My Answer to “What Should I Buy First?” T

[Pages:8]April 2017 Vol. 3 Issue 11

My Answer to "What Should I Buy First?"

T he number of Dividend Hunter subscribers continues to grow. A fact for which I am very grateful and that helps motivate me to keep improving the service and keep it relevant to the needs of income-focused investors. One question that I often receive from new subscribers is "What five of your recommended stocks should I buy first?"

My usual answer is that the Dividend Hunter

recommendations list is 20 stocks long for very good reasons. It takes that many individual stock holdings

In This Issue

to get reasonable diversification. Also, I can find good

dividend paying investments for the long term, but I

Nuveen Nasdaq 100 Overwrite Fund ........3

am not very accurate on picking which ones will give the best performance over the near future.

Dividend Capture Strategies ......................4

I put together the Dividend Hunter recommendations list with the goal of providing information on enough

Easterly Government Properties.................5 Portfolio Update ........................................6

stocks so that an income focused investor can build a portfolio that pays a high current yield, the dividends

Current Portfolio Buy .................................7

are among the safest for continued payment and

there is potential for future dividend growth. Each of

the 20 recommended stocks has very positive dividend income or total return potential.

With some caveats, I am going to give you a smaller list of stocks. These are some that I think everyone should own. They are also a good starting point if you are just beginning to build a dividend income focused portfolio.

Let's start with my top two:

? Main Street Capital Corporation (NYSE:MAIN) ? New Residential Investment Corp(NYSE:NRZ)

Then own one of these two commercial mortgage stocks:

? Starwood Property Trust, Inc.(NYSE:STWD) ? Blackstone Mortgage Trust Inc(NYSE:BXMT)

Pick at least one energy infrastructure stock:

? InfraCap MLP ETF (NYSE:AMZA) ? Plains GP Holdings LP (NYSE:PAGP)

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Add a growing dividend prospect out of this list:

? Aircastle Limited (NYSE:AYR) ? Easterly Government Properties Inc. (NYSE:DEA) ? MGM Growth Properties LLC (NYSE:MGP) That gets you to five stocks. A GOOD START to building a dividend income portfolio. I am certain that there will be other stocks on the Dividend Hunter recommendations list that will outperform some or all the stocks I have listed here. I try to have 20 stocks on the list because I believe you are best served with a long-term investment approach to own this many stocks. A final point on this subject. These stocks will all go down in value for periods of time. That's what stocks do. Our dividend-focused approach dictates that when share price go down, that is a good time to buy more shares. That will increase our dividend income stream and the effective cash flow yield of the portfolio. Both very good things to have happen I want to encourage you to read through this issue of The Dividend Hunter (as you should for all issues!). I am making several changes to the recommended stocks list this month. To see which stock I am dropping, you can jump to the Portfolio Update section. We have updated the Monthly Dividend Paycheck Calendar for April. You can access the updated calendar immediately by clicking the link below. Click here to see the updated Monthly Dividend Paycheck Calendar. Land, Fly or Die,

Tim Plaehn Editor The Dividend Hunter

P.S. Dividend Options Machine re-opened for one day only. On Wednesday, we shut down accepting new subscribers to the Dividend Options Machine. I honestly did not quite expect the VOLUME of requests we received and since then I've been flooded with emails from readers who missed out, asking if they still had time to try it out. Well, we decided we should give you one last chance, especially with our first trade just recently sent out and our next one coming out soon. For today and tomorrow only, you can sign up for the Dividend Options Machine and still get the deeply discounted rate reserved only for Dividend Hunter readers. Click here to sign up now... ... after that, however, we're shutting the doors tight.

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April 2017 Vol. 3 Issue 11

Nuveen Nasdaq 100 Dynamic Overwrite Fund

The closed-end fund (CEF) universe includes a lot of high-yield investment options. I regularly take a closer look a handfuls of different CEFs. Most do not meet my criteria for safety of dividends or do not provide diversity to the Dividend Hunter recommendations list. Most also do not offer a strong opportunity to make money but rather than lose money.

Currently, there is just one CEF in the Dividend Hunter recommendations list: Reaves Utility Income Fund (NYSE:UTG). UTG has done a nice job of providing investment exposure to the utilities sector, paying an attractive dividend yield and strong total returns.

Today I am adding the Nuveen Nasdaq 100 Dynamic Overwrite Fund (Nasdaq: QQQX) to the Dividend Hunter recommended stocks list. This closed-end fund gives us high-yield exposure to the technology sector.

dynamic part is that the fund sells call options covering between 35% and 75% of the value of the fund's equity portfolio, with a long-run target of 55%. The goal with this is to enhance the portfolio's risk-adjusted returns. The call option income plus realized capital gains have allowed QQQX to pay a steady dividend, currently at $0.35 per share per quarter. That gives a current yield of 6.7%.

