Your Best Shot at a Home Run Dividend Stock

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When I think of the term "home run stock," my greed meter gets overheated.

I don't normally think of 20% returns, or 50% returns, or a double, or even a triple. I think of something on the order of magnitude of a 10-bagger.

But there's danger in explicitly stalking a 10-bagger. Many times, we are attracted to the upside potential of a stock only to be blindsided by the downside risk.

In an attempt to find a market-beating truce between upside potential and downside risk, let me propose combining two concepts -- the home run stock and the dividend stock.

What's a home run dividend stock?
A dividend stock doesn't normally elicit the visceral adrenaline rush of a home run stock, but it's a classic tortoise-and-hare phenomenon. The empirical evidence shows that dividend stocks have beaten nondividend payers historically.

My favorite explanation why is that dividend payers are at a point in their lifecycle where they are stable enough to promise some payback to their investors. Dividend investors may miss out on the young cash-hungry start-ups like Microsoft in the 1980s, but they also miss out on many of the story-stock, never-was companies that drag down returns.

Another benefit of a dividend is that it takes capital away from bonus-seeking managers who may otherwise waste it by chasing ill-conceived growth (e.g., diworsifying acquisitions, risky or low-return projects, ill-conceived expansions, etc.).

Because of the risk-mitigating qualities of a dividend, I'm willing to accept a lower upside potential on a "home run dividend stock" than a regular swing-for-the-fences home run stock. I'm looking for a solid, sustainable dividend that could help me generate a double or triple rather than a boom-or-bust play that could be a 10-bagger or could be bankruptcy.

Let's look at three options.

Option 1: The big yielders
Not all dividend stocks are boring. If you want an adrenaline rush, the biggest yielders out there exceed 10%.

When my colleague Dan Dzombak recently looked at the top 25 yielders, Hatteras Financial (NYSE: HTS  ) and Anworth Mortgage Asset (NYSE: ANH  ) each yielded close to 15% and were among the top seven yielders. That's notable because they have similar business models. They invest in mortgage-backed securities and make money on the interest rate spread between these securities and their borrowings. Spreads are historically high right now, so they're making a mint. And since they're real estate investment trusts, they have to distribute most of these profits to shareholders. Hence the stratospheric yields.

But do you know what's more notable than two similar companies making the top seven? That all seven top yielders employ this same business model.

For those hoping to generate an easy double over a few years by simply cashing the dividends, that's a little unsettling. Are all these companies just riding a rising tide that's sure to ebb? The obvious risk is that interest rate spreads decline. Further, these companies generally borrow over shorter terms than the assets they buy. That's dangerous because a cash squeeze can come quickly with short-term borrowing, especially when your longer-term assets fall precipitously in value. And especially when you're overleveraged. If you want an example, see Bear Stearns and Lehman Brothers.

This is an example of why James Early, the advisor of our dividend stock service, consistently warns that yields over 8% are frequently too good to be true.

Conclusion: If the model is resilient, this could be a home run dividend stock opportunity. But this investment is only for the very skilled.

Option 2: The sleepy giants
On the other end of the spectrum are the boring stocks people think of when they think of dividend stocks.

I own shares in ExxonMobil (NYSE: XOM  ) , Microsoft, and Altria (NYSE: MO  ) . They're all great dividend-paying companies that dominate their industries, and I'd argue that ExxonMobil in particular is a great pickup right now.

However, none of these are in the part of my portfolio that is targeting doubles and triples in the next few years.

Conclusion: To use a baseball analogy, these stocks are high on-base-percentage picks, but they lack power.

Option 3: Ignored bank stocks
It's this final option that has me salivating at the opportunity of unearthing a home run dividend stock.

Bank of America, Goldman Sachs, and the other big boys make all the news, but I'm more interested in the smaller banks.

Why? Because recent financial reform hit the big banks much harder than the smaller ones. Because the smaller banks offer simpler business models and balance sheets. Because the best small banks stick to taking deposits and making loans. And because it's a part of the market that isn't getting much coverage from analysts or the media.

While we can't analyze all the individual loans these small banks make, we can look for banks that trade cheaply (on a price-to-tangible-book and price-to-earnings basis), that have taken allowances to cover all their non-performing loans, and that are confident enough in their futures to maintain healthy dividends.

