay out 90% of all taxable income as a dividend. Unlike regular equity REITs that own properties, mREITS invest in mortgages, loans and other debt tied to properties. This includes providing direct financing for new and existing construction.
However, because mREITS borrow cheap money to fund their lending/investing activities, higher interest rates hurt their bottom lines — and thus their ability to pay out high dividends.
But with the Fed pausing for now, superstar mortgage REITs like Annaly Capital Management, Inc. (NYSE:NLY) could be a big buy.
Annaly, which invests in a variety of agency/government-backed mortgage securities, is the premier player in the industry. The real win for investors is that NLY’s management has been smart, already adjusting its borrowing costs ahead of the Fed’s inevitable rate hike. So Annaly benefits for now, and it’s well-insulated whenever the Federal Reserve does decide to get serious.
Add in the well-timed buy of a major rival, and NLY has the goods to keep its nearly 10% dividend going.
High-Dividend Stocks to Buy ASAP: Ares Capital Corporation (ARCC)
ARCC Dividend Yield: 9.8%
Business development companies (BDCs) are another typical avenue for high-dividend stocks. BDCs provide loans and capital to small- and mid-sized companies — basically, firms that are too big to go to their local bank, but not big enough to do a real cash raise through a bond offering. And like mREITs, they borrow cheap money to make it all work and turn a profit, thus higher rates equals a little more pain.
One of the best BDCs is elder statesman Ares Capital Corporation (NASDAQ:ARCC). ARCC benefits from its relationship with private equity giant Ares Management LP (NYSE:ARES), and together, the pair have been successful lenders over the years. ARCC’s current portfolio sits at an estimated value of $8.9 billion, across 214 different portfolio companies.
That provides plenty of diversification benefits that can come in handy. A few of ARCC’s portfolio companies recently have been late with their payments, causing non-accruals to rise a tad bit this year. However, its overall portfolio has been strong.
ARCC also has another ace up its sleeve: mergers and acqusitions. As one of the biggest players in the industry, Ares Capital is savvy about buying up smaller and sometimes bigger rivals.
High-Dividend Stocks to Buy ASAP: HCP, Inc. (HCP)
HCP Dividend Yield: 5.8%
It’s not every day that you can pick up a blue-chip stock with a high dividend yield, but HCP, Inc. (NYSE:HCP) isn’t an everyday find.
HCP is one of the first and largest healthcare REITs around. It focuses its properties on skilled nursing, senior housing, hospitals and other medical-related real estate. And business has been booming while healthcare demand rises exponentially.
It does have a big, black mark: The skilled nursing segment of its portfolio has been flat-out lousy. Tenants have faced lower demand (thus lower rents), credit downgrades and even a government investigation or two. As a result, HCP stock has been hit hard. The threat of rising interest rates was just the icing on the cake.
But the Fed’s pause should grease the path for HCP, and it gives investors a little extra confidence in this high yielder. HCP already has taken steps to quell the issues in its skilled nursing area, such as asset sales and a spinoff of an entire portfolio.
HCP looks much better now than it has in some time. A nearly 6% yield doesn’t hurt.
High-Dividend Stocks to Buy ASAP: AmeriGas Partners (APU)
APU Distribution Yield: 8.3%
The only time many of us think about propane is on the Fourth of July. But the truth is, for some 48 million American households, propane is a vital energy source.
That number doesn’t even include industrial uses and demand.
Propane gas is a stable business, but it’s a boring one. That lack of excitement and growth means many of the stocks dealing in it are mostly ignored — and that’s a shame.
AmeriGas Partners, L.P. (NYSE:APU), a master limited partnership (MLP), is the nation’s largest distributor of liquefied propane, operating approximately 2,100 propane distribution locations and boasting more than 2 million retail and business customers. That huge size gives AmeriGas some unique advantages over its mom ‘n’ pop rivals. Margins are thin here, so economies of scale are everything. APU did have a rough 2015, but it’s in the midst of a 2016 renaissance, up more than 30% year-to-date.
As the Fed continues to kick the can down the road, AmeriGas investors will be able to benefit from one of the most boring, stable niches in the energy market — and that includes an 8%-plus distribution.
High-Dividend Stocks to Buy ASAP: BP Prudhoe Bay Royalty Trust (BPT)
BPT Dividend Yield: 11.8%
One of the most storied high-dividend stocks these days isn’t a REIT, MLP or BDC … but a royalty trust.
As one of the largest royalty trusts, BP Prudhoe Royalty Trust (NYSE:BPT) collects fees on the first 90,000 barrels of oil collected in the massive Prudhoe Bay oil field located on Alaska’s North Slope. The problem is that BPT has suffered in the wake of low oil prices and pending rising interest rates.
But with oil prices stabilizing and potentially rising in the New Year as production across the world drops, those 90,000 barrels could be worth more later than they are today. And now that the Fed has kicked the interest rate monkey off BPT’s back, the selling pressure should subside.
Not a bad situation for this nearly 12% yielder.
One note, however: BP Prudhoe Royalty Trust is not a forever hold. As a royalty trust, it does have a finite life, and depending on how you model the depletion (when oil costs more, BPT pumps more) it could expire as early as 2020.
Still, you could do worse than put your bucket under this income spigot for a couple of years.
High-Dividend Stocks to Buy ASAP: Southern Co (SO)
SO Dividend Yield: 4.2%
While most investors don’t look at utilities as being truly high-yield dividend stocks, they still feel the Fed’s wrath when it raises rates. That’s in part because they have huge needs for cheap capital to fund their massive capital expenditures and operating costs.
And let’s not forget that the low-interest-rate environment may have pushed valuations up for utilities to nosebleed levels. A bump in interest rates could be very problematic for the boring utilities indeed.
But for now, utilities like Southern Co (NYSE:SO) are safe.
SO is one of the largest generators of electricity in the United States and is the largest wholesale provider in the Southeast. Those 4.7 million customers provide plenty of stable revenues. But I like Southern because it’s transforming itself (even if it needs low interest rates to keep doing that).
About a year ago, Southern bought natural gas pipeline giant AGL Resources. On the surface, the deal made SO just another multi-utility, offering both electricity and gas to its customers. However, AGL is really a midstream giant — with intrastate pipelines, salt cavern storage facilities, gathering liens and even a liquefied natural gas plant under its umbrella.
In other words, Southern Co is becoming a major midstream infrastructure play. If rates stay low, it’ll get there much faster.
High-Dividend Stocks to Buy ASAP: PowerShares KBW High Dividend Yield Financial (KBWD)
KBWD Dividend Yield: 8.5%
Considering that all these high-dividend stocks have their risks, you might want to consider diversifying to stave off single-stock risk. That’s where exchange-traded funds (ETFs) come in. ETFs allow you to hold a basket of stocks for (usually) low annual fees, providing instant diversification while making a targeted bet.
So the PowerShares KBW High Dividend Yield Financial ETF (NYSEARCA:KBWD) might just be the best play of them all.
The KBWD tracks the KBW NASDAQ Financial Sector Dividend Yield Index — an index of mREITs, BDCs and other high-yield financial stocks. This is a big group of major beneficiaries of low borrowing costs. All told, the 37 holdings produce a massive 8.5% yield — one of the best yields in the ETF world.
What’s more, KBWD pays its dividends monthly, which adds up quickly when you’re talking about compound interest.
Expenses for the ETF run at 0.35%, once you back out the acquired fund fees and expenses accounting that comes with buying BDCs.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.