A Steady 7% From 3 Stocks For Investors Who Don’t Want Drama

In the universe of higher yield stock investing, often no news is good news. Income stock investors want to own shares that pay steady dividends from companies that can be counted on to earn enough to cover the dividends quarter after quarter.

Stock market drama usually leads to share price volatility, which is something that makes dividend investors uncomfortable. As a result, often the best dividend stocks don’t make much news in the financial news, which makes it harder for investors to find them.

One group that gets little press but pays steady dividends and attractive yields are the small cadre group of commercial mortgage finance real estate investment trusts (REITs).

REITs are divided into two broad categories. Equity REITs own commercial properties. They earn revenue from rent or lease payments. Finance REITs originate or own portfolios of real estate secured loans. The residential focused REITs usually own highly leveraged portfolios of mortgage-backed securities (MBS).

Commercial finance REITs typically originate loans on commercial properties and hold them in their own portfolios. Commercial finance REITs contrast starkly compared to the more popular residential MBS owning REITs. They are less leveraged, financially more conservative, and have better dividend track records. 

Income for Life? How to Get $6,851 Per Month Before Social Security, Pension or Any Other Retirement Source

Commercial finance REITs are lower risk and historically have been more stable dividend payers. Commercial mortgages are typically done with variable interest rates, and commercial REITs match their loans with variable debt. They lock in the interest rate spreads, no matter which way interest rates move. These REITs also use a lot less leverage than their residential MBS owning cousins.

If you are looking for 7% to 8% yields where you can count on the dividends for years to come, consider commercial finance REITs. Here are three that I’ve been following for years to get you started.

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

As of its 2019 third-quarter earnings, BXMT had a $16.4 billion portfolio of senior mortgage loans.

In the quarter, the company originated $3.7 billion of new senior loans and received about $3 billion of principal paybacks. 94% of the portfolio is floating rate.

The loans were at 62% loan to the value of the underlying properties. Leverage is 2.8 times debt to equity.

The stock currently yields 6.8%.

Ladder Capital Corp (LADR) uses a three-prong approach to its investment portfolio. The three legs are commercial mortgage loans, with a current $3.4 billion portfolio of floating and fixed-rate loans, commercial real estate equity investments, valued at $981 million, and commercial MBS bonds, worth $1.9 billion.

The business plan is that the three groups cycle to more or less attractive through the commercial real estate cycle, each being more attractive at different phases of the cycle.

Leverage is a comfortable 2.6 times.

Since it paid its first dividend for Q1 2015, Ladder has steadily increased the quarterly payout at an average 5% annual growth rate.

The shares currently yield 8.0%.

Starwood Property Trust, Inc. (STWD) is one of the largest commercial lenders of any business type – including banks. The company currently has an $8.0 billion loan portfolio with a 65% loan to value.

Since launching in 2009, the company has deployed over $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 led to 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. Recently Starwood has invested in non-agency residential MBS.

The $1.2 billion RMBS portfolio has a 68% loan to value. Management constantly looks for investment opportunities both in and out of the commercial mortgage business.

STWD current yields 7.9%.

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This Retailer’s Stock Has Out Performed Amazon Since 2008

On Friday, the government released two economic reports that were emblematic of what’s been happening with the U.S. economy for several months.

To skip all the technical jargon, consumers are quite happy while factories are not. To be more specific, consumer spending remains fairly robust. Folks are out there at the malls buying things at a good clip.

However, the factory sector of the economy isn’t doing so hot. The manufacturing isn’t so much retreating, but it’s not growing either. How long can this divergence last?

That’s the big question, but first, let’s dig into Friday’s news and see what’s going on.

October Retails Beat Estimates

Let’s start with retail sales for October. This report is important because it’s often a good proxy for consumer spending, which makes up about 70% of the U.S. economy.

The report showed an increase of 0.3% in October, which was 0.1% better than expected. Digging down a bit we see that when you exclude sales of vehicles and gasoline (which can be volatile), then retail sales were up 0.1% last month. So far this year, retail sales are up 3.1%. In plain terms, consumers are holding up the economy.