Huntington Bank (Nasdaq: HBAN  ) and Synovus (NYSE: SNV  ) are two banks that many of my readers are drooling over, but they don't pass my initial test. They aren't generating positive earnings, their dividends aren't that big, and they're a bit light in provisioning for bad loans.

One bank that does pass is Missouri-based Great Southern Bancorp (Nasdaq: GSBC  ) . It has a low price-to-tangible-book ratio (1.2), enough earnings to have a P/E ratio of just 7.5, an ample allowance for bad loans, and a dividend yield of 3.3%.

But this is just an initial screen. You'll want to note that Great Southern still needs to repay $58 million in TARP money to the government, has a fair amount of construction loans, and relies on commercial lending for much of its loans.

Still, if you have the know-how to dive in, I think a portfolio of smaller banks is your best shot at finding home run dividend stocks. In fact, I do this in my own portfolio.

But like the high yielders we talked about earlier, bank stocks aren't for everyone. For some dividend opportunities that may better fit your investing style, click here to get The Motley Fool's five-page free report: 13 High-Yielding Stocks to Buy Today.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

 Anand Chokkavelu owns shares of Altria, ExxonMobil, and Microsoft. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value recommendation. The Fool owns shares of Altria Group, ExxonMobil, and Microsoft. The Motley Fool has a disclosure policy.

Read/Post Comments (22) | Recommend This Article (98)

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  • Report this Comment On October 08, 2010, at 5:38 PM, vgaymer wrote:

    I agree with you that I think there are a lot of regional and smaller banks that have share prices still depressed from the financial crisis and association with the bigger banks. I also agree that their current yields are tempting. However, given a choice, why not pick a bank that took no TARP money at all? One I know even has a better yield.



  • Report this Comment On October 08, 2010, at 5:52 PM, CMFStan8331 wrote:

    If you're looking for out-size returns from dividend stocks, currently high yields should be among the least of your concerns. High yielding stocks are great for preservation and enhancement of existing capital, but are rarely the best picks for the sort of growth that can generate huge long-term multi-bagger returns. The way to reach for those super-size returns is through a combination of stock price appreciation via earnings growth and accompanying dividend growth. It's very unusual to see explosive dividend growth in a stock that's already paying a dividend on the high end of the spectrum. Not impossible, but you really can't count on finding a lot of those to fill out a portfolio.

    The recipe is to look for non-massive, high quality companies that have been paying dividends for a while and still have a low payout ratio and plenty of room to grow the business.

  • Report this Comment On October 08, 2010, at 10:00 PM, TimoDOZ wrote:

    Well your readers seem to recognize that which you make into a prevarication. "They aren't generating positive earnings.." Did you write this a year ago and just get around to posting it? HBAN posted $0.01 in the first qtr followed up with $0.03 in the second qtr. S&P has the stock rated a buy/4 Stars with a 1 year target of $12. S&P:"We expect this trend in profits to continue" Their estimate is for 11 cents in the current quarter. It is true that HBAN is not a great dividend payer but there is the princess who yet lives, in the woods in the cottage of the 8 Dwarfs. HBAN has a preferred issuance that can put a smile on your face with a price still just over par. Risk reflected valuation to be sure. The 7.88 non-cumulative preferred HPCCP is an interest paying vehicle and may work better in tax sheltered accounts. No dividend tax break but as long as those penny a quarter common distributions are maintained and this bank continues as S&P reports, to have significantly decreasing non-performing loan assets, improving earnings, and the anticipation of yet another $1/2 Trillion of QE-@ flooding the bond markets with liquidity this one is likely going higher in price and lower in yield. Call protected out to 2021. Let's see where the DKT traded at in the first Qtr of 2009 When DB went from a $13.89/sh loss in the 4th qtr of '08 to report $2.50/sh earnings in that first Qtr of '09. We find DKT traded between $8 and $16 in that first qtr of '09. This is a clumsy analogy but nione the less DB while not a stellar performing bank in the last 3 months has certainly returned from the dead. DKT now trading at $26 and Change. DKT still call protected out to 2018 so maybe not a bad choice either with it's strong investment grade rating. If the lunatic Wizard manges to get the yield on the ten year bond down to 2% or less banks like HBAN should continue to prosper charging plenty of fees, paying nothing for deposits, and continuing to reduce the size of their loan portfolios and building their reserves. Their reach down into the Corn belt where corn is soaring with the rest of the commodities and over into Shale gas and coal country certainly should offset their northern Midwest exposure where profits may continue to be hampered. HPCCP... there is the yield of $7.5%

    in a derivative sponsored by a bank so many of your readers love. All it will take is another earnings surprise of +11 cents before one of these high yield newsletters as B. Perry or Carla Pasternack spin out, picking up on this one and send it to +$26. We find others that have already been discovered as DRU & PLP trading +$3 over par.

