Source: TaxCredits.net via Flickr.
Last week may have been a rough one for some investors, but it could be the perfect time to pick up a quality dividend stock. Dividends not only put extra income in your pocket, but they can be the sign of a healthy business that will remain undeterred by a little downside in the stock market.
With that in mind, we asked three of our analysts to give us their take on one dividend stock trading near its 52-week low that they believed had a decent shot at a rebound. Here's what they had to say:
Eric Volkman: The stock of business development company Apollo Investment (AINV -0.07%) is currently approaching the trough of its one-year range.
The erosion of Apollo's quarterly dividend -- from a high of $0.52 in 2008 to the present $0.20 -- is a likely medium-term reason why.
A more recent factor is the company's results. Net investment income per share has barely moved lately, clocking in over the past three quarters at $0.23, $0.22, and $0.22.
But Apollo's in a good position to boost those returns. First, it's shifted from unsecured debt (i.e., loans not backed by collateral) to the less risky (if not as exciting) secured variety. This solid asset category comprised nearly 60% of its total investment portfolio in the most recently reported quarter.
More encouragingly, Apollo's gradually increased its proportion of floating-rate securities. This means it'll collect more cash when interest rates rise, as seems inevitable in the near future.
Meanwhile, its recent net investment income on a per share basis was 15% higher than its dividend. So it's got more than enough to sustain the current payout, at least.
AINV Dividend Yield (TTM) data by YCharts
Thanks to the battered shares, said payout yields just under 10%, a juicy number for even the traditionally high-yielding BDC segment.
Matthew Frankel: I completely agree with Eric that now is an excellent time to buy undervalued BDCs and I'm a big fan of Ares Capital Corp. (ARCC 0.24%) right now, which is the largest BDC in the U.S.
Even though it pays slightly less than Apollo (and other leading BDC Prospect Capital), the company's size and diversification definitely makes up for it. The company has more than $8 billion in assets, spread among more than 200 different companies. So, while the companies that BDCs lend to are generally higher risk, this means that Ares' profits aren't too dependent on any one company's debt payments.
Another reason I like BDCs is that they will do just fine if interest rates rise. In Ares' case, more than 80% of the portfolio investments are floating-rate, so when interest rates start to rise, the company get higher returns to help offset the higher cost of borrowing.
And finally, it's hard to argue with Ares' track record. Even after this year's declines, the company has still produced an average annual total return of 14% to its shareholders over the past decade, handily beating the S&P.
ARCC Dividend Yield (TTM) data by YCharts
The company's next three years of earnings earnings are expected to be more than enough to maintain the dividend, and the company actually carried over $0.82 per share in excess taxable income from last year, adding even more safety for income-seekers.
Sean Williams: It's certainly not carnage out there, but the past week and change hasn't exactly been kind to investors. Thankfully, I believe I have the perfect remedy: GlaxoSmithKline (GSK -0.92%).
To be fair, GlaxoSmithKline has had its fair share of hiccups recently. Topping that list are various bribery allegations in overseas markets that landed GlaxoSmithKline a conviction in China and an accompanying $500 million fine. On top of this, last year the Food and Drug Administration laid out the groundwork for biosimilars of its blockbuster chronic obstructive pulmonary disorder, or COPD treatment, Advair (known as Seretide outside the U.S.) to enter the market, meaning Advair's run will be over in a matter of years.
But, there's also plenty to like. To begin with, GlaxoSmithKline continues to maintain one of the premier branded respiratory portfolios, even without Advair. The recent approvals of Breo Ellipta and Anoro Ellipta, which were co-developed with Theravance (NASDAQ: THRX), have blockbuster potential, as do the remaining COPD drugs both companies are working on.
Additionally, GlaxoSmithKline played a wise game of chess with Novartis (NVS 1.10%), selling its oncology unit to Novartis for the whopping sum of $16 billion, and buying Novartis' vaccine operations for $7 billion. Vaccines, as Sir Andrew Witty, the CEO of GlaxoSmithKline told CNBC in April, "[are] a true annuity business." They've also seen a nice 4% bump higher in revenue through the first-half of the year.
GSK Dividend Yield (TTM) data by YCharts
Combined, these positives have led to trailing 12-month yield of a whopping 6%! With a payout ratio of 84% based on this year's projected EPS shareholders can feel confident they're getting a nice piece of the pie, while Glaxo's now healthy cash balance more than justifies hefty ongoing dividend payments. Do yourself a favor and give this big pharma dividend a closer look.
