Three Stocks Under $15 - Investors Alley

[Pages:9]U.S. Dividend Stock Investing for Canadian Investors

Three Stocks Under $15

1

Three Stocks Under $15

Stock prices are a funny thing. Fundamentally, the price of a stock has zero relationship to the value of the underlying company. A $100 stock with 10 million shares has a $1 billion market cap.

A $10 stock with 100 million shares also has a $1 billion market cap. These two examples are companies of equal value, even though the stock prices are different by a factor of 10.

Yet there are perceived and psychological differences between low-priced stocks and high-priced ones. Institutional investors including pension plans and mutual funds often have rules against buying low-priced shares, and their trading costs will be slightly lower buying high-priced shares.

Another consideration is that low-priced shares are often ones that previously traded at higher values. Before jumping on one of these now-low-priced stocks to earn an attractive yield, investors need to understand the reason for the stock price decline and have a good thesis as to why the dividend is sustainable, and the share price likely to recover.

At the other end of the low-priced stock spectrum are new companies that have yet to be discovered by the investing public. It's a great find when you get a new company with a $10 per share IPO price and a few years later it tops $20.

With new high-yield stocks, you don't need to rush in and buy on the IPO date. I like to watch new dividendpaying companies for a few quarters to see how management rewards share owners with dividend income.

For income-focused investors specifically, investing in stocks that will keep the dividends coming through all stock market conditions is an utmost necessity. As you build an income stock portfolio, take the necessary steps to make sure you earn a stable and growing income stream through any market conditions.

Before I jump into discussing specific low-priced stocks to provide an attractive stock opportunity, here are a couple of basic portfolio strategies you should always have in mind as you research stocks to add to your portfolio.

? Diversify across a number of stocks you own and by economic sectors. I recommend that about 20 stocks will give an adequate amount of diversification. This number needs to be spread across different market sectors such as equity real estate investment trusts (REITs), financial companies (REIT or otherwise), energy, telecom, and transportation. This is how I've constructed the portfolio in my Dividend Hunter newsletter.

? Plan to reinvest a portion of your dividends, even if you are investing for income to pay your living expenses. The nice thing is you can still have a relatively high take-home yield even if you reinvest a portion of the dividends you earn.

1

Three Stocks Under $15

For example, consider a generic dividend stock that yields about 8%. Taking 5% as income still leaves you 3% to reinvest. That reinvestment will buy more shares, giving you higher dividend payments the next time around and in the future. ? Look for dividend growth. Invest a portion of your portfolio--at least a quarter and up to half--in income stocks that are more focused on dividend growth than current yield. I like to call investments like these "accelerating dividend stocks" because of their commitment to regularly increasing their dividends. The power of an accelerating dividend for driving total returns a force that works through stock market up and down cycles. Many of the stocks in my Dividend Hunter newsletter--and nearly all of the stocks in my Automatic Income Machine service--are stocks with a history of raising dividends. So now that you know what to look for with dividend stocks, let's get into three of my top recommendations.

Land, Fly or Die, Tim Plaehn Editor The Dividend Hunter

2

Three Stocks Under $15

ARBOR REALTY TRUST INC. (ABR)

At a current $8.00 per share, Arbor Realty Trust Inc. (ABR) is a relatively unknown small-cap finance REIT that is just starting its way up. The company is a commercial mortgage lender, with a focus on making multi-family residential property senior loans. Arbor is a leader in its commercial mortgage niche and unlike a lot of finance REITs, the company is on a nice growth trajectory. That growth includes a growing dividend.

Arbor Realty divides company operations into two sectors.

For the balance sheet-held loans and structured investments, the company primarily originates or invests in multifamily secured loans. 90% of this portion of the investment portfolio is in bridge loans, with 74% of the bridge loans to multi-family properties. As of December 31,2019 the portfolio was valued at $4.3 billion.

The other business segment is as a multi-family property commercial loan originator under Fannie Mae and Freddie Mac programs. The company is one of only 25 Fannie Mae Delegated Underwriting and Servicing (DUS?) licensed lenders nationwide, and a top-10 DUS lender for 10 straight years. Arbor is one of only 22 Freddie Mac Program Plus lenders, and the number-one Freddie small balance lender as well as an Affordable Housing and HUD originator. Arbor is a serious and successful player in the multi-family financing sector.

The loan origination business produces servicing revenue for Arbor Realty. Loan servicing provides a steady revenue stream that is not dependent on interest rates. As of year-end 2019, the servicing portfolio totaled $20.06 billion of commercial mortgage loans.

Recent Developments

From the bottom of the 2008 to 2009 bear market, the ABR stock price cruised along at a sub-$10 price as the company paid a steady dividend. Then starting in 2016, the Arbor management team started to make moves that would take the company and stock price to the next level. This stock has gone from a dull and boring dividend payer to one with great dividend growth prospects combined with an attractive current yield.