  • Report this Comment On October 08, 2010, at 10:32 PM, BearishKW wrote:

    I think a double or tripple in a stock already paying a dividend at this point in the market will take quite a long time.

    Why not buy stocks that have been hard hit, yet haven't yet reinstated the dividend? Or don't plan on it until raising more capital?

    Sure there's more risk, but what home run stocks come without it?

  • Report this Comment On October 09, 2010, at 12:28 PM, TMFBomb wrote:


    I used trailing twelve months rather than latest quarter for profitability determinations. When I screen for smaller banks, I've been using a pretty stringent screen with the full knowledge that I will miss out on some good opportunities. That's my method now because of time constraints, but I will also look into interesting banks individually. For example, I plan on doing some one-off analyses of banks that have swallowed up FDIC-failed banks.


    Agreed. For this article, I was trying to find the equivalent of a have your cake and eat it too scenario. Buying into high-dividend, high-quality small banks is the best opportunity I see of this. But if you're looking for outsized, swing-for-the-fences opportunities, beaten down situations hold promise (if you can stomach the strikeouts with the home runs).

    Fool on,


  • Report this Comment On October 09, 2010, at 5:25 PM, lctycoon wrote:

    "I think a double or triple in a stock already paying a dividend at this point in the market will take quite a long time."

    Wouldn't that depend on your timeframe? Remember that something with a 7.2% dividend will double in ten years without any dividend increases or share price increases.

    NLY should double in less than 5 years with all dividends reinvested if they can hold that dividend - the Fed will probably keep interest rates low, so that one might be able to pull it off.

  • Report this Comment On October 09, 2010, at 5:51 PM, neamakri wrote:

    I just purchased chimera (CIM) last week. Yes, it is a little risky but the numbers look okay to me. They currently pay 17% dividend.

    As long as the FED keeps interest near zero, CIM is good-to-go.

  • Report this Comment On October 10, 2010, at 9:24 AM, TimoDOZ wrote:

    For doubles and triples you really do need to find the company in the business of a depressed enterprise. What one commodity has not participated in the huge on going commodities rally ? That would be lumber. Lumber made the Faux rally into the housing tax credit and then got knocked back stiffly when it expired.

    So an obscure forest products company 50% owned by LT thinking BAM might be interesting. Just recently expanded by merging/acquiring Cellfor on the left coast. Acadian Timber pays a near 3% dividend but has some tax with holding for US investors. That tax can for now still be claimed as a Foreign tax credit. At less than $6 with the Currency leverage ACAZF/ADN.T has the capacity in 3-4 years to be a $12 stock. The value of the real estate lone, goes the saying. A similar Chart is the VWDRY. The historical leader in the manufacture of wind turbines. A Danish company that has gotten knocked way back off it's highs. VWDRY/Vestas had some issues with the carbon quality on it's most recent new product roll out. The European crisis has affected it's business and the strength of the Danish Krone. So VWDRY is not directly a Euro currency exposure, You can see how the selling is over on the chart and it is very stubbornly holding to ~$25-$26. With oil getting the strong bid some of these Alt energy themes might start moving. Another depressed commodity is Nat Gas so there is the GDP with the Eagle Ford and Haynesville shale interests. GDP just recently receiving a cash infusion from CHK for partnering with CHK on some properties that GDP owns. CHK just might like them too much and decide to buy out the company. If/When the US & Canada start exporting more gas from some newer terminals than Kenai, and the global price for Gas recovers to nearer $6-7 GDP could become a double. Then there is always the possibility that the USA could wake up and start paying attention to the T Boone Pickens energy initiative. RRC an even worse laggard than GDP could easily get a bid as well.

