High yield stocks come out of a range of different business sectors. You may be aware of business development companies (BDCs), real estate investment trusts (REITs), and master limited partnerships—MLPs. Also, on high yield investor radars will be closed-end funds (CEFs) and leveraged ETFs. For an attractive yield combined with a high level of safety, the best high yield stocks come from a subsector of a subsector of one of these three letter descriptors.

REITs operate under a pass-through tax rule that allows a company to not pay income taxes if its business involves the ownership or financing of real estate and at least 90% of net income is paid to investors as dividends. The REIT sector can be divided into equity REITs and finance REITs. Equity REITs are companies that own commercial real estate. These companies usually specialize in a specific type of property such as healthcare, hotels, office buildings, warehouses, and apartments.

Finance REITs operate on the lending side of real estate. A finance REIT may be a lender or just a company that owns a portfolio of mortgage backed securities (MBS). A lot of finance REITs will be a combination of originating new mortgages, packaging mortgages for sale and fee income, holding loans in a portfolio, and owning MBS.

Finance REITs separate into two categories. These companies typically focus on either the residential side of mortgage lending or on commercial property financing. The residential mortgage side takes a lot of interest rate risk to be able to turn 4% home loans into a 10% stock dividend yield. I am not a fan of this business model. The commercial mortgage REITs, on the other hand, give investors an attractive combination of high current yield and a financially conservative business model.

Commercial finance REITs have these attractive attributes:

• Commercial mortgages are written at low loan to value amounts. These companies typically have portfolios with an overall 65% LTV.
• Commercial mortgages are almost always adjustable rate. This means that if interest rates increase, so will the REIT’s interest income.
• Commercial property lending requires a high level of expertise and flexibility. This allows the REITs to generate higher yields on the loans they make.
• A commercial finance REIT can generate attractive yields on equity using a very moderate amount of leverage.

Here are three commercial finance REITs that will put some serious yield into your income portfolio.

Starwood Property Trust, Inc. (NYSE: STWD) is one of the largest commercial lenders of any business type – including banks. The company currently has a $12.6 billion loan portfolio with a 62% loan to value. Since launching in 2009 the company has put out almost $40 billion in loans and investments with zero realized losses.

In recent years, Starwood has acquired the largest commercial mortgage special servicer. This acquisition has produced growth in CMBS origination and investments. The company also owns a $2.7 billion equity commercial property portfolio that generates 9% to 12% cash on cash returns. Management constantly looks for investment opportunities both in and out of the commercial mortgage business.

STWD current yields 8.4%.

Ladder Capital Corp (NYSE: LADR) uses a three-prong approach to its investment portfolio. The three legs are commercial mortgage loans, which account for 75% of the company’s capital allocation; commercial real estate equity investments for 12%; and commercial MBS bonds accounting for 8%. The business plan is that the three groups shift as more or less attractive through the commercial real estate cycle. Leverage is a comfortable 2.7 times equity. Since it paid its first dividend for Q1 2015, Ladder has steadily increased the quarterly payout at an average 8% annual growth rate.

The shares currently yield 7.7%.

Blackstone Mortgage Trust, Inc. (NYSE: BXMT) is a pure commercial mortgage lender. The REIT receives high quality mortgage lending leads from its sponsor, The Blackstone Group L.P. (NYSE: BX).

As of its 2018 first quarter earnings, BXMT had a $12.1 billion portfolio of senior mortgage loans. 94% of the portfolio is floating rate. The loans were at 62% loan to the value of the underlying properties. In the first quarter the company originated $1.9 billion of new loans, while $900 million of principal was paid off. Leverage is 2.3 times debt to equity.

Blackstone management states that each 1% increase in LIBOR will grow annual net income by $0.24 per share. The stock currently yields 7.5%.

In recent months, I have added two newer, still in the growth phase, commercial mortgage REITs to my Dividend Hunter recommendations list. If you like the idea of high yield and growing dividends, check out a subscription for these two winners and more of my picks.

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Source: Investors Alley 

Moe Ansari, host of the popular Market Wrap radio show and podcast, asked me on air:

“Brett, how do you find dividend paying stocks that will double your money?”

He was intrigued enough by my analysis to ask me on his show, but I knew he was a bit skeptical as well. And that’s perfectly normal – even experienced investors and money managers like Moe think of dividend payers in terms of their current yields only.

Price appreciation potential often gets ignored, and the thought of achieving 100%+ profits from a safe dividend payer sounds absurd. But smart investors bank their payouts while their stocks double in price.

(Want to hear me describe this strategy in detail? Click this link for the full interview.)

Subscribers to my Hidden Yields service know the three-step formula that I explained to Moe well. In fact, our “dividend doubling” portfolio has earned 23.3% yearly gains since inception three years ago – which means we’re closing in on 100% profits already.

How’d we do it buying safe dividend paying stocks? Let me walk you through the simple three-step formula. (And shortly I’ll show you how to get your hands on my latest research, which features ten dividend stocks likely to double, too.)

Step 1: Buy Dividend Growth for 10%+ Annual Gains

On the show we discussed Verizon (VZ), which has piqued the interest of many income investors lately. The stock yields 4.6%, and the dividend is covered by monthly cell phone bills across America.

Here’s the problem buying Verizon in hopes of a double – it’s not going to happen. Its 4.6% yield would get us repaid in 15 years. That’s not fast enough for our purposes, so we would need to look to dividend growth to fill the gap and speed up the pace of our profits.