Investment Considerations

Tech stocks are hot and the Nasdaq Composite index continues to set new highs. The call selling by QQQX will result in the fund's share price lagging the index during gains, but also gives a cushion if the index falls. The dividend payments will include some of the gains earned as the tech sector stocks rise. The Nuveen website states that QQQX provides the potential for:

The fund name gives a good overview of what the fund does. The Nasdaq 100 is the index that tracks the 100 largest stocks trading on the Nasdaq stock exchange. Many of these stocks are in the technology including the big-name brand stocks. The top five holdings are:

? Apple Inc.(Nasdaq:AAPL) ? Microsoft Corporation (Nasdaq:MSFT) ? , Inc. (Nasdaq:AMZN) ? Facebook Inc. (Nasdaq:FB) ? Alphabet Inc. (Nasdaq:GOOG, GOOGL)

I think it provides excellent portfolio diversification if we can have exposure to companies like these and earn an attractive dividend yield. QQQ is the symbol for the PowerShares ETF that tracks the Nasdaq 100 Index.

The next part in the name of QQQX is "Dynamic Overwrite". Overwrite means fund managers sell call options against the fund holdings or QQQ itself. The

? Attractive quarterly distributions ? Participation in Nasdaq 100 Index returns ? A measure of downside protection in declining

markets ? Tax-advantaged distributions

As a closed-end fund, the QQQX share price will at times trade at a premium or discount to the net asset value (NAV) per share. Currently, the market share price and NAV are almost the same. Over the last year, the fund has traded at an average 4% discount to NAV. In general, if the Nasdaq 100 index is rising the discount will be small or even go to a premium. If the market starts to fall, the discount will widen. This is a factor to keep in mind when investing in any CEF.

My recommendation is to start with a relatively small position. Be ready to buy more shares if the Nasdaq tech stocks have a significant decline or the share price to NAV discount gets larger. I will watch this and send out an email or weekly stock recommendation if QQQX becomes a "deal".

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April 2017 Vol. 3 Issue 11

The Truth as I See It About Dividend Capture Strategies

It seems like an easy and surefire way to generate higher returns from high-yield stocks. Dividend capture is the strategy of buying shares of a stock just before it goes ex-dividend and then selling those shares soon after the ex-dividend date.

If you own the shares when the market opens on the ex-dividend date, you will receive the dividend payment. With this strategy, the goal is to earn the dividend by owning the stock for just a few days rather than holding shares through a full quarter of share price swings up and down.

The idea is then expanded with the expectation that you can use the same money to buy different dividend stocks more often. Possibly earning 6 or 7 or 8 dividends over the course of a year, rather than the four dividends from a dedicated buy-and-hold strategy. In theory, dividend capture seems like a relatively easy and safe way to significantly boost the income an investor would earn.

Here are the problems with successfully implementing a dividend capture strategy. First, the stock market has a built-in mechanism to eliminate the profit of trading a

stock to just earn a big dividend payment close to the ex-dividend date. On the ex-dividend date, when buying shares will no longer result in receiving the upcoming dividend, the stock price opens at the previous day's closing price minus the dividend amount.

For example, Dividend Hunter recommended stock New Residential Investment Corp. (NYSE:NRZ) went exdividend for a $0.48 per share payment on March 23. As you can see from the chart below, on March 22, NRZ closed at $17.09 per share. On March 23, it opened at $16.65, down by $0.44, very close to the dividend amount. The dividend capture traders now must wait for NRZ to climb back up to whatever price they paid for the shares to have a profit equal to the dividend amount.

The bigger problem involves all the other novice investors who have "discovered" the possible returns of dividend capture. The stock market is a pure demand driven auction market. This means that as demand increases, so will share prices. Values fall when there are more investors who want to sell than there are ready buyers. You can see where this is going. As an

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ex-dividend date approaches, buying demand picks up

$1.00 or more higher than what you paid for your

and so does the share price. After the ex-dividend date,

shares. At this point, you can sell that last group of

all those dividend capture traders are looking for the

shares you bought and lock in that more than $1.00

first opportunity to unload those shares, so there is

gain, which is over double the $0.48 per share dividend

much more selling pressure on prices than there is

you would earn by holding through the ex-dividend day.

buying demand.

After ex-dividend, if the shares fall you can buy them

Since most investors are impatient, many will just throw

again. This is an entirely optional trade, based on what

in the towel and sell their shares at a lower price,

the share price does. If the "reverse dividend capture"

without waiting for the share price to recover to pre-ex-

strategy gets the right share price move, you can make

dividend levels. The result is often a share price increase

some extra profit. If it doesn't, you still own shares of a

just before ex-dividend and a continued decline in the

quality stock paying an 11% plus yield. That is a win-win

share value after the ex-dividend date. Look at the NRZ

way to manage your high yield stock holdings around

share price run-up just before this most recent ex-

the ex-dividend period.

dividend in the chart on the last page.

