The market’s fall pullback is starting to reverse itself, but don’t worry: there are still bargain dividend payers yielding 7.4%+ dividends to be had out there.

But investing (along with everything in our lives!) has changed. You simply won’t get safe, high payouts by clutching to old habits and buying big-name, high-yielding S&P 500 stocks. The real dividend bargains are in closed-end funds (CEFs), which give you higher payouts, greater safety and often better returns over the long haul.

To show you what I mean, let’s line up three S&P 500 “dividend darlings” against the CEF competition and see how they compare. (Spoiler: it’s a blowout win for CEFs!)

AT&T: Big Dividend Lousy Return

AT&T (T) is a stock so old my grandmother has had it in her portfolio since before my mother was born. Ma Bell has been known as a huge income producer, with enticing 5%+ yields; today the stock’s yield is above 7%.

Such a big payout sounds like a slam dunk, so why not pick it up? To be honest, there are many reasons why this would be a bad move.

For one, AT&T’s net income fell 25% in 2019 from the prior year and has so far fallen 31.1% in 2020. As well, the company’s assets are barely growing as fast as its debts. Even if we ignored all of that, AT&T has badly underperformed the market over the long haul, even when you include its dividend!

The stock has done much worse than the alternative I’d suggest: the Liberty All-Star Growth Fund (ASG), which is full of companies that have beaten AT&T over the long haul, like Amazon.com (AMZN), Microsoft (MSFT) and Alphabet (GOOG). 

Plus, ASG gives you much more diversification than buying

Co-produced with PendragonY

The Business

Each business goes through several stages. First, there’s the introduction stage. When the business picks up, it becomes the growth stage. Following that, it reaches cash cow stage whereby the growth is lower, but the company is generating high enough cash to be able to reward shareholders. This is where Altria (MO) is today. In this case, MO is able to reward shareholders with very high dividends.

Altria is a tobacco company owning the U.S. rights to many of the most popular brands like Marlboro, Benson & Hedges, Parliament, and Virginia Slims. The revenues from these brands make it one of the largest tobacco companies in the U.S. with its headquarters in Richmond, Virginia. While it has investments outside of tobacco, most notably Anheuser-Busch-Inbev (BUD), Cronus Group (CRON), and JUUL, it still gets approximately 85% of its revenue from cigarettes. “I Quit Original Smoking” (or IQOS) is a new heat-not-burn tobacco product that’s also seeing significant investment from Altria.

In past articles on Altria, we have pointed out that tobacco companies have typically had improving stock prices when the economy struggled. This year has proven to be the exception to that rule. And while MO share prices declined along with the rest of the market in late February and March, it also has been slower than the rest of the market to recover from those declines. If the company’s operations have recovered, this lack of share price recovery is an opportunity.

So how has the share price done?

Here’s how the share price of MO compared to the S&P 500 during the initial market reaction to the COVID-19 crisis from Feb. 17 to April 30:

ChartData by YCharts

So MO crashed pretty much in line with the market as a whole and

Introduction

For public equities investors, the U.K. motor insurance sector consists of Admiral (OTCPK:AMIGF), Direct Line (OTC:DIISF), Sabre Insurance (OTC:SBIGY), and (soon-to-be-acquired) Hastings (OTC:HNGGF), with market capitalizations ranging from Admiral’s £7.67bn ($10bn) to niche player Sabre’s £650m ($850m).

Year-to-date, Hastings’ share price is up nearly 40% due to the takeover, Admiral is up 17%, but Direct Line and Sabre remain substantially down. The three still-public motor insurers’ shares currently offer Dividend Yields of between 5.5% and 8% approximately.

In this article, we explain why they can be attractive to dividend investors.

Long-Term Structural Growth

U.K. motor insurance premiums have long-term structural growth driven by growth in both the number of vehicles and claim costs.

The number of registered cars and other vehicles in the U.K. has increased every year since the 1990s until H1 2020 (which saw a decline due to COVID-19), with annual growth mostly in the 1-2% range and averaging 1.7%:

Claim costs have also been growing over the long term, driven by structural factors such as more expensive and complex vehicles (which increase repair costs) and medical advances (which increase bodily injury costs).

