You might think that speculative traders on Robinhood Markets aren't big on dividend checks. They're investors for capital gains, not the allure of quarterly dividend checks. However, there are still some interesting stocks among the 100 most popular stocks on Robinhood that pack healthy yields.
AT&T (T +0.00%), Invesco Mortgage Capital (IVR +1.38%), and Prospect Capital (PSEC 0.38%) are three high-yielding names among the top 100 on Robinhood that bear watching. Let's take a closer look.
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AT&T: 7.7% yield
Let's kick off the discussion on Ma Bell by pointing out that the yield here is about to get a massive haircut. When AT&T announced plans in May to unload WarnerMedia it came with the warning that there will be a dividend cut. After 34 consecutive years of hikes, this Dividend Aristocrat is hanging up its cleats.
AT&T still makes the cut here. It expects to be yielding about 4% by the time the asset transaction is completed, and there could be capital gains on the way. AT&T's growing wireless business should continue to be a cash cow, and wider adoption of 5G raises the ceiling on what AT&T can command of its subscriber base.
Invesco Mortgage Capital: 11.1% yield
It's easy to see why Robinhood's young investors are drawn to Invesco Mortgage Capital. The stock has the potent combination of a low stock price -- $3.23 as of Monday's close -- and a juicy double-digit dividend yield.
There's no free lunch at the high-yield buffet. As a mortgage real estate investment trust, Invesco Mortgage Capital borrows money to buy mortgage-backed securities. The larger the difference between the rate it can borrow and the securities it can buy with them, the wider the net interest margin. As a REIT it pays out the lion's share of its funds from operations to its shareholders. In its latest quarter the gap was 212 basis points for a net interest margin of 2.12%.
Invesco Mortgage Capital got roughed up last year. It was taking too many risks in the pursuit of bountiful payouts. Its commercial mortgage-backed assets and non-agency credit-risk transfer assets blew up when the economy stalled as the pandemic coated the marketplace. It has cleaned house since then, leaning on safer agency assets that sacrifice yield for default safety.
Things aren't perfect. The stock may be trading at roughly its book value of $3.21 per share, but that per-share metric was at $3.65 three months earlier and $3.86 when the year began. It's also vulnerable to hiccups in the real estate market as well as the potential flattening of the yield curve. High risks come with these high yields.
Prospect Capital: 9.2% yield
Despite sharing the word Capital in its moniker, Prospect isn't in the same niche as Invesco Mortgage Capital. Prospect Capital is a business development company -- or BDC -- that generates current income and seeks long-term capital appreciation through debt and equity investments in middle-market companies.
Prospect Capital tosses out a pretty wide net. Its portfolio has investments in 124 different businesses covering 38 different industries. Prospect Capital has $6.9 billion in capital under management as of the end of June.
There are some advantages here when pitted against Invesco Mortgage Capital. Net asset value is actually rising. Next month's dividend -- and, yes, Prospect Capital does declare monthly distributions -- will be 50 times in a row that it has been able to shell out $0.06 a month. Prospect Capital is also trading at nearly a 20% discount to its net asset value of $9.81 (as of the end of June), but most BDCs trade at hefty markdowns. It's diversified enough to withstand a failure here and there, but the risk here is if the economy hits the skids.