    Instead of looking for the home run though there is just jumping on the stocks with good relative strength on market pull backs. Some ETFs are interesting. In less than 2 years AGQ an ETN has nearly tripled. Will another $1/2 trillion of QE-2 slow that one from reaching $100. Maybe a poorer mans way with out the leverage might be CNDA with all it's miners. Will Carney, Harper and Flaherty stand idly by while the the Wizard continues to inflate the balloon, but then at the end of the story then admits, "I can't come back, I don't know how it works". "Unusually Uncertain" as he is already admitting to. Perhaps the BOC hikes again in response to the US' QE-2. The Loonie ... now that's a bird of a different "colour". $1.05 by year end chasing the Suissie higher and dragging the Aussie with it. $1.10 by next year. IAF EWC????

    If MEAtlOaF/MTO.V gets the financing they have announced seeking might they not get back to US$ 0.70 from the less than US$ 0.40 such a financing would bring in the way of dilution? We sometimes wonder/wish when GACHF stumbled along below 70 cents for a couple months a couple years ago... But then look what TECK paid to take out Fording. Could GACHF get a bid of more than $9. The more the US devalues and inflates the US dollar the more valuable the stuff what ever it is, that is still in the ground then becomes.

    The doubles and triples are probably out there someplace. We have seen them before.

    Ben the Dollar Slayer protege' of "Easy Allen" whose finger prints are all over this "Great Recession", still hanging around. Some Change that is!

  • Report this Comment On October 10, 2010, at 10:08 AM, BearishKW wrote:

    agreed...natural gas, shipping, and as anand writes of financials have also all been laggards to the post-crash rally.

  • Report this Comment On October 10, 2010, at 12:17 PM, plange01 wrote:

    the only home run dividend stock worth buying at the moment is nly..the other great dividend payers are to high priced to buy these dont buys include...vz,t,mo,pm,and kft. great companys but all near 52 week highs...

  • Report this Comment On October 10, 2010, at 2:15 PM, michel99 wrote:

    So get TARP-free Canadian banks stocks. You not only win by holding bank stocks that are much more secure, you also win a few extra % points from the Canadian dollar going up.


  • Report this Comment On October 11, 2010, at 8:07 AM, TMFBomb wrote:


    Lumber sounds interesting...I know I've been meaning to re-look at the homebuilders as well.

    Agreeing that there are opportunities in natural gas.


    Canadian banks appear to be extremely well run and the regulatory environment appears to be quite good. However, in my mind, the market's already pricing that in. Still, they remain on my watchlist for dips.


  • Report this Comment On October 11, 2010, at 2:26 PM, michel99 wrote:


    The only way that Canadian banks will have any significant dips is if the whole economy starts to tank, in which case US banks will crater. The big difference is that Canadian banks are much more likely to bounce back. But an important factor is that if the economy tanks the Canadian dollar goes down, so in relative terms a tanking US economy gives you great deals on Canadian assets.

  • Report this Comment On October 11, 2010, at 4:34 PM, TMFBomb wrote:


    I'm not necessarily saying Canadian banks will fall from here...I'm just not excited about the current prices affording much opportunity for doubling or tripling.

    Do you have a Canadian bank that is currently a favorite at today's prices?


  • Report this Comment On October 12, 2010, at 12:50 PM, michel99 wrote:


    Keep in mind that Canada doesn't have many banks, by design, and they all seem to perform well enough, so no "Bob's Bank and Linoleum Company".

    Take a look at

  • Report this Comment On October 13, 2010, at 2:23 PM, LeNagus wrote:

    Does anyone know TD BANK - American or Canadian? I think it started in Canada.

  • Report this Comment On October 14, 2010, at 7:33 AM, TimoDOZ wrote:

