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I'm about to give you the names of four special stocks paying out dividends that blow the lid off the average yield of S&P 500 stocks. In fact, these yields range from 2.5 times to more than eight times the yield of an average S&P stub. Even better, several of these stocks have near-term catalysts that could raise those dividends substantially, driving shares higher. Then I'll give you special access to thirteen more dividend stock picks from our top analysts.
If that sounds interesting, then read on.
Special dividend situations
In my Rising Stars portfolio, I follow stocks that have a specific catalyst to unlock value and that are underappreciated by the market. I love to focus on one of the great catalysts -- dividends -- so you get paid to wait for your thesis to play out and then you have a concrete driver of higher share prices.
The idea that dividends drive stock prices shouldn't be too surprising. After all, one of the key ways to value a stock is to look at its future dividend payments and discount them back to the present to determine the stock's intrinsic value. But a key assumption of this model is that a stock has a lot of time to continue growing its dividends. So you need to be extremely wary of companies -- even those with huge dividends -- that have a clearly limited life. So let's take a brief look at PDL Biopharma (Nasdaq: PDLI ) and Great Northern Iron Ore (NYSE: GNI ) , both of which have serious roadblocks in a few years.
Great Northern has a 12.3% yield, but this royalty company will be dissolved in about four years. And even four years at that high payout will provide just half your money back, and there's no guarantee that the payout will even stay this robust. Great Northern earns royalties on commodities, which are subject to high volatility. That leads to a volatile dividends and share prices, as recent owners will attest. Without the luxury of time, you have to gamble that iron ore prices are going up -- and soon.
It's a similar situation with PDL Biopharma, whose yields sits at a seemingly attractive 9.1%. The company receives royalty payments on a patent drug portfolio. While revenue growth has been brisk in the past five years, the patents expire in 2014, meaning revenue will probably drastically shrink afterward. The company also has a host of convertible debt outstanding, which could seriously dilute shareholders and push the yield down. Without time on its side, PDL is not a stock I care to own.
That doesn't mean investors can't make money on these stocks. Iron ore could soar, or PDL's management might create value by acquiring another lucrative royalty stream. But instead, I'd rather look for stocks that have a more open-ended opportunity without having to "beat the buzzer."
So below I highlight four dividend stocks that have various special opportunities before them.
|CVR Partners (NYSE: UAN )||10.5%|
|Annaly Capital (NYSE: NLY )||13.9%|
|Seaspan (NYSE: SSW )||4.4%|
|Vodafone (Nasdaq: VOD )||4.8%|
Source: Capital IQ, a division of Standard & Poor's.
What's so special?
CVR Partners is interesting because it's on the verge of beginning payouts to unitholders (the term for shareholders of publicly traded partnerships). The company held an IPO in April led by parent CVR Energy, which continues to hold more than 70% of the units. CVR Partners owns and operates a nitrogen fertilizer plant in Kansas. The company's input costs are 79% fixed and stable, and it has a cost advantage since it's located close to its agricultural customers. You won't find this yield listed on most sites yet, but you can read more about it here. That payout should drive the price higher.
Well, the last few weeks have made Annaly look even more attractive. Yields on 10-year Treasuries have hit 2011 lows -- around 3.1% -- and budget dithering in the U.S. and the European financial crisis are not improving the overall economic landscape. All the more reason to look to Annaly's heavy yield, which benefits from lower interest rates. Annaly isn't without its concerns, since its interest rate spread has been falling steadily quarter by quarter. Still, this is a proven long-term performer, and I own shares in my own account.
The story at Seaspan is of a progressive dividend policy that should see the company quickly ramp up its payouts as it finishes building out its fleet of containerships by March 2012. Distributable cash is already up nicely so far this year and should continue to grow, so it wouldn't be surprising to see the payout double or even triple in the next couple years, taking the share price with it. The Motley Fool Hidden Gems team has already sunk real money into this stock and seen a 65% return in a year. And I've picked up shares for my Rising Star portfolio.
The big catalyst for Vodafone concerns its 45% stake in Verizon Wireless, a joint venture with fellow megatelecom Verizon (NYSE: VZ ) . The company receives no cash from the tie-up, but that could change soon. Since Verizon Wireless has nearly finished paying down its own debt, the company can distribute the cold hard stuff to its co-owners. Many analysts have speculated that Verizon would have the venture pay out cash because it needs to construct its U.S. network. Others see Verizon buying out Vodafone's stake. Either way, Vodafone looks like it could have a chunk of change in its pocket soon. Oh, and there's no U.K. withholding tax on dividends, so taxes are simpler, too.
Foolish bottom line
So there are four special dividend stocks I'm looking at for my Rising Star portfolio. They have some interesting near-term catalysts that could well push the yields much higher.
If you're searching for more fat payouts, I invite you to examine 13 other dividend stocks -- including one I've called the dividend play for a lifetime -- in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these stocks, simply click here -- it's free.