I have researched and observed this price action for dozens of high-yield stocks over a half-dozen years of

Easterly Government Properties, Inc.

quarterly ex-dividend periods, and my analysis shows it is very, very difficult to make even a portion of the dividend yield through dividend capture. The share price run up before ex-dividend and then declines after occurs during most quarterly dividend periods.

Easterly Government Properties Inc. (NYSE:DEA) is a relatively new public REIT that lives up to its name and owns properties that are leased to federal government agencies. Easterly plans to aggressively grow its portfolio of facilities, and this growth should lead to a

If there is a tendency for the share price of a high-yield stock to be driven higher before the ex-dividend date and then fall after, we can employ some contrarian

rewarding combination of attractive current yield, dividend growth, and share appreciation. To date, the REIT has lived up to management growth forecasts.

strategy to improve the overall results from our highyield stock holdings.

Background

These price swings give us the opportunity to buy low, when others are selling for the wrong reasons. I personally use the post ex-dividend share price drops as opportunities to add to my holdings in the high-yield shares of stocks like NRZ, AMZA and STWD.

Easterly Government Properties was formed in 2011 by a group of executives with an average of 25 years of commercial real estate management experience. The company went public with a February 2015 IPO. At the time of the IPO, Easterly owned 29 properties that were 100% leased, with 26 leased by federal agencies. The

You should look to do the same. Just by doing this you

portfolio now is up to 44 facilities.

will increase the average yield of your portfolio and the amount of your future cash dividend earnings.

The company's goal is to acquire properties to lease to government agencies. Their criteria for buying buildings

Also, if your timing is somewhat lucky, you can turn the losses from the dividend capture crowd into your shortterm gains. For example, you buy 200 shares of NRZ at a nice low price after ex-dividend. Then as the next ex-

is that they must be less than 20 years old (the average government facility is almost 50 years old) and can be put on 10 to 20 year leases with built in rent increases. The General Services Administration (GSA) sets up

dividend date approaches the share price jumps up by

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almost all government leases and is moving the federal government away from owned facilities.

GSA leased square footage has grown by 29% since 1998 with owned asset size staying flat over the same period. Changing missions and technologies are also pushing agencies into newer buildings that better support department requirements.

Leasing to the GSA takes a high level of expertise to work through the government contracting process. Currently, no landlord owns more than 3% of GSA leased properties and the top 10 own about 15% of government-leased properties. The handful of REITs operating in the government buildings sector has stable portfolios but little growth potential.

Investment Potential

Easterly, however, has come into the government leasing sector with more aggressive growth plans. The goal is to acquire $150 million to $200 million of properties in 2017 to the portfolio to lease to government agencies. Four properties valued at $157 million with signed GSA contracts were acquired in 2016.

To date, one acquisition has been signed in 2017. With a current enterprise value of about $1.2 billion, that target equates to 12% to 16% annual growth. Easterly currently carries a low debt balance that equals 24% of enterprise value. Its peer REITs have debt levels of 40% to 50%.

year. The DEA shares now yield 4.9%. My expectations are that the combination of long-term government guaranteed leases with an attractive growth profile will catch the investing markets attention as Easterly Government Properties continues to build a track record.

This level of growth plus safety could result in the market pushing the share price up and the yield down. If the yield goes to less than 4% we would see a mid$20's share price.

Buy or add DEA shares if the yield stays above 4.8%.

Portfolio Update:

It was mostly a no news month for the Dividend Hunter recommended stocks list. The stock market has turned more volatile after four months of gains after the election.

The one piece of important news was the offer from the sponsor of VTTI Energy Partners LP (NYSE:VTTI) to buy out the public shareholders. You have probably noticed the share price has stuck right at $19 plus or minus a nickel. I have looked deeper into the consequences of this offer and have decided the best course is to sell out of VTTI and to put that money to work elsewhere. The $19 price appears to be the $18.75 buyout offer plus most of one more dividend payment.

This means that Easterly can fund property acquisitions with more debt, which will increase the cash flow per equity share. The fact that Easterly has its long-term leases with the world's most financially safe client allows the use of moderate to high debt levels while still maintaining a secure balance sheet.

The Easterly management team is forecasting that annual FFO per share will grow by 7% from $1.17 per share for 2016. I am looking for the current $0.22 quarterly dividend to be increased by at least 5% this

At this point, it appears that the sponsors of VTTI are no longer willing to continue to support the previously announced growth plans. I do not have patience for a management team that is not working for the best interests of public shareholders. Thus, now I recommend selling your shares of VTTI and putting that money to work in another Dividend Hunter recommended stock.

