{"id":34006,"date":"2012-12-03T11:02:41","date_gmt":"2012-12-03T16:02:41","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/12\/3-dividend-stocks-for-those-who-like-to-live-dangerously\/"},"modified":"2012-12-03T11:02:41","modified_gmt":"2012-12-03T16:02:41","slug":"3-dividend-stocks-for-those-who-like-to-live-dangerously","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/12\/03\/3-dividend-stocks-for-those-who-like-to-live-dangerously\/","title":{"rendered":"3 Dividend Stocks for Those Who Like to Live Dangerously"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

One of my favorite scenes in the classic James Bond spoof Austin Powers<\/em> is when Powers sits down at the blackjack table occupied by Dr. Evil\u2019s Number 2. (see “Bond Investing. \u00a0JAMES Bond Investing<\/a>.”)<\/p>\n

Number 2\u2019s cards give him 17\u2026and because he \u201clikes to live dangerously\u201d he says \u201chit me.\u201d (Number 2 has x-ray vision that lets him see that the next card was a 4, but that is not particularly important in this metaphor.)<\/p>\n

\"\"<\/a><\/p>\n

I also like to live dangerously.<\/p>\n<\/div>\n

Power\u2019s cards give him 5\u2026and because he \u201calso <\/em>likes to live dangerously\u201d he decides to stay.<\/p>\n

Of course, Powers loses to the house.\u00a0 It is mathematically impossible to bust when you have a total of five; you would need at least two more cards to exceed 21. \u00a0So Power\u2019s decision to stay was not living dangerously; it was a case of not understanding the rules of the game.<\/p>\n

This is how I feel when I see investors chasing yield in some dodgy sectors of the market.\u00a0 Not only are they living dangerously, they are failing to appreciate that they are taking risks at all.<\/p>\n

I\u2019ll start with mortgage REIT Chimera Investment Corp (NYSE: $<\/span>CIM<\/a>), <\/strong>which yields an impressive 13.7%.<\/p>\n

When you hear \u201cREIT\u201d you automatically think of productive real estate.\u00a0 But that is not at all what Chimera is.\u00a0 In fact, it has far more in common with a high-flying hedge fund than it does with a staid old real estate investment.\u00a0 Mortgage REITS like Chimera play the spread game, borrowing large sums of money cheaply and investing it (generally) in mortgage bonds and their derivatives.<\/p>\n

The ability of mortgage REITS to maintain their massive dividends depends on the spread between the short-term rates at which they borrow and the prevailing market rate on the mortgages they buy.\u00a0 Well\u2026have you checked mortgage rates lately?\u00a0 They are at all-time lows.\u00a0 And with Bernanke\u2019s QE Infinity in full effect, that\u2019s not likely to change.<\/p>\n

But let\u2019s say mortgage rates start climbing tomorrow.\u00a0 That\u2019s great for future mortgage purchases, but what about the existing portfolio?\u00a0 It\u2019s book value gets hammered, and the investment manager may be forced to liquidate and sell at a loss if short-term borrowing rates rise.<\/p>\n

I\u2019m not telling you to never buy a mortgage REIT.\u00a0 In fact, I myself have a small position in Two Harbors Investment Corp (NYSE:$<\/span>TWO<\/a>)<\/strong> in some of the portfolios I manage.\u00a0 My point is that these are not your grandpa\u2019s REIT.\u00a0 If you want stable dividend growth from a pool of real estate, consider something like Realty Income Corp (NYSE:$<\/span>O<\/a><\/strong>).\u00a0 But invest in mortgage REITs at your own risk. \u00a0(Lest you think I am being dramatic, Chimera has seen its share price swing from $3.16 to $1.81 and back to $2.69 over the past 12 months.)<\/p>\n

Next on the list is SandRidge Permian Basin Trust (NYSE: $<\/span>PER<\/a>)<\/strong>, which yields 14.3%.\u00a0 Oil and gas royalty trusts have become popular in recent years as yield-hungry investors have had a lack of better alternatives.\u00a0 But these should not be confused with oil-and-gas-based Master Limited Partnerships (MLPs).<\/p>\n

I love MLPs.\u00a0 They pay high and growing streams of tax-deferred income while (generally) taking little commodity price risk. They operate like toll roads, getting paid for the volume of oil and gas they transport, irrespective of the market price.\u00a0 If bought at a reasonable price, they are about as close as you can get to a perfect investment.<\/p>\n

Alas, none of this holds true for oil and gas trusts.\u00a0\u00a0 The trusts are highly sensitive to the price of energy and to engineering estimates of their reserves.\u00a0 But more than this, they are not going concern businesses; they are depleting assets.\u00a0 You shouldn\u2019t expect long-term capital gains from these; the high income you receive today is all you\u2019re going to get.<\/p>\n

Again, this is not to say that you should never buy an oil or gas trust.\u00a0 Under the right set of circumstances, you can make a killing in them. But these are highly-speculative investments and should not be confused for safe and stable dividend producers.<\/p>\n

Finally, I\u2019ll throw out France Telecom (NYSE: $<\/span>FTE<\/a>)<\/strong> as an example.\u00a0 Investors have flocked to American and European telecom stocks in recent years because the high dividend payouts seemed too good to ignore.\u00a0 I recommended Spanish telecom giant Telefonica (NYSE: $<\/span>TEF<\/a>)<\/strong> two years ago primarily for its exposure to Latin America, but its 8% dividend at the time was certainly a sweetener.<\/p>\n

Alas, it was too good to be true.\u00a0 With its domestic market in free fall and its borrowing costs surging, Telefonica suspended its dividend to conserve cash.<\/p>\n

Though France Telecom did not face a crisis on the level of Telefonica, it too recently had to cut its dividend, from \u20ac1.40 to \u20ac0.80.\u00a0 This dropped the yield from the mid teens to about 9% today.<\/p>\n

Even at the reduced payout, France Telecom is one of the highest yielding stocks in the world.\u00a0 But it operates in a brutally competitive market.\u00a0 Telecom services are a commodity where the dominant factor to consider is price.\u00a0 Given that the mobile phone market is saturated in Europe, the only way a provider can grow is at the expense of a rival.\u00a0 This is a zero-sum game, and it\u2019s not good for profits.\u00a0 (And this says nothing of fixed-line phone service, which is going the way of the dodo bird.)<\/p>\n

Again, I\u2019m not saying that investors should always steer clear of telecom firms.\u00a0 I still own Telefonica because I consider it an attractive growth play in Latin America.\u00a0 But telecoms are no longer conservative utilities.\u00a0 They operate in a brutally-competitive market, and investors should buy at their own risk.<\/p>\n

Disclosures: Sizemore Capital is long TWO, O and TEF. This article first appeared on InvestorPlace.<\/em><\/p>\n

The post 3 Dividend Stocks for Those Who Like to Live Dangerously<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

\n

Related posts:<\/p>\n