The other report showed a very different story. It said that industrial production fell by 0.8% last month. That’s a big tumble, but there’s an important footnote. Much of that drop was due to the GM strike. Still, even after we exclude auto output, industrial production was down 0.5% in October. Over the last year, industrial production is down 1.1%.

We’re seeing sagging manufacturing and buoyant shoppers. This divergence was recently confirmed by a weak ISM Manufacturing report. Now I have to add an important word about the manufacturing sector.

You’ll often hear someone say that “America doesn’t make anything anymore.” That’s simply not true. In fact, America is a manufacturing powerhouse. The difference is that a lot fewer people are involved in manufacturing.

That’s actually good news because it means that our workers are more productive. That’s why, in times past, you wouldn’t see a shoppers/factories divergence like we see today. That’s because so many shoppers were factory workers.

So, where does the economy stand? The odds of a recession starting soon are very slim. The recent rate cuts from the Fed certainly help. Still, there are concerns that growth is slowing down. The staff at the New York Fed sees Q4 growth of just 0.4%. At the Atlanta Fed, their model points towards the growth of 0.3%. That’s down from 1% just one week ago.

The Federal Reserve has helped restore investor confidence. Just recently, the S&P 500, along with all the other major indexes, hit a new all-time high. Mortgage delinquencies have fallen to their lowest rate in 25 years. Unemployment is near a 50-year low. Also, homebuilding stocks are having a very strong year. You might not have guessed that from the headlines.

Have you spotted the “5G” signal on your phone yet?

Ross Stores Has Topped Earnings for 13 Straight Quarters

So what should investors do? Typically, a good way to play strong consumer spending would be a pure consumer play like Walmart (WMT), but right now, I suggest a different take.

I like shares of Ross Stores (ROST). The deep discounter is due to report earnings again on Thursday, November 21st. Traditionally, Ross likes to give very conservative guidance, which they almost always beat. Sometimes, by a lot.

The October quarter is ROST’s fiscal Q3, and the biggie is Q4 (meaning, November, December, and January). For Q3, Ross said it expects comparable-store sales growth of 1% to 2% for Q3 and Q4. That’s probably a low ball.

Because of the trade war with China, Ross sees Q3 earnings of 92 to 96 cents per share. That’s lower than what the Street had been expecting. I think Ross can beat that. For Q4, the biggie, Ross sees earnings of $1.20 to $1.25 per share. That adds up to a full-year guidance of $4.41 to $4.50 per share. Last year, Ross made $4.26 per share.

Don’t be fooled by the conservative guidance. Ross is a very profitable business. The company has been able to stand and thrive in the age of Amazon. Ross knows its customer base well, and these shoppers enjoy the “treasure hunt” feel when you visit each store. The stock has topped Wall Street’s earnings estimates for the last 13 quarters in a row.

Here’s a fact that would surprise a lot of investors. Since the beginning of 2008, Ross has done better than Amazon (AMZN). Just offering a plain-old bargain can be a great business model. Ross Stores is in a strong position to benefit from the wave of happy shoppers and sad factories.

Have you spotted the “5G” signal on your phone yet?

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$50,000 in Dividend Income, 0% in Tax. Here’s How.

I’m going to show you my favorite (perfectly legal) way to pay 0% tax on your dividend income.

To show you the big savings this could mean, let’s look at two fictional investors who are nearing retirement: Jane and Janet.

We’ll assume both are single, are earning $50,000 per year and live in a state with no income taxes. Now let’s assume Janet has taken the so-called “right” path, as suggested by her financial advisor, while Jane has steered her own course. A quick look at both will show how that “right” path can create a hefty tax problem.

Let’s say Janet put a million dollars in the Vanguard S&P 500 ETF (VOO) because she’s been told that a low-cost index fund is best for retirement. VOO is giving her $14,100 in annual dividends as a result, but because Janet is still working, she’ll have to give Uncle Sam $1,864 in taxes on her dividends for just one year—and that doesn’t include tax she’ll pay when she eventually sells her shares.

Over to Jane. Instead of following the herd and buying VOO, she’s put her million in a lesser-known fund called the Nuveen Municipal High Income Opportunity Fund (NMZ), which pays a 5% dividend yield, giving her an income stream of $50,000 from her investment. Not only is her nest egg now entirely replacing her work income, but she’s also getting all of it.