Editor's Note: VTTI will no longer be followed in The Dividend Hunter.

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Current Portfolio: Buy / Accumulate

Stock

Nuveen NASDAQ 100 Dynamic (QQQX) Gramercy Property Trust (GPT) Plains GP Holdings LP (PAGP) LTC Properties Inc. (LTC) Golar LNG Partners LP (GMLP) MGM Growth Properties LLC (MGP) Uniti Group Inc. (UNIT) Lamar Advertising Co. (LAMR) Chatham Lodging Trust (CLDT) Easterly Government Properties (DEA) Reaves Utility Income Fund (UTG) Aircastle Limited (AYR) Hercules Tech. Growth Capital (HTGC) InfraCap MLP ETF (AMZA) Blackstone Mortgage Trust (BXMT) EPR Properties (EPR) New Residential Investment (NRZ)** Main Street Capital (MAIN) Starwood Property Trust (STWD) Ship Finance International (SFL) Macquarie Infras. Company (MIC)

Entry Date

03/31/17 01/31/17 12/01/16 09/28/16 09/01/16 07/01/16 05/31/16 04/29/16 03/31/16 03/01/16 11/02/15 09/30/15 04/30/15 03/31/15 01/31/15 10/30/14 07/30/14 06/27/14 05/30/14 05/30/14 05/30/14

Entry Price

$20.52 $26.34 $35.00 $52.61 $19.29 $26.43 $24.98 $62.04 $20.62 $17.50 $29.95 $20.61 $13.90 $21.51 $41.05 $55.64 $12.16 $32.51 $24.39 $18.52 $61.48

Recent Price

$20.52 $26.11 $31.15 $48.00 $22.10 $26.66 $25.81 $75.01 $19.65 $19.80 $32.57 $24.22 $15.35 $11.09 $30.94 $73.68 $17.09 $38.34 $22.66 $14.75 $80.77

Status

Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy Buy

Div. Earned

$0.0000 $0.0000 $0.5500 $1.1400 $1.1550 $1.1625 $1.8000 $3.1100 $1.3200 $0.9200

$3.544 $1.4800 $2.4800 $4.1200 $5.3800 $9.0600 $4.8000 $7.2300 $5.7600 $5.2200 $12.460

0

Current Yield

6.8% 5.7% 7.1% 4.7% 10.4% 5.8% 9.3% 4.4% 6.7% 4.8% 5.9% 4.3% 8.1% 18.6% 8.0% 5.6% 11.2% 5.8% 8.5% 12.2% 6.6%

Cash Return

0.00% 0.00% 1.58% 2.19% 5.99% 4.40% 7.21% 5.01% 6.40% 5.26% 11.83% 7.18% 17.84% 19.15% 18.42% 16.28% 39.47% 22.24% 23.62% 28.19% 20.27%

Recent price is determined by the last "Ask" price at the closing of the market on the day before publication; most recent update 03/30/17.

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Current Portfolio: Hold

Stock

Williams Companies (WMB) Lexington Realty Trust (LXP) Kinder Morgan (KMI) Stag Industrial (STAG)

Entry Date

05/29/15 03/02/15 01/31/15 12/31/14

Entry Price

$51.10 $10.78 $29.20 $24.50

Recent Price

$29.52 $9.94

$21.70 $24.98

Status

Hold Hold Hold Hold

Div. Current Earned Yield

$3.8500 2.8% $1.3700 6.5% $2.1050 2.2% $3.1047 6.0%

Cash Return

7.53% 12.71%

5.13% 12.67%

Recent price is determined by the last "Ask" price at the closing of the market on the day before publication; most recent update 03/30/17.

Notes: Entry price is determined by the last "Ask" price at the closing of the market on the day before publication. Recent price is determined by the last "Ask" price at the closing of the market on the day before publication. Status denotes whether you should continue to accumulate shares, listed as "Buy" or should hold but not accumulated any more shares, listed as "Hold". Annual Div is the dividend payment as declared by the company and made publicly available. It is as of the closing of the market on the day before publication. Current yield reflects the yield of the regular annual dividend payments (monthly or quarterly depending on the stock) in relation to its share price at the time of publication. We make no guarantee that any company in the portfolio will continue dividend payments. For a more detailed look at the portfolio, log on at . ** NRZ entry price adjusted for 1 for 2 split on 10/20/14. Original entry price on 07/30/14 was $6.08. ** There have been two separate trades for VTR, one recommended in May of 2014 and closed on January 30th, 2015 and the second which was opened on September 1st 2015 and closed on August 31st 2016. ? 2017 Investors Alley Corp. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Investors Alley Corp., 41 Madison Avenue, 31st Floor, New York, NY 10010 or . For complete terms and conditions governing the use of this publication please visit .

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