4 Special Dividend Plays -- and They're Huge!

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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.


Dividend Yield

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.

Jim Royal, Ph.D., owns shares of Vodafone and Annaly. The Motley Fool owns shares of Seaspan and Annaly Capital. Motley Fool newsletter services have recommended Vodafone, as well as writing a covered straddle in Seaspan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (63)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2011, at 4:11 PM, Gonzhouse wrote:

    I particularly like CVR

    I've wanted a reasonably priced fertilizer company and they fit the bill. In particular, their cost structure is lower because most of their fertilizer input is petroleum coke (from their majority owner) rather than natural gas. Their location dead center of the country with superior access to rail lines.

    Management has said they are paying out all cash they generate so the payouts will be lumpy, depending upon market conditions. If you are OK with that, UAN is your company.

  • Report this Comment On May 19, 2011, at 4:35 PM, ChrisLynn1 wrote:

    Re: Seaspan (SSW). NOT being critical, but trying to understand. After reading your article, I tried to figure out the financials of this company. They don't appear to be a limited partnership (like CVR Partners or Annaly)--am I missing something? 2010 EPS appears to be -1.70 so the dividend they are paying out does not appear to be sustainable. Granted, they have a tremendous depreciation expense since their business is so very capital intenssive, but their debt is also very high, so a large amount of their cash will go to pay off their debt and the 9.50% series C cumulative preferred shares which they are offering. That also seems like it will dilute the amount of cash available for dividends to common stock shareholders. Information I find is that there have been no insider purchases of this stock during the past 5 years. Would love to learn why you consider this a good buy since I am indeed looking for an income-producing investment.

  • Report this Comment On May 19, 2011, at 4:52 PM, TMFRoyal wrote:

    Hi, Chris,

    I go into the case for Seaspan more here:

    In short, look forward, not back.

    Foolish Best,


  • Report this Comment On May 19, 2011, at 5:45 PM, energysystems wrote:

    I'm an owner of VOD. While some analysts have speculated that VZ will buy out VOD, those same analysts pegged that at an over 100$ billion dollar deal, which were estimates before the T-Mobile sale price of 39 billion. While I'm sure VZ would like to buyout VOD, do they have the capital to do that, while at the same time investing within their own capex? Personally, as a VOD shareholder, I'm hoping for they don't break up, but boost VODs dividend.

  • Report this Comment On May 19, 2011, at 6:23 PM, TMFRoyal wrote:

    Hi, energysytems,

    Yeah, I'm hoping for the dividend boost for VOD as well. Verizon is highly leveraged already, so I'm skeptical of the claim that Verizon would buy the JV, given its size. And if what Verizon really needs is cash for an infrastructure buildout, then dividending out cash from the JV could work as well or better, at least in the short term. Still, with interest rates at unbelievably low rates, who knows what will happen? Financially, it can make a lot of sense to borrow and buy assets.


  • Report this Comment On May 19, 2011, at 6:24 PM, ChrisLynn1 wrote:

    Thanks Jim,

    Appreciate the additional info on Seaspan.

  • Report this Comment On May 20, 2011, at 9:51 AM, energysystems wrote:


    I see it the same way. Hopefully VZ won't take advantage of these historically low rates

  • Report this Comment On May 20, 2011, at 12:15 PM, kurtdabear wrote:

    One note of caution about CVR: Their plant, which is in the Red River flood plain, was inundated a few years ago and was out of production for months. The company came pretty close to going broke till some of the creditors' agreed to a stand-still agreement.

    As to NLY, I have difficulty understanding NLY's consistent popularity among investors large and small, considering that they've cut their dividend once already in the past year and are leveraged approx. 6-1 debt to equity in an environment of credit contraction. That much leverage makes it hard to borrow, and a decreasing yield makes it harder to sell shares, which could be a problem if they need to raise capital in the next year or two.

  • Report this Comment On May 20, 2011, at 12:26 PM, DJDynamicNC wrote:

    I'm rather bullish on VZ for the long term, actually. They are heavily leveraged because they are bringing a fiber optic network to the United States - no small proposition. But it positions them well for the digital future.

    Verizon has a history of building a heavy backbone to support their operations, which is expensive but rewarding (counterexample: AT&T). I think that's a smart play and I continue to hold Verizon stock.

  • Report this Comment On May 27, 2011, at 12:34 PM, gcmagone wrote:

    This is the first recommendation I have seen in a long time for anyone in the shipping business because of the glut on new ships entering the market. So, I will pass on SSW. Regarding VOD, I think you have it right. One way or the other (buyout or dividend) they should come out a winner.

  • Report this Comment On June 13, 2011, at 9:13 PM, MichaelHamilton wrote:

    If CVR issues more shares to grow then the dividend will be shared between more shareholders and the yield will go down

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