Many investors seek dividends for sure, easy cash in an income portfolio. And given that dividend stocks typically outperform non-dividend payers over the long term, it's no wonder. We called together some of our top analysts to give their take on high-yield (7%+) dividend stocks you should dig into in September. Oh, and there's a bonus if you don't feel comfortable with the stocks -- an ETF that would allow you to diversify your risk.
Matt Frankel: In my opinion, the best dividend stock to buy right now is Prospect Capital Corporation (PSEC -0.65%), which yields about 13%. Thanks to an earnings miss, Prospect's share price has pulled back to just over $10, and is trading at a discount of nearly 5% to its net asset value of $10.56 per share.
Despite the high yield, Prospect carries less risk than you may think, with its $6 billion investment portfolio spread among about 140 different companies in a variety of industries. And, less than 2% of the companies that make it through Prospect's rigorous screening process actually make it to closing. Because of this screening, just 0.3% of Prospect's assets were non-performing over the past year, down from a peak of 5.9% in 2009.
Prospect has already declared its monthly dividends through December, and has never cut its dividend since it started monthly payments in 2010. And, speaking of monthly dividends, Prospect's already generous payout is actually an effective 14% per year thanks to the more frequent compounding.
David Koppenheffer: Among the most unique mortgage REITs is 10.8% dividend-yielder PennyMac Mortgage Investment Trust (PMT -0.23%). Over the past several years, the company's bread and butter has been buying non-performing residential loans at significant discounts and working with borrowers to help them avoid defaulting. If credit quality improves, PennyMac Mortgage can sell off the loans and earn a profit.
To diversify its business, the company has recently emphasized making correspondent lending and mortgage serving rights a bigger part of its strategy. The company uses its established pipeline to buy residential loans, get them packaged into mortgage-backed securities, and sell them into the secondary market for a profit. Equally important, they retain the rights to service the mortgages, and earn fees for acting as middle man between the borrower and lender.
While there is certainly risk investing in distressed assets, PennyMac Mortgage has huge upside creating a total return of nearly 90% since September 2011. Because of the company's unique and diverse strategy, along with growing its portfolio of mortgage servicing rights – which are one of the few mortgage-related assets that perform well when interest rates rise – I think PennyMac Mortgage is a great high-yielding dividend investment you can buy today.
Patrick Morris: If I could select any stock with a massive dividend, it would be none other than American Realty Capital Properties (VER) with its juicy yield of nearly 8%. Although it has undergone massive change over the last year and a half -- as a result of mergers and acquisitions its real estate investments grew from $2.2 billion at the end of 2012 to $17.4 billion at the end of the second quarter -- there is still a lot to like.
The first is its immense diversity of revenue streams -- its top 10 tenants make up less than one-third of its revenue -- and nearly half of those tenants are considered to be top-tier investment grade, which places it in the top of its class of peers. In addition, despite the fact its dividend yield of nearly 8% considerably tops the roughly 5% average of those very same peers, it also trades at a remarkably attractive valuation of just 11.5 times 2014 estimated Adjusted Funds From Operations, well below the multiple of 17 seen by those very same peers.
And finally, while he is still somewhat new to the company, all signs point to David Kay, the American Realty Capital Properties' president, to be a very capable leader following all the change which has occurred.
Change of course is scary, but all signs seemingly indicate this could be a company poised to deliver great returns in September and beyond.
John Maxfield: For a bonus, I'm going to take a different tack. When it comes to high-yielding stocks, I like the iShares S&P U.S. Preferred Stock Index (PFF 0.28%). As its name suggests, it's an exchange-traded fund that tracks the investment results of an index of U.S. preferred stocks.
Although its yield is slightly below 7% -- it's 6.68% to be precise -- it has multiple traits that make up for the deficit. In the first case, because preferred stock is higher on the priority chain, it is, essentially by definition, less risky than common stock. Along these same lines, dividends on preferred stock must typically be paid out before earnings can be distributed to common stock holders.
Finally, the fund's share price is stable. According to its factsheet, its beta, which measures a security's volatility relative to the S&P 500, is only 0.09. For the record, a beta below 1.0 signifies less volatility than the large-cap index while a figure great than 1.0 signifies greater volatility.
Put these three things together and you have exactly the type of stock that's great for an income-seeking investor.
