Every year, between the end of December and April 15, I pore over the market looking for stocks to add to my portfolio that can provide reliable income with yields above 4%. For whatever reason, the start of a new year gives me a certain clarity regarding where a company has been and where it’s going. But I don’t want just any high-income stocks, I want stocks to hold for at least five years with reasonable confidence they will maintain their high yields while preserving capital – and, hopefully, generating capital gains. Here are three must-buy income stocks for 2014.
Ashford Hospitality Trust (AHT), the best-managed hotel REIT in the sector. It holds 114 hotels, with a focus on upper-scale, full-service hotels in major and secondary-market cities and resorts, mostly in the United States. Smart management enabled it to survive the Great Recession, which saw the company suspend its common stock dividends for two years and its price tumble from above $10 to less than a dollar. But since then, that same management has brought AHT roaring back, with an average annual return of 60.03% over the past five years, 13.61% for the past three and 18.29% last year. As of the end of February, the stock price was back above $11. And it has a dividend, yield of 4.34% that looks stable or better, considering growing demand for an undersupply of hotel rooms, enabling management to raise prices.
Preferred stocks are fantastic generators of fixed income with limited risk. With bond yields having fallen to unattractive levels, and ever-present risk in the stock market, preferreds make a perfect compromise. You can invest in individual preferreds or preferred ETFs.
Ashford has a Preferred D that yields 8.30% and an E Series that yields 8.49%). You might take a look at Public Storage (PSA), which has a Series P that yields 6.32%. If you prefer, you can use the nicely constructed iShares S&P U.S. Preferred Stock Index (PFF). This ETF holds a basket of preferred stocks presently yielding 6.24%. In terms of total return, it was down 1.29 percent last year, but that was better than the investment grade bond market as a whole, which was down 2.02%. But looking back further, PFF’s total returns have been solid, averaging 6.61% a year for the past three years, and a handsome 11.61% over the last five.
Finally, I’d go with Kinder Morgan Energy Partners, L.P (KMP). This energy pipeline outfit is considered the gold standard of stocks in this sector. The company has consistently raised its dividend — sometimes even quarter to quarter — over the past eight years. Energy is not going away, consumption will always be with us, and despite clamoring for “green energy”, let’s just say that ain’t ever gonna happen in broad enough ways to put a dent in Kinder’s business. The stock presently yields 7.29%, but the company has been raising the dividend nearly every quarter for the last four years, so it could go higher. [512 words]Three Safe, Little-Known High-Yield Stocks
There are some companies so fundamental to the way the global economy functions, and so well run, they’re likely to flourish and reward investors from here to the next geological era. Warren Buffet calls them “forever stocks,” but to clarify: I think you can buy shares of these companies and not lose a night’s sleep for the next 30 to 60 years.
For example, take Boeing (NYSE: BA). The world is always going to need commercial airliners, and America is always going to need military hardware. Boeing is a leader in both: it’s one of only two global makers of big commercial jet planes, and one of the biggest and best Pentagon contractors.
After a great run from $26 in 2009 to $144 in January 2014, Boeing’s stock took a $25 hit. The reason? Concern that military spending is shifting into permanent low gear. But let me tell why I’m not worried.
First, in 2013 Boeing generated 61% of its record $86.6 billion in revenue and 63% of its earnings from operations from its commercial airplane business. Second, the company has an order backlog of $441 billion, of which only $67 billion is from its military and government businesses. Third, it’s cutting costs and raising margins. Fourth, the company continues to focus on increasing shareholder value: it bought back $1 billion of its common stock in 2013, and increased its dividend by 50 percent – for an unbroken record 43 years of rising dividends.
Boeing now pays an annualized dividend of $2.92 a share, for a yield of 2.27% . Whatever happens to military spending, you can look for those numbers to increase over the long term.