That’s right. Of that $50,000 a year NMZ is giving Jane, zero is going to Uncle Sam. And it doesn’t matter if she gets a promotion at work and makes more, or if NMZ starts paying her more (which it did for its shareholders at the start of the year; more on that later).

She will not have to pay any of her income from this fund to the tax man.

Of course, the more Janet gets paid, the more taxes she’ll have to pay out. If her work pay rises 20%, for instance, the tax on her dividends will climb to $2,115 per year, meaning her tax burden has gone up by almost as much as her raise!

Municipal Bonds: Your Tax-Free Income Option

Municipal bonds, the investments NMZ holds, are popular because they’re one of the few ways Americans can legally get paid without having to pay taxes. It’s all thanks to a 1913 law exempting municipal bonds from federal income tax. Since then, investors have been using “muni” bonds to generate a high income stream—and keep all of it.

Dispelling the Biggest Muni Myth

How popular are muni bonds? Right now, the market is worth nearly $4 trillion in the US, which is about 13% of the size of the total stock market. Considering municipalities aren’t in the business of making a profit, it’s surprising that muni bonds are as big as they are.

While many muni bonds are gobbled up by wealthy investors looking to cut out the tax man, the middle class often ignores them. One reason why is fear: headlines about municipalities going bankrupt and leaving investors in the cold result in paranoia—and many bad investment decisions.

Here are the facts: according to Moody’s, the total default rate of muni bonds since 1970 is 0.09%. In other words, for every 10,000 muni bonds issued, nine go into default. Put another way, you’re 1,442 times more likely to get in a car crash than to hold a muni bond that defaults.

The Power of Diversification

Here’s another crucial point: when a municipality defaults, it doesn’t mean investors get nothing. In reality, municipalities will restructure their debts on new terms, which could mean a small loss for bondholders. But one way to limit this risk even further is to hold a fund like NMZ.

With $1.5 billion in assets, NMZ can diversify across many bonds (it currently holds 598 of them) to slash the risk of being exposed to a default.

This doesn’t just make NMZ safer, it’s also made the fund’s returns impressive. Thanks to NMZ’s unique market access and expertise, it’s crushed a muni-bond index fund like the iShares National Muni Bond ETF (MUB), in orange below.

The Power of Diversification—and Expert Management

It’s rare to get superior returns and greater safety, but NMZ delivers both.

Finally, a Word on Rates

There’s one last reason why Jane would be smart to buy NMZ: the Federal Reserve.

In 2019, the Fed cut interest rates three times, which has had two effects on muni bonds. The first is that they’re more attractive to investors than before. From 2015 to the start of 2019, when the Fed was raising interest rates, muni bonds were struggling to make headway, as you can see in the chart below:

Rising Rates a Drag on Munis—Until 2019

There are two reasons why munis stalled in this period: first, many investors thought they could get higher income streams elsewhere as rates rose. Second, and more important, bonds fall in value as interest rates go up, which meant the resale value of these bonds dropped with the Fed’s aggressive rate-hike cycle.

Fortunately, the opposite is also true: lower rates mean muni bonds go up, which is why you see that huge hockey stick at the end of the chart above. It’s also why NMZ raised its dividend earlier in 2019, and why it may raise it again. The Fed’s aggressive rate cuts have been a blessing for munis this year, and with the central bank likely to continue lowering rates, that hockey stick will get bigger.

5 Huge 8.8% Dividends That Fit Perfectly With NMZ

NMZ is just the start: now, I want to give you 4 more funds that hand you a much bigger dividend payout—I’m talking a blockbuster 8.8% average yield.

PLUS, these funds are so cheap now, they’re “spring-loaded” for 20%+ price upside in 2020.

So if, say, you invested $400K in this diversified collection of income powerhouses, you’d be looking at $35,200 in dividend cash by November 2020—and $80,000 in price gains too!

But these 4 income plays won’t be cheap for long—especially with the Fed determined to keep cutting rates, which will drive more income-starved investors into the CEF market.