Prospect Capital (PSEC 0.92%) has long been a favorite among high-dividend seekers, but has recently turned investors off by cutting its dividend. While the stock still yields over 11% annually, it's understandable that many investors want dividends that are safer and less volatile.
We asked three of our analysts for stocks that have a better (but not necessarily higher) dividend than Prospect Capital. Here is what they had to say:
Dan Caplinger: With Prospect Capital having just slashed its dividend, it's tempting to go with just about any company that has done a better job of sustaining its payout to shareholders. But if you want a similar risk profile to Prospect, one option to consider that would still give you an enviable dividend yield is the mortgage REIT Two Harbors (TWO 1.02%).
Admittedly, Two Harbors has also suffered dividend cuts in recent years, with its latest payout down by a third from levels just three years ago. But investors now have greater confidence that Two Harbors can sustain its payout at current levels, with investments in agency and non-agency mortgage-backed securities that allow the REIT to earn high yields without the enormous amounts of leverage that some of its more agency-focused mortgage-REIT peers take on. Moreover, with strategies including taking on excess mortgage servicing rights as a partial hedge against rising interest rates and to boost returns, Two Harbors has found ways to keep income levels up while keeping risk levels in check. As long as the company's selection of assets ranging from sub-prime mortgages to prime jumbo mortgage loans remains prudent, Two Harbors has the capacity to keep giving solid streams of income to shareholders.
Matt Frankel: One dividend stock that I think is a better choice than Prospect is PennyMac Mortgage Investment Trust (PMT 0.30%), which pays a 10.8% annual yield.
One of the reasons I like PennyMac is that it operates a lot differently than most mortgage REITs. Generally, mortgage REITs like Annaly Capital Management borrow money at low rates and then invest the funds in mortgage-backed securities. They keep the "spread" between the two rates as their profit, which is generally in the 2% range. So, in order to generate double-digit dividend yields, they leverage up their balance sheets by a factor of five-to-one or higher.
By contrast, PennyMac invests in "distressed" mortgages, which generally pay higher interest and are usually sold at a substantial discount. As a result, the company can afford to pay a high dividend without excessive borrowing. In fact, PennyMac's leverage ratio is currently about 1.8-to-one, much less than its competition.
And while the term "distressed" mortgages may give you reservations about the safety of investing in the company, take a look at PennyMac's dividend history compared to its completion (or Prospect for that matter). While most mortgage REITs were slashing their dividends in late 2013 and early 2014, PennyMac actually increased its payout. The company has raised its dividend by 11% since 2012, and has delivered an annualized return on equity above 15% for the last 10 quarters.
Selena Maranjian: Come on, people -- dividends aren't everything. Any company with a great dividend can fall on hard times or might not be a great company to begin with, and may end up cutting its payout. So instead of focusing on the dividend alone, look for a healthy, growing company, ideally one with a solid, growing dividend. Here's my suggestion: Intel Corporation (INTC -1.79%). It recently yielded 2.8%, and it has increased its payout by an annual average of 7% over the past five years, and 9% over the past 10.
The chip giant has stalled a bit in recent years, in part due to weak PC sales and not moving fast enough into the mobile arena. But it's not smart to count Intel out, as the company has lots of resources and opportunity, with more than $10 billion in annual free cash flow. It may not be firing on all cylinders yet at this point, but it has plenty of promising businesses. Its data center revenue, for example, grew 25% year over year in its fourth quarter, while taking in more than $2 billion in its Internet of Things businesses in 2014, up 19% over 2013. Also promising for its Internet of Things initiatives is its recent purchase of the German home-networking specialist and chipmaker Lantiq, which includes some 2,000 patents.
Intel still faces some challenges, such as getting a stronger position in mobile. Its upcoming Broxton chip is promising, but it appears that it might not be debuting until next year, when it will compete with a Qualcomm chip. Its stock price isn't at a screaming-bargain level right now, but patient believers might want to ease into a position, or at least keep an eye on Intel -- there's a lot that can go right with it.