Next up, Intel (NASDAQ:INTC). The world runs on computers and Intel is the long-term dominant company in personal computer processors, with some 84% of the world’s PC chip market. Neither of those is going to change. PC sales have been declining worldwide, while smartphone and tablet sales soar, but Intel’s not asleep: it’s making a push into those markets too, with splashy introductions of new chips that are faster and extend battery life more than the competition’s.
And, as processing moves into the cloud, power for all the data centers has to come from somewhere. It’ll be Intel, which has the cash and smarts to remain on the cutting edge of technology. The company has $22 billion in cash and routinely generates $8-$10 billion in free cash flow annually. That’s a ton of cash to fuel everything it’ll ever want to do, including paying its handsome 3.6% yield.
Third: the world will always demand entertainment. My pick here is Disney (NYSE: DIS), the only firm that’s managed to make entertainment a cash cow. It’s been a global brand name for more than 50 years, has tremendous product diversification (movies, a TV network, theme parks, and more), and makes robust acquisitions that help it stay ahead of the competition. I wish its 1.1% yield was larger, but when you consider its average annual return of 25.3% over the last three years, it’s been a very good deal indeed
Three Safe, Little-Known High-Yield Stocks
Are you frustrated by the lack of high-yield opportunities in all the safe, well-travelled corners of the world of bonds you’re used to visiting? Well, just like relatively undiscovered vacation bargains you hear about every once in a while, there are regions of the financial markets that offer deluxe yields with surprisingly low risk that remain known only to the cognoscenti. Here’s my guide to two of them.
The first such part of the financial world is my favorite — the great, sun-bathed shores of the fixed income market known as preferred stocks. These stock-bond hybrids combine the comfort of bond-like stable prices with the ready liquidity of stock trading. And, like their name implies, payment of their dividends takes priority over the issuer’s common stock. A preferred stock usually trades around its initial offering price, moving a few percentage points around it depending on the underlying health of the company that issued it.
Thanks to the Fed, interest rates are still near all-time lows and, despite the “tapering” of its bond-buying program, the central bank is still set on keeping interest rates near historic lows for the time being. As a result, Treasurys and high-quality corporate bonds just can’t compete with. My favorite in this space is Ashford Hospitality Trust Series E (AHT)– its symbol varies by broker – which pays an annualized dividend of $2.25 per share for a current yield of 8.49%. Ashford has maintained significant liquidity for many years, even through the financial crisis.
If you want diversification, go with the SPDR Wells Fargo Preferred Stock ETF(PSK). It offers a great yield of 7.44%. Financials comprise 81% of its portfolio, with top holdings including preferred stock issued by PNC Financial Services (PNC), MetLife(MET), JPMorgan Chase (JPM) and Wells Fargo (WFC).These are all companies that were relatively unscathed by the last financial crisis. The second biggest sector in PSK’s portfolio, representing 8.75% of the portfolio, is utilities, with names like Dominion Resources(DRU), Duke Energy (DUK) andIntergrys Energy (ICE). None of these is a high-flying growth company, but when it comes to preferreds growth is not the priority.What’s important is abundant cash flow and a solid balance sheet, and that’s what these holdings have in spades
Another general destination for invigorating yields is the land of REITs. You can also thank the Fed for giving mortgage-based REITs longer-lasting appeal. These investments are particularly lucrative if the mortgages they invest in are 1) backed by the federal government (called “agency REITs”) and 2) interest rates stay low. They make their money off the arbitrage between the rates at which they can borrow money to purchase these investments, and the long-term rates of the mortgages they buy. My choice here is American Capital Agency (NASDAQ: AGNC) which currently yields 11.6% and as far as I can see, is safe for at least the next two years.
I like all of these opportunities because they are about as close as investors can get to the kind of deals one might find in the exclusive world of private equity – and that’s the kind of destination usually reserved for the high-net worth investor.
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at firstname.lastname@example.org.
Learn how to generate more income from your portfolio.
Get our free guide to income investing here.