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The Best Dividends For A Bearish 2019

Thanks to the December selloff, it’s relatively easy to find 9% yields. The stock market was a relentlessly receding tide in the fourth quarter, which is bad for “buy and hope” investors but quite helpful for income specialists like us.

Let’s look first at real estate investment trusts (REITs). Many now pay 9% – some good, some bad. The main index Vanguard Real Estate ETF has only paid this much (4.9%) twice before in the past ten years!

By cherry picking the lot we can find 49 stocks paying 9% or more. But we should avoid names like Government Properties Income Trust, which frequently pops up on cute recession-proof dividend lists.

Most of the company’s income comes from government entities, so it seems like a smart way to potentially tap Uncle Sam for rent checks. However, its share price is down 66% in five years. Even with the supposedly generous payout, GOV investors have the taste of stale government cheese in their mouths.

There are a few reasons GOV has been consistently crushed. First, its stated funds from operation (FFO) have been in decline. FFO per share is 24% lower today than it was five years ago.

Second, it’s likely worse, because GOV may be overstating its FFO! The firm has been accused of conveniently excluding maintenance-related capital expenditures. Can you imagine old government buildings that don’t require any maintenance?

Stay away from this sketchy situation.

Moving Beyond the Pure Landlords

When considering the 9% payers, we should look beyond the landlords collecting rent checks. These firms carry the REIT corporate structure so that they can avoid paying taxes! By doing so, they agree to dish most of their dividends to shareholders.

They are often misunderstood, hence their high payouts – and opportunities for us. For example, let’s consider Arbor Realty Trust, which makes loans for commercial and multifamily properties between $750,000 and $5 million. This is a niche banks don’t serve much these days.

Arbor is masterfully run by Founder and CEO Ivan Kaufman. Both an operator and shareholder, he is able to peer past Wall Street’s quarterly treadmill to made smart long-term decisions. Ivan has been able to find better business opportunities than slum-lording old government properties!

Contrarian 9%+ Opportunities in CEF-Land, Too

If you’re smart about your CEF (closed-end fund) purchases, you can diversify your portfolio and fortify your dividend stream. You can even buy these vehicles:

  1. For 9% yields or higher,
  2. And at discounts so that you can snare some price upside to boot!

Here’s why: CEFs (unlike their ETF and mutual fund cousins) have fixed pools of shares. Meanwhile, their prices trade up and down like stocks – which means these funds can sometimes trade at a discount to the value of their underlying assets! You can literally buy a dollar for less.

And even though stocks-at-large are looking quite precarious today, this scary environment has income seekers scared of CEFs. Many of my readers have actually asked me if they should bail on our high-paying vehicles. The financial media drumbeat is in their heads, and they’re concerned that their funds are going to keep dropping in price.

In recent years, the bad rap on bond CEFs is that they couldn’t thrive in a rising rate environment. Now, the Fed is ready to hit “pause” indefinitely (traders are pricing in only a 50/50 chance of any rate hike in 2019). Yet basic investors are selling them in a liquidation panic.

Please, don’t follow this misguided herd. Instead, let’s consider a couple of contrarian ideas with big upside potential.

The Kayne Anderson MLP Investment Fund pays an amazing 11% today. It holds a collection of master limited partnership (MLP) stocks. Most MLPs will kick you a K-1 tax form around your return deadline and annoy you and your accountant, but KYN gets around this by issuing you one neat 1099 (which is not nearly as messy).

Plus, when energy is out of favor, you can buy KYN for less than the value of the stocks it holds. Today, its portfolio is selling for just 94 cents on the dollar. That’s about as cheap as you’ll ever see it!

Since KYN’s holdings pipe energy around, it tends to trade with oil prices. A freefall the goo has sent MLPs spiraling lower. When energy prices eventually find a bottom – probably sometime in 2019 – this will be a compelling yield plus upside play.

Finally, let’s give some turnaround credit to Aberdeen’s Asia-Pacific Income Fund. I issued a sell recommendation for FAX in May 2018 because its NAV was heading the wrong way. Rising rates were pressuring the value of the fund’s fixed-rate bond portfolio, and those bonds weren’t paying enough for FAX to pay its dividend without price appreciation help.

Fast-forward to October and the financial winds shifted. This has helped FAX’s portfolio, which has actually increased in value as broader markets have unraveled. This shift is not yet reflected in the fund’s price, which has drifted 18% below its NAV!

FAX has paid the same $0.035 monthly dividend since 2002, which is now good for a 10.7% yield on its depressed share price. If the fund can continue paying its distribution while grinding its NAV sideways or better, it’s going to be a steal at these levels.

Disclosure: none

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