In the 20 years to 2016, total direct motor Gross Written Premiums have doubled, implying a long-term CAGR of approx. 4%:

Profitability Pressures in Recent Years

Except Sabre, all of the insurers mentioned above have other business lines (especially home insurance), but motor insurance continues to drive the bulk of their profits – and this has been under pressure in recent years.

The 2019 underwriting margins for the different companies’ motor businesses are shown below. The range is diverse – while Sabre and Admiral each had an underwriting margin exceeding 20%, Direct Line had one of only 5%, Hastings barely broke even and esure (OTC:ESXRY) (listed until 2018) made an underwriting loss:

U.K. Motor

Annaly Capital is a mortgage REIT (the company basically borrows money against its book value to buy mortgage related assets, mainly agency RMBS), and it often captures the eye of income-focused investors because it offers a high yield. Mortgage REITs have been through a lot this year as liquidity challenges caused heightened volatility. However, not all mortgage REITs are created equally. In this article we review Annaly Capital, with a particular focus on the preferred shares. The preferreds offer compelling high yields, price appreciation potential and they are safer than the common. We consider Annaly’s current balance sheet and liquidity, credit spreads, share price action, valuation and risks. We conclude with our opinion on investing.

Overview

Annaly Capital Management (NLY) is one of the largest mortgage real estate investment trusts (mREIT). It invests in and finances residential and commercial real estate assets. As of 30 June 2020, NLY had $103.6 billion invested in various assets, and the company operates through four segments:

  • Agency (93% of total invested assets): invests in GSE backed RMBS that are created out of a pool of similar types of mortgages from banks (through the process of securitization).
  • Residential Credit (2.5% of total invested assets): invests in non-agency residential mortgage assets through securitized products and the whole loan market.
  • Commercial Real Estate (2.4% of total invested assets): originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity assets.
  • Middle Market Lending (2.1% of the total invested assets): provides financing to private equity backed middle market businesses.

Source: Annaly Capital Management

Annaly’s RMBS Assets Provide Increased Safety

As we saw above, the overwhelming majority of Annaly’s assets are invested in Agency Residential Mortgage Backed Securities (NASDAQ:RMBS) which provide a high level of safety because the underlying mortgages that these securities represent

(Bloomberg) — U.S. stocks climbed to a month-week high on optimism over economic stimulus and that President Donald Trump will leave the hospital later Monday. Treasury yields jumped and the dollar weakened.

The S&P 500, Nasdaq Composite and Dow Jones Industrial Average all rebounded from Friday’s swoon in the wake of Trump’s coronavirus disclosure. Regeneron Pharmaceuticals Inc. rallied after Trump was given an experimental antibody treatment made by the drugmaker. Energy, health care and technology shares were the biggest gainers in the S&P.

“Fiscal stimulus continues to be a wild card for the market, and uncertainty around the health of the president certainly looms large,” said Chris Larkin, managing director of trading and investment product at E*Trade Financial. “So while there’s a lot of noise out there, experienced traders may find bullish opportunities.”



timeline: BlackRock's TLT had its best week of inflows on record


© Bloomberg
BlackRock’s TLT had its best week of inflows on record

Trump said on Twitter that he’ll leave Walter Reed hospital Monday evening after being treated since Friday for Covid-19. With less than a month until Election Day, Trump’s hospitalization has jolted the presidential campaign, forcing him to scrap rallies and other events as polls show him trailing Joe Biden nationally and in swing states.

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On the stimulus front, Trump tweeted from the hospital that a deal needs to get done. House Speaker Nancy Pelosi was optimistic on Friday that a bipartisan stimulus bill can be done.

“Absent of vaccine breakthrough, we’re in an economy that is modestly recovering from the lows of March and April, but it can only go so far,” said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management’s Ascent Private Wealth Group. “Areas of the economy that are susceptible are still feeling the pain. That’s why we need so much stimulus from the Federal Reserve and Congress.”

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