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I just found one of the safest 13.0% yields I've ever seen
-- and it's in a place practically no income investor dreams
of looking right now.
In addition, I've found securities few American investors
even know exist that are offering incredible dividend growth
potential.
Believe it or not, both of these opportunities exist in the
beleaguered and hated financial sector. Investors threw out
the good along with the bad and the ugly during the
financial crisis. But sifting through the rubble, there's
still plenty of good -- if you like double-digit yields.
You see, while failing banks have captured all the
headlines, certain financials actually avoided risky
derivatives and multi-billion dollar write-offs. There are
also companies that have kept earnings and dividends at
pre-financial crisis levels. But because of their
association with a hated sector, many investors simply
walked away and have ignored them since.
And while some smart investors have already come back into
the sector to pick the lowest-hanging fruit (In fact, Carla
has been alerting her
High-Yield Investing subscribers of
opportunities in financials since December), there are still
areas where you can lock in mouth-watering yields.
In particular, I've found the three following areas within
the financial sector that are serving up juicy yields.
Canadian Banks
If you think big banks with high yields and strong growth
prospects are a thing of the past, think again. They still
exist; they're just north of the border.
The largest Canadian banks are dividend machines that have
collectively grown dividends by an average of roughly +15%
per year over the past five years. While current yields of
up to 5% may not "wow" many income investors, prospects for
dividend growth have rarely been better.
Canadian banks didn't have nearly the subprime and bad loan
exposure of most large U.S. banks. And unlike most of their
G7 counterparts, Canadian banks didn't require capital
injections from the government. It shouldn't be a surprise,
then, that profits are on the rise. While all of the six
largest Canadian banks reported profits last quarter, four
of the six reported higher profits than a year ago and three
reported all-time record profits.
These banks are poised to continue gaining business and
prime assets at the expense of their struggling stateside
counterparts. For example, as investment firms struggle and
Goldman Sachs and Morgan Stanley succumb to stricter
regulations as traditional banks, lucrative underwriting and
merger and acquisition business is opening up for some
Canadian banks like never before. In addition, a strong
Canadian dollar puts these banks in an ideal position to
acquire prime U.S. banks and assets at compelling values.
This growth will likely lead to higher future dividends.
Investing in select Canadian banks now is an ideal way to
grab a piece of solid and growing payments.
Mortgage REITS
I mentioned earlier that I found one of the safest 13.0%
yields I've ever seen.
This yield comes from a type of security that's scared most
investors away -- mortgage REITS. These companies invest
exclusively in mortgage-backed securities.
But aren't mortgages what got us into this mess?
Maybe so, but contrary to popular perception, business has
never been better for well-positioned mortgage REITS. The
government has stepped in to bolster Fannie Mae and Freddie
Mac, making the mortgage-backed securities held by many mortgage
REITs as safe as Treasuries.
The REITs simply borrow at short-term interest rates and
invest in longer-term, higher-yielding mortgages, thus
making money on the spread. With low rates on short-term
borrowing, spreads are historically high.
That's allowed REITs like Annaly Capital (NYSE: NLY),
which yields 13.0%, to make high, safe payments to
investors.
Preferred Stock and Exchange-traded Bonds
Carla mentioned the virtues of investing in exchange-traded
bonds and preferred securities just a
couple of weeks ago, and she was spot on.
These securities are a dream for investing in financials.
They pay regular and predictable income on a consistent
basis. The beauty of these securities is that payments don't
fluctuate with the underlying company's earnings. Market
fluctuations and economic cycles are only a concern as to
whether the underlying company can continue to make
payments.
Preferred stocks and exchange-traded bonds of most financial
institutions have managed to continue to make regular
payments throughout the financial crisis. For instance,
while Wells Fargo has to cut its dividend by more than -85%
during the crisis, its 8.625% Trust Preferreds (NYSE:
WCO) kept right on paying investors. At the height of
the crisis, these securities were paying yields as high as 15%
as investors fled anything related to financials. Today they
still yield over 8%.
It just goes to show some of the opportunities awaiting
investors in the most-hated sector of the market.
Good Investing!
Tom Hutchison
Carla Pasternak's Dividend Opportunities
P.S.
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