3 Dividends for the Not-So-Lazy Investor
Jan 31st 2012 10:42AM
Updated Jan 31st 2012 10:44AM
I've written before about how lazy investors can boost their returns without really trying: by investing in companies with safe dividend yields. It's a proven strategy and one I've used to build the foundation of my own portfolio. Unfortunately, sticking to set-and-forget investments means missing out on higher yields and opportunities for greater capital gains.
The good news for lazy investors is chasing the potentially larger returns doesn't require that much extra effort. If you're ready to step up and become a not-so-lazy investor, then consider checking out one of these three dividend stocks.
On the REIT track
Real estate investment trusts -- or REITs for short -- are required to pay out at least 90% of their taxable income to shareholders as dividends. Consequently, REITs generally offer above-average dividend yields. However, because the payout ratios are so high, the yields aren't exactly safe. If profits decline, REITs will most likely do everything they can to maintain the dividend, but eventually they will have no choice but to lower it. The good news is you can usually see trouble coming, as we'll see with the two companies I've highlighted below.
The mortgage REIT Annaly Capital Management (NYS: NLY) makes money by borrowing cash at low short-term interest rates and then lending it out by purchasing government-guaranteed mortgage-backed securities that yield a higher interest rate. As long as the interest rate spread doesn't begin to contract, then the company should be able to maintain its 13.9% dividend yield.
At the moment, economic conditions for Annaly are quite favorable, and the Fed's recent pledge to hold interest rates near zero through 2014 suggests that conditions are unlikely to change for the near future. Still, investors need to keep an eye on the interest rate spread just to be safe.
Extreme Makeover: Strip Mall Edition
Retail Opportunity Investments (NAS: ROIC) offers investors the magic combination of a 4% dividend and the potential for significant capital gains. The company is a small-cap REIT that buys dumpy shopping centers at bargain prices, fixes them up, and then raises the rent.
I realize that this business model sounds scary in the current economy. However, CEO Stuart Tanz has established an impressive track record in real estate investment. During his tenure as the CEO of Pan Pacific Retail, Tanz helped increase the company's market cap from $447 million to $4 billion in 10 years. Moreover, Retail Opportunity Investments has managed to thrive in spite of less than stellar market conditions. During the most recent quarter, the company's property portfolio now boasts an impressive 92.5% occupancy rate.
This doesn't mean that Retail Opportunity Investments is impervious to shifts in the real estate market. A sharp plunge -- which would likely be accompanied by a similar downturn in the overall economy -- would limit the company's ability to raise rents and keep its properties occupied.
A dividend value play
Finally, the French environmental services and water utility Veolia Environnement (NYS: VE) is by all accounts an ugly stock. Due to investors' fears over Europe, operational problems, and the discovery of an accounting problem in the company's U.S. Marine Services division, the share price has plunged more than 60% in the past 12 months. Furthermore, Motley Fool Income Investor advisor James Early predicted that Veolia's current dividend yield of almost 13% will likely get cut when he recently recommended the company.
Like, I said, Veolia's ugly. However, I agree with my fellow Fool Brian Stoffel and see a lot of potential upside at these prices. The company has been busy scaling back its operations -- reducing the number of countries in which it does business from 77 to less than 40 -- which should help profitability in the long run and ultimately reward patient investors with substantial gains.
I should note that owning Veolia does entail a little extra paperwork. France places a 15% withholding on U.S.-bound dividends, so it's best to hold the company in a taxable account and file IRS Form 1116 in order to claim a foreign tax credit.
These three stocks may require a little extra supervision, but I believe they have the potential to become valuable additions to your dividend portfolio, so I've opened outperform CAPScalls on all three. I also plan to add Annaly to my own portfolio as soon the Fool's disclosure rules allow.
If you're interested in more dividend ideas, then you should check out our special report "Secure Your Future With 11 Rock-Solid Dividend Stocks." It's absolutely free, so click here to download it today.
At the time this article was published The Motley Fool owns shares of Retail Opportunity Investments and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Retail Opportunity Investments, Annaly Capital Management, and Veolia Environnement. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Fool contributor Patrick Martin does not own shares of any of the companies mentioned here. You can follow him on twitter @TMFpcmart03. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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