Call it the best of both worlds - income and growth - from the same position. Though yields and the income with which to pay dividends have both generally taken beatings thanks to the recession, there is an upside to this mess: A handful of stocks are now paying double-digit dividend yields and are likely to keep making those payouts in the future.
Best of all, several of these names also offer substantial capital appreciation. Here are five to consider.
IN PICTURES: Eight Ways To Survive A Market Downturn
Most sources peg the annual (last 12 months) dividend yield of Capstead Mortgage (NYSE: CMO) at around 15.3%. It's solid, and it's growing again after a string of mere 2 cents per quarter payouts in 2006.
Though the mortgage industry did change - for the worse - thanks to a massive real estate implosion, that may actually be the reason for Capstead's massive growth since the 2006 lull. You see, Capstead focuses on government-backed loans. Say what you want about Fannie Mae's and Freddie Mac's solvency, but the market knows the U.S. government isn't going to fail to back them up, making Capstead Mortgage one of the few reliable mortgage REITs.
When's the last time you heard of a profitable biotech company, let alone one that paid dividends? PDL BioPharma (Nasdaq: PDLI) is both.
The company has actually figured out how to pick the biotech industry's low-hanging fruit. Rather than take on the burden of marketing a product and hope the competition doesn't one-up it, PDL simply licenses its drugs and collects royalties. The overwhelming majority of the company's revenue this year and last year came from royalty payments, which is generally high-margin income. In other words, the income may vary, but PDL has few expenses to chew into income.
Prospect Capital Corp.
The quarterly dividend from Prospect Capital Corp. (Nasdaq: PSEC) has plateaued at around 40 cents per share since 2007, but plateauing at a yield of 15.7% is nothing to be ashamed of.
Earnings and revenue took a few dents over the prior eight quarters, but last quarter's return to profitability and the forecast for similar profits during the current quarter suggest the dividend is protected. Moreover, with the economy on the mend (albeit a long one), venture capital and private equity firms are indeed finding viable opportunities.
Penn Virginia GP Holdings
Apparently coal and natural gas are two ideally complementary businesses to be in. Penn Virginia GP Holdings (NYSE: PVG) maintained or increased a pretty hefty dividend since May 2007; the current yield clocks in at 11.1%.
Longevity? Not a problem. Penn Virginia GP hasn't taken a loss in years. Revenues weren't even rocked that much during the recession. As natural gas and coal prices move upward again with demand, revenues and margins should only augment an already-profitable operation.
Just like the name implies, Cellcom Israel (NYSE: CEL) provides mobile phone services in Israel. Though this one may seem the most aggressive/risky by its virtue of being a foreign investment, the company's results say Cellcom is at least as stable as any of the other dividend stocks mentioned above; the company hasn't generated a quarterly or annual loss in at least three years.
The current 9.9% dividend yield is solid, but check this out - analysts foresee the company earning $11.61 per share in 2010 (and it's on track to earn $11.09 this year). At a current share price around $31, that translates into a forward P/E of about 2.7.
The Last Word
Diversifying your dividend payers is just as important as diversifying your entire portfolio. I make that point specifically to warn you that collecting the very best dividend-paying stocks right now would concentrate you in two related areas - mortgages and oil/gas. There's nothing necessarily wrong with either, but too much of anything is still too much. That's why I presented five different industries among my top five dividend-paying picks.
Viewing the bigger picture, with yields alone on some stocks now producing greater returns than the market's average annual growth - not to mention the growth potential these stocks offer - investors are looking at a relatively rare opportunity. (To learn more, see Dividend Yield For The Downturn.)
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