In July 2016, Arbor Realty purchased the agency platform of Arbor Commercial Mortgage, LLC. This move pulled the servicing revenue of originated agency mortgages into the REIT. Arbor Realty now owns the servicing business on a $16 billion portfolio of commercial mortgages, which generates an average 48 basis points per year of servicing revenue. Mortgage servicing fees are a steady revenue stream that become even more valuable in a rising interest rate environment. The acquisition also turned the REIT into a fully-integrated lending franchise with a significant agency origination business with high barriers to entry for potential competitors.

In May 2017, Arbor Realty took its management structure from third party management to an internal management. This move aligns management goals much closer to shareholder goals and reduces expenses.

Investment Considerations

Arbor Realty is a growth-focused business with a high current yield and growing dividends. The coronavirustriggered bear market in early 2020 crashed the ABR share price, but did not put a serious dent in the companies business operations. Current yield is 15%, which gets an investment in the stock off to a great start. Over the last

3

Aug 2013 Dec 2013 Apr 2014 Aug 2014 Dec 2014 Apr 2015 Aug 2015 Dec 2015 Apr 2016 Aug 2016 Dec 2016 Apr 2017 Aug 2017 Dec 2017 Apr 2018 Aug 2018 Dec 2018 Apr 2019 Aug 2019 Dec 2019 Apr 2020

Three Stocks Under $15

seven years, and powered by the new management initiatives, the ABR dividend has been increased by a total of more than 100%. The dividend growth rate will slow somewhat, but I still expect double-digit growth for the next several years.

ABR Dividend Hikes

$0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05

$-

ABR is a low-priced stock that is on its way to a much higher value. Picking up shares below $10 will look like a great idea in hindsight a few years down the road. Right now, you get a very attractive 15% yield. Don't worry that you missed the recent bottom during the COVID-19 crisis.

HERCULES CAPITAL, INC. (HTGC)

Hercules Capital, Inc. (HTGC) is a business development company (BDC) with a 15-year track record of paying growing dividends to investors. The rules governing BDCs, along with the use of external management companies by most of the companies in the sector, have made it tough to find BDC stocks that meet my criteria for the safety of dividend payments and growth prospects.

Business Overview

Hercules is one of the oldest BDCs, founded in 2003 and available to investors after a 2005 IPO. The company is internally managed with a $1.15 billion market cap. In the BDC world, $1.05 billion, with a $2.4 billion enterprise value (market cap plus debt) is one of the larger companies. What sets Hercules apart from its peers is its client focus. The company works with venture capital and private equity firms to provide funding for companies that are pre-IPO or being groomed for mergers or acquisitions. The BDC lives up to its name, primarily providing financing to various types of technology-related companies.

To assist its client companies and their venture capital backers, Hercules makes only senior debt loans with maturities of 3 to 3 ? years. About 90% of Hercules' assets are loans with 10% as equity positions that can pay off very well when a client goes public or is acquired.

4

Three Stocks Under $15

The loans made by Hercules carry an average "core" yield of 13% to 14%. The typical loan has a 10.5% coupon rate, and the core yield is bumped up by commitment and origination fees. Equity profits and early termination fees have increased the company's average effective returns to above 16%. Through relationships with over 500 venture capital type firms, Hercules has grown its book of business steadily and, step-by-step, increased its annual dividend. Since 2010, the annual dividend has increased from $0.80 per share to $1.24 paid in 2014. The dividend was again raised by one cent quarterly at the start of 2019.

For the final quarter of 2018, Hercules started to pay small supplemental dividends on top of the regular quarterly rate. The extra dividend amounts are small, but over five quarters of dividend payments, they added up to an additional half of a regular quarterly dividend.

Investment Potential

In May 2017, the Hercules management team floated a proposal to convert to an external management structure with the same management team. The market hated the idea, and the company's share price dropped from over $14 to $11.60. The proposal was withdrawn and appears to have been permanently scrapped. For the next several years, the stock has traded in a roughly $12 to $13 range, eventually climbing to almost $16 per share before the 2020 stock market crash. At the current $11 share price, the shares yield over 12% just on the regular dividend. In its 2020 first-quarter earnings report, Hercules reported a net investment income of $0.37 per share, providing 116% coverage of the base $0.32 per share dividend. At that time, undistributed earnings totaled $0.66 per share.

Once the coronavirus pandemic is a few months--or realistically, a couple of calendar quarters--in the rearview mirror, I expect the Hercules share price to move again above $15.00.

BROOKFIELD PROPERTY REIT, PREFERRED A (BPYUP)

Brookfield Property REIT (BPYU) is one of the publicly traded companies managed by Brookfield Asset Management (BAM). Brookfield is headquartered in Toronto, Canada, and has a global presence as a developer, owner, and manager of alternative assets. The Brookfield website states:

As an alternative asset manager with over $500 billion in assets under management and a 120year heritage as owners and operators, we are invested in long-life, high-quality assets, and businesses in more than 30 countries around the world.