    Toronto Dominion is A Canadian bank and favored for it's expansion into the US. (Growth model) Canadian Imperial Bank may be as strong or stronger than the Royal Bank of Canada. CIBC seems to have more proprietary trading exposures. I can not say what the rules in Canada are on banks trading for themselves, but what ever the structure CIBC would be closest to a Goldman Sachs. Royal Bank coulda woulda shoulda when RY yielded 6%! Then the Bank of Nova Scotia aka Scotia Bank another strong trader in the markets a huge exposure to the Caribbean basin and Central America. Probably even into parts of South America. Also known as Scotia Bank. Some what of a known player in the Precious metals as well. As/if Cuba currently being "exploited" by Repsol with their off shore of Florida oil and Gas drilling becomes more of a free market economy and normalizes ties with the US Scotia Bank would be a big beneficiary. There are the two others of substance that you can google on a "Top Banks" search. One out of Vancouver I think. I am not that familiar with either of them. The Vancouver economy quite strong on the precious metals and energy exporting themes. Kitimat under construction and ready to ship by early 2014. PNGKF $18 to +$25 in six months as gas has been crushed. Alta Gas another that just keeps going higher for some reason since converting to a LLC from a trust and cutting it's dividend by 40% ? Go figure? Perpetual starting to move, Daylight has been moving and just took out the $10 handle. Both with strong hedge contracts and expanding out out of Gas and trying to increase their oil assets.

    Perpetual that's an idea that might be a double IF gas moved back to $6-$7. You could sit on the fat distribution waiting. But then if not in a tax sheltered account there is the 15% with holding. A $300 max now I think on claiming foreign tax credits?

    Of course here in the US that alone is a reason for the investor class in general to stay away from Canadian stocks. What is worse & even more despicable than a couple words like Pelosi and the dreaded "liberal" label? "Socialist" of course! So those taxes you pay for owning Canadian shares go into the socialist economy that has been run by the same Group of Republicans who disguise themselves in Canada with the moniker Tory for the last 8-10 years. They are so misguided having taxes to pay for their social safety net, strict immigration and "labour" laws to prevent illegal immigration & severely punish any scoff law employers. Is it any wonder that Maple syrup is over $17/Gal with those Quebcoius having to use documented labor ? If they used our model they would have 10% of the impoverished world flooding into their country undermining their social safety net. So they want none of that which America loves. They have 5-6 of the worlds 15 top strongest banks, a strong and appreciating currency. MR Carney has RAISED Rates 3 times this year. A strong housing bubble was starting to form, so he decided that maybe they should remove a bit of the sugar from the punch bowl. Unless they get themselves squared away up there and institute the required reforms of tax cuts and empty promises of spending cuts on wasteful programs like Mediscam Prescription-B, they are surely going to end up with that socialist economy on the rocks. Canada not a very friendly environment for those of the American investor class with the "UGLY AMERICAN" outlook!

    Quite a run up in that HPCCP issuance in just a few days. Looks like the $$24.85 to $25.15 valuation has gotten away on that one.

    I continue to wonder if the Maple Leafs are not somehow playing on home ice along Causeway Street.

  • Report this Comment On October 14, 2010, at 7:51 AM, TimoDOZ wrote:

    Whoops!!... that's maple syrup at $17 a quart. Gals can only be afforded by food stamp harvesting. Just a Laurentian slip. C'est pas ?

  • Report this Comment On October 14, 2010, at 8:04 AM, TimoDOZ wrote:

    Oh the other error on VWDRY!! The stock is trading off the flat pivot of near $12.50 not $25.xx. It is just that the chart shows me the selling seems pretty well exhausted and there is some accumulation starting at this valuation. LGCTX is another that in the mutual fund business put in a 20% gain off last years State of the Union speech. It gave up all that gain and more since it's price peaked. A nicer looking chart over the last 6 weeks though. Dick Nixon used to have a sign on his desk. When you have them by the 84115 their hearts and minds will follow! With oil pushing up towards $100, I will "assume" that alt energy will follow. More ethanol initiatives in just the last few days.

  • Report this Comment On October 15, 2010, at 1:30 PM, worthless111 wrote:

    itchycoon, I have been in Canroys, new to capital stocks..I can not find anything wrong with NLY ..Am I crazy..I think I understand leverage,barbell principle,etc..Do not care about upside.just the dividend..thanks

  • Report this Comment On October 15, 2010, at 2:03 PM, cpaMike46 wrote:

    I agree regional banks are under priced. The one I work for, BSRR, is worth a look now. Did not take TARP and our reduced divided is still about 2%. Has been able to raise capital twice in the midst of all the turmoil. Price to book about 1.0.

  • Report this Comment On October 15, 2010, at 2:16 PM, emotleyguy wrote:

    Take a close look at the payout ratio on those yields. 95 and 103. They are not sustainable at face value. A close look at the SEC filings might be in order.

    Salve Lucrum

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