While the market’s sizzling run in 2013 was the toast of Wall Street, it wasn’t roses in every corner. Specifically, thanks to a spike in Treasury yields, many higher-yielding assets such as utilities, real estate investment trusts, master limited partnerships and business development companies — which are sensitive to interest rates — took it on the chin.
But that’s not to say big income should be avoided in 2014. Several high-yielding dividend stocks look particularly tempting against the current backdrop, and could offer investors payouts in the high single digits, even double digits. Better still, I think each of the following three stocks could be set up for capital gains as well.
Here’s a closer look:
Apollo Investment (AINV)
Dividend Yield: 9.4%
Money flows into equity markets remain robust, and while the Federal Reserve has said it will taper its bond-buying, the prospect of interest rates still remains quite low for the foreseeable future.
As such, for conservative income investors, I recommend Apollo Investment (AINV). AINV — one of the largest business development companies, or BDCs, by market capitalization ($1.9 billion) — is trading right around book value. It’s also coming off a strong quarter in which the company beat Wall Street estimates, saw net asset value rise by 2% to $8.30 per share and continued its 20-cent per share dividend, which translates to a current annual yield of 9.4%.
The strength of the credit markets has allowed Apollo Investment to monetize some portfolio holdings (net $59 million), and during the quarter the company invested $412 million across 12 new and 18 existing portfolio companies. At the end of its most recent quarter, Apollo’s portfolio consisted of 93 companies and generated a weighted average yield back to the company of roughly 11.5%.
My 12-month price target for AINV, which currently sits around $8.50, is $10.
Calamos Global Dynamic Income Fund (CHW)
Dividend Yield: 8.4%
The global recovery is starting to make its way around to the emerging markets now that we’re starting to see some stability in China and Europe.
Between the Chinese government and analysts, China’s GDP growth is expected to come in between 7.2% to 7.7% for 2014. Meanwhile, while the growth is slower in Europe and they’re two years behind the U.S., you’ve got Mario Draghi, president of the ECB, saying we’ll do whatever it takes to bring this economy back. That provided a big pop in the euro, so they’ll continue to use that strength to pump money into the economy because the world still is in a race to devalue currencies to drive exports. The ECB is going to carry along Portugal, Spain, Italy and other countries that are still trying to work out their mess. It’s enough that the major concerns overriding the potential sovereign bond crisis are starting to lift.
The 2014 FIFA World Cup and the 2016 Summer Olympics mean Brazil is embarking on a major infrastructure build-out. Brazil is to the rest of the South American economy what China is to the Pacific Rim. In addition, Chile is starting to see a bottom in some of the commodities, and copper especially is starting to turn.
Given the global upswing, the hunt for more hybrid income tied to a rising equity market has led me to select the Calamos Global Dynamic Income Fund (CHW) as a top long-term buy. This is about as eclectic of an income pick as it gets against the current trading landscape, but one that I view as a sound fit with what the market is rewarding.
In a market where searching out good deals is getting scarcer, the fact that shares of CHW trade at a roughly 12% discount to their net asset value offers a real blue-light special. From what I can tell — and charts rarely lie — the discount incurred during the June-October timeframe is attributable to having a 30% weighting in the corporate-bond market when interest rates adjusted higher before settling out. I find this to be a bullish anomaly that affords investors a nice way into a well-positioned closed-end fund at an attractive entry.
Given the disinflationary environment and the Fed’s mandate of 6.5% unemployment that serves to keep interest rates low, coupled with forecasts for 2014 that have the S&P 500 targeting 1900, owning CHW is a highly suitable fit for both conservative and aggressive income investors.
Guggenheim Enhanced Equity Income Fund (GPM)
Dividend Yield: 10.9%
For more aggressive income investors, the Guggenheim Enhanced Equity Income Fund (GPM) is a good way to allocate some capital to the broad market rally. Very simply, the GPM fund is a highly active index fund that utilizes a covered-call program to generate a very attractive 11% annual yield. With liquidity dominating the investment landscape, the case for a higher equity market is strong at least through the first quarter of 2014.
Bear in mind that this fund incurs about 700% turnover, which is a function of index ETFs being called away so fund management must re-establish positions month after month. The fund also deploys about 26% structural leverage in the process to crank out the double-digit yield. At the same time, the fund trades at a respectable 7% discount to its net asset value and has demonstrated that it can pay out the current dividend rate that has been in place since early 2009.
Clearly, this fund’s success rests on a great deal of deft market timing on the part of the fund managers. Because of the use of leverage and a solid weighting in the Nasdaq, there is going to be a wider trading range for this fund. Before purchasing these shares, understand that for every 1% swing in the S&P 500, shares of GPM will move 1.5%-2% in relation.
That’s wonderful when the market is trading higher, but this high-powered income fund is joined at the hip with the S&P and Nasdaq, so know that there will be a higher level of volatility associated with owning it as they continue to add future gains.
My 2014 target for the S&P is 1975 and 4400 for the Nasdaq — but not without some nasty bouts of selling on the way. If achieved, the GPM fund should return around 25% to 30%, provided that the market doesn’t experience a major selloff.
Again, this is an aggressive play; I have utilized index-options funds in Cash Machine on two separate occasions, and those positions returned 26.8% and 47.8%, respectively.
My 12-month price target for GPM is $10.50, assuming the targets for the indices I noted above are achieved.
Bryan Perry may hold the aforementioned securities in his Cash Machine portfolio.