Brookfield Property REIT shares are financially identical to Brookfield Property Partners LP (BPY). Dividends paid by the Brookfield REIT are identical in amount and timing to the Brookfield Partners distributions, and the former shares are exchangeable one-for-one into units of the latter. Brookfield Partners owns 92% of the REIT shares, and Brookfield Asset Management owns 55% of the REIT. Do you have all that? The difference is that Brookfield Propety REIT is a 1099-reporting REIT that has identical performance to the Bahamas-registered, K-1 reporting, Brookfield Property Partners.

Brookfield Property Partners owns 88% of the Brookfield Asset Management real estate assets. Those assets total $194 billion in value, spread across the globe. Office, retail, and multi-family are the largest asset classes in the

5

Three Stocks Under $15

real estate holdings. Brookfield Property Partners also participates in Brookfield Asset Management-originated development projects. Currently, 41% of the Partners portfolio is classified as limited partner investments.

The BPYU Preferred: a Dividend for a Safer Income Investment

The pandemic had two effects on income investments. The economic shutdown put the revenues of many companies in jeopardy--including Brookfield Property REIT, due to its large number of retail properties and shopping centers.

Other investments sold off, even though dividends are secure. This type of company becomes a great deal during a stock market crash. The Brookfield Property REIT Preferred A (BPYUP) shares are such an investment. Preferreds have a par value of $25 per share and have guaranteed dividend payments as long as any common share dividends continue to be paid.

In the crash, the preferred shares dropped to $10. They currently trade around $15, giving a 10.5% yield on guaranteed dividends. This stock is a great deal up to $20. In time it will recover to trade near the par value.

In 6 Months or Less You Can Build a Portfolio Paying You $36,000 a Year

Recently a rather new subscriber wrote in to tell me how well my system works for him. His name is Brad and he's a teacher in the Mid-West. He wrote:

"I just wanted to thank you for the excellent advisory service that you provide. In three months I have collected $8,284 in dividends from my investments.

In less than six months, I have put together a portfolio that will generate $36,000 per year for the rest of my life.

Your system really does work and once I had demonstrated that to myself, I purchased your service for life!

It is nice to actually come across something that really does work and perhaps more importantly, doesn't make outrageous promises that can't be kept! Thanks again!"

Click here to discover how you can get your retirement income plan on track just like Brad did.

6

Three Stocks Under $15

BONUS RESEARCH: MAIN STREET CAPITAL CORP (MAIN)

Paying fourteen dividends a year yielding 7%, and having a six-year track record of superior dividend growth, this may just be the best income stock that exists. This share price for this company is more than $15 but it's such a strong income generator and a core holding in my Dividend Hunter service that I felt you needed to have access to this research.

I regularly review a large number of high-yield stocks. I try to dig out the details that separate a high-quality company from one that has the potential to truly whack investor wealth. I often talk about how tremendous value can be found in the dark corners of the stock market, where the investing public doesn't understand how these undiscovered nuggets of dividend-paying companies operate. But sometimes I realize I need to go back and discuss a stock that should be a core holding for almost every stock market investor.

We can all learn some lessons from how Main Street Capital Corporation (NYSE: MAIN) operates and pays investors. As a BDC, Main Street Capital operates under special laws and tax rules that require the company to provide financing to small and mid-size corporations.

There are about 40 publicly traded BDCs, ranging from market caps measured in tens of millions up to Ares Capital Corporation (NASDAQ: ARCC), which has almost $5 billion of market value.

Overall, I think the BDC space carries a lot of risk, primarily driven by government restrictions put on the business type, and only about one tenth of the stocks in the group offer acceptable investment risk. Out of this small subset, Main Street Capital stands well above the rest as a company that has developed a very strong business model inside of the BDC rules.

A BDC can make either debt (loans) or equity (buying shares) investments in its client companies. Most BDCs focus on the debt side and make high-interest-rate business loans with cash for BDC dividends coming from the interest rate spread the BDC earns. Main Street Capital makes plenty of loans, but it also puts a significant amount of capital into equity investments. These investments allow the organization to participate directly in the growth of its client companies. The two-tier model has worked very well for Main Street Capital, with the strongest evidence coming from its dividend payment record.

Main Street Capital has paid uninterrupted monthly dividends since switching from quarterly to monthly in September 2008.

Starting in 2011, the company has been able to increase the monthly dividend twice a year, every year.

Since 2012, Main Street Capital has paid twice-yearly bonus dividends out of the profits earned from equity investments. Those special dividends have meaningful value, adding 26% extra cash income on top of the monthly dividends. While normally scheduled for June and December, MAIN has elected to continue with the regular dividend but temporarily suspend the bonus dividend while we work through this bear market and recession.

(Note: My 36 Month Accelerated Income Plan can show you how to earn over $4,000 a month in extra income even if you have $0 invested today.)

7

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download