Although tax day is just nine short days away, that still leaves plenty of time for investors to make a qualifying investment in their individual retirement account.
For those of you who have a Traditional IRA, if you've yet to hit your contribution limit of $5,500 in 2013 then you have until April 15 to do so. Best of all, Traditional IRAs allow for an upfront tax deduction based on the amount of your contribution (based on adjusted gross income), which could help lower your 2013 tax liability. For the remainder of you with Roth IRAs, your contribution, while not tax-deductible upfront, will be allowed to grow tax-free over a lifetime, which may ultimately offer many investors a much larger benefit than an upfront tax deduction.
Last week we glimpsed at a myriad of last-minute IRA selections, pointing out how these companies could grow over time for both risk-averse and risk-willing old and young investors. Today, we're going to stick with the concept of last-minute IRA ideas, but with a twist. Instead of focusing on the combination of growth and dividend yield, I'm focused solely on delivering a high sustainable yield for income-seeking investors.
The criteria I looked for were pretty straightforward:
- A yield above 5%.
- A propensity to maintain or raise its dividend.
- A highly sustainable payout structure.
- A market valuation in excess of $300 million.
The end result was an arbitrarily picked five-stock portfolio for your IRA that, if invested in equal portions, has the current potential to yield 6.5% on an annual basis. Put another way, if these yields and stock prices remained stagnant, you could double your money about every 11 years on dividend income alone.
Let's take a closer look at the five companies I believe could be the key to success for high-yield income seekers.
Alliance Resource Partners (NASDAQ:ARLP): 5.8% yield
First we have Alliance Resource Partners, a master-limited partnership in the coal production space. Before you freak out about a coal producer delivering sustainable profits understand that as an MLP Alliance Resource has a favorable tax structure which helps lower its costs, and also consider that it differs from its peers by locking in long-term contracts numerous years ahead. The result is that very little of Alliance Resource's production is exposed to current market prices which are currently under pressure, helping add cash flow consistently to Alliance Resource Partners' bottom line.
In spite of coal's swoon, Alliance Resources has delivered 13 consecutive record annual profits and has boosted its dividend in 23 straight quarters (its payout has more than doubled in those 23 quarters). With a yield of 5.8% and a sustainable payout ratio of 66% based on Wall Street's estimated 2014 EPS, Alliance Resource Partners appears to be the real deal for income investors.
New York Community Bancorp (NYSE:NYCB): 6.3% yield
When we're talking big dividends, it should come as no surprise to find one of the financial sector's most consistent payers among the crowd, New York Community Bancorp. Having not cut its dividend throughout the financial crisis, New York Community Bancorp delivered another strong fourth-quarter report in January, with a 15.3% return on average tangible equity, and a 9.4% improvement on held-for-investment loans despite a 23 basis-point year-over-year decline in net interest margin. However, don't let its shrinking net interest margin scare you, as its only real weakness was due to a number of prepayments signaling the improving credit quality of its clientele.
With consistency being king for this savings-and-loan giant, New York Community Bancorp has been pushing out $1 per share annually for close to a decade. Although I wouldn't anticipate any dividend hikes anytime soon as it's in the market to make a large purchase, I don't believe there's anything to worry about with regard to its 6.3% yield, either.
Energy Transfer Partners (NYSE:ETP): 6.8% yield
Tired of the natural up-and-down nature of the oil and gas drilling and refining sector? There's an easy solution to that: play the middle ground!
Energy Transfer Partners is a midstream energy company that handles the transportation, transmission, and storage of energy assets such as oil and natural gas. With the past decade yielding record shale deposits on land, and the Gulf of Mexico offering drillers a bevy of energy assets deep below the surface, the need to store and transport all of these assets is only going to grow over time. The smartest way to play this energy boom is with the basic need of infrastructure, not the actual volatile assets like oil and natural gas themselves.
Inclusive of its acquisitions, Energy Transfer Partners' revenue basically tripled in 2013 to $46.3 billion from $15.7 billion in the year-ago period as its operating income improved by low double digits. As Energy Transfer Partners benefits from improved oil & gas production it could even see its dividend get raised beyond its current yield of 6.8%.
FLY Leasing (NYSE:FLY): 6.8% yield
Aircrafts aren't cheap -- and both the airline industry and FLY Leasing know this -- which is why more and more airlines are choosing to lease aircrafts over the course of a few years rather than purchase new planes outright. The advantage is often seen in both ends of the spectrum, with lower upfront costs for the airline and probably better fuel economy as well. For FLY it's the perfect scenario, because it allows the company to maintain strong pricing power while also giving it an opportunity to unload the aircraft when the lease is up, providing capital to purchase newer aircraft to lease out.
Clearly, FLY must be doing something right because its adjusted net income rose 10% for the full year, and it recently boosted its dividend again, pushing its yield very close to the 7% barrier. Shareholders should probably reduce their expectations of another huge dividend hike any time soon after this year, with FLY adding quite a bit of debt to its balance sheet from new plane purchases, but its current 6.8% yield is quite sustainable as is.
GEO Group (NYSE:GEO): 7% yield
Lastly, we have one of the most basic necessities of all: prisons. With a considerably large number of Americans locked up behind bars in comparison with incarcerated citizens in other countries, the prison system in the United States has become a big money business. That's music to the ears of income investors.
Even better for investors, GEO Group officially became a real estate investment trust in early 2013, netting the company substantial tax benefits, but also requiring that it pay out at least 90% of its income in the form of a dividend to shareholders. This REIT conversion has helped push GEO Group's dividend up to the 7% mark, and it looks as if it'll remain quite sustainable, given the ongoing need for more prisons in this country.