Problem is, Verizon raises its payout every single year. But it’s barely moving in absolute terms! A sleepy 7.3% cumulative dividend increase over the last four years has rocked its share price to sleep (+6% over the entire time period):

Verizon’s Dividend “Growth” Rocks Its Shares to Sleep

For double-digit price appreciation, we must buy dividends destined to grow by 10% or more annually in the years ahead. This means we need to find businesses that are booming (with higher profits driving higher payouts). To do so, it helps to focus on stocks that are threat-proof.

Step 2: Be Sure to Threat-Proof Your Purchase

The classic “Dogs of the Dow” strategy advises buying the then highest-yielding Dow Jones Industrial Average stocks, then holding onto them for a year. The idea is that higher yields are a signal of a beaten-up share price in which the business struggles are temporary. When business picks up again, so will the undervalued stock.

The problem using this strategy blindly today is that many businesses are becoming obsolete before our very eyes. Look no further than Jeff Bezos and his firm Amazon, which crushes entire sectors for sport additional growth.

To qualify for our Hidden Yields portfolio, a business model must be Amazon-proof, rate-proof and heck, even tariff-proof.

Incidentally, this doesn’t mean we must avoid all brick and mortar stores. Best Buy (BBY), for example, decided to take Amazon head-on in 2012 when turnaround CEO Hubert Joly took the helm. And not only did the electronics giant live to tell about it, but it’s now leveraging Jeff Bezos’ website as a shopping channel of its own!

In recent years, Joly has been smartly “doubling down” on the quality of its retail stores (which Amazon doesn’t have). This has powered impressive free cash flow (FCF) growth, which has in turn driven serious stock returns:

Expert Service. Unbeatable Stock Price.

What else doesn’t Amazon have? A dividend, of course. Meanwhile Best Buy pays one, and its growth has been spectacular. Joly & Co. just raised their dividend by 32%. This “high velocity payout” is now up 165% in the last five years!

Its stock has followed its dividend higher, delivering 187% total returns (including those payouts). But are BBY shares truly a best buy today? It depends if the price is still lagging its payout.

Step 3: Greedy for Gains? Only Buy a Dividend That Lags

Dividends are magnets that pull their share prices along with them. If you’re looking for the stock market’s tail that wags the dog, pay attention to the payouts attached to a given share price.

Steps one and two help us lock in double-digit yearly gains. But if we’re looking for quick triple-digit (100%+) upside, we should only buy stocks that are lagging their payouts.

Texas Instruments (TXN) is a great example of a stock we’ve profited from in Hidden Yields (+46% returns in the 14 months we’ve owned it).

Since 2012, its share price (blue line below) as consistently lagged its payout (orange line below). Try as it might, TXN the stock (+358%) hasn’t been able to catch up with TXN the dividend (+464%):

TXN’s Magnetic Dividend Drives 358% Stock Gains

Since dividends follow their share prices higher, we can make the most money by buying when these payouts are most likely to “snap higher” towards their runaway dividend curves.

In other words, we buy the price dips when the dividend appears to be running away. Anyone who says you can’t time stocks hasn’t used this surefire strategy for buying shares ready to “catch up” to their runaway payouts.

It’s simple:

1. Plot a stock price versus its dividend,
2. Look for a “lag” between the shares and the payout, and
3. Buy any big lags you see.

Bonus: An Extra “Steroid” for Upside

The stock market can do its own thing over any set of days, weeks or month. But over many years, dividends are the tail that wags the (price) dog. As payouts go, so will their corresponding stock price.

This is where share repurchases become a compelling natural steroid for our portfolio. When management teams repurchase their own stock smartly (when it’s cheap), they reduce the number of outstanding shares. Which means any dividend raises get an added boost on a per share basis.

Ideally, we look for a pattern like this one. This firm has reduced its share count (red line) by 10.8%. It’s tripled its dividend per share over the same time period. And its stock hasn’t kept pace, indicating pent up value (it has another 85% to go to catch up!)

Share Count Down, Dividend Up & Price is Due

This stock boasts an ideal setup for us. Shares are too cheap, the business owns a profitable niche with business momentum, and the broader investing herd isn’t paying attention because they don’t understand how the company truly makes money.

If you like this setup, you’ll LOVE nine more that I’ve identified. All of these stocks pay dividends today. And they’re all likely to double your money in the months ahead.

Coming This Friday: 10 Dividend Payers with 100% Upside

How much money should you allocate to pursuing dividend stocks that will double your money?

As you can see – as much as possible. This strategy is such a “slam dunk” for investing returns that there’s no reason to collect more current yields than you need right now. There are three big benefits to buying dividend payers that are likely to double your money.

Benefit 1. You invest a set amount of money into one of these “hidden yield” stocks and immediately start getting regular returns on the order of 3%, 4%, or maybe more.

That alone is better than you can get from just about any other conservative investment right now.

Benefit 2. Over time, your dividend payments go up so you’re eventually earning 8%, 9%, or 10% a year on your original investment.

That should not only keep pace with inflation or rising interest rates, it should stay ahead of them.

Benefit 3. As your income is rising, other investors are also bidding up the price of your shares to keep pace with the increasing yields.

This combination of rising dividends and capital appreciation is what gives you the potential to earn 20% or more on average with almost no effort or active investing at all.

Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!

Source: Contrarian Outlook