Big dividends. And I mean really big dividends. Yields that are multiples of the average of the members of the S&P 500 Index. But big dividends are worthless if the companies behind them aren’t up to sustaining them, or if the dividend stocks aren’t working in the market. A dividend yield won’t be worth much to anything on dividend stocks that are lagging or tanking.
Investing for dividend income takes work researching companies — both their income statements and their balance sheets. As a former banker and bond guy — I have always been about balance sheets as just as important as income statements.
Income statements cover the revenues from products and services, and investors get all excited about growth expectations. But for me, it also comes down to operating margins. Sales are great, but not if a company loses more than what they generate in revenue. And of course, problems will happen. So, I look at what will happen to either impact sales or costs. And in turn, I work through how the company has or will cope.
Balance sheets are crucial, as without credit, even the best product idea won’t make for a great company that’s headed into receivership. And earlier this year with the Covid-19 mess including lockdowns, the status of companies — including their operations, their suppliers and customers — was critical to analyze. But so, too, was the debt and credit of the companies, so that they could power through even the worst parts of the Biblical plagues that might be striking their core businesses.
The following big dividend stocks have been vetted by me and I’ve been recommending them for some time. And that time includes both good and bad conditions — so the dividends are sustainable.
- AllianceBernstein (NYSE:AB)
- Compass Diversified (NYSE:CODI)
- Hercules Capital (NYSE:HTGC)
- Sixth Street Specialty Lending (NYSE:TSLX)
Dividend Stocks: AllianceBernstein (AB)
AllianceBernstein is an asset management company that is set up as a passthrough. This means that it avoids general corporate income taxes and dividends can come with some tax advantages. Asset managers are all about getting and keeping assets under management (AUM). AUM is what generates fee income — so the more they have, the more fee income they get.
AUM keeps rising for AllianceBernstein, with the average for the trailing five years alone running at 6.51% on a compound annual growth rate (CAGR) basis.
This fuels dependable revenue from fee income. And this fuels the dividend, which is yielding 8.58%. And over the same trailing five years — the dividend distributions have been hiked by an annual average of 7.96%. And it has great credit and fiscal management.
The stock isn’t just about the dividend, as the price has also reflected the growth in the value of the company. Over the past five years it has returned 95.8% for an annual equivalent of 14.37% which is above the return for the S&P 500 Index.
Compass Diversified (CODI)
Compass Diversified is an investment holding company under the Investment Company Act of 1940, and as such, it again avoids general corporate income taxes. It buys, owns and occasionally sells middle-market companies that are in strongly branded industrial and very-specialized consumer/professional products.
One of the companies in the portfolio is Foam Fabricators which makes specialized foam for shipments of goods. And the company is part of the Covid-19 Warp Speed project as the provider for packaging for vaccines.
Revenue continues to flow, with gains that over the past five years has been climbing by an average of 16.89% annually (CAGR). And the company has lots of cash and very little debt. And the stock trades at a discount to trailing sales by 20%.
The stock performs with a return over the past five years of 83.78% for an annual equivalent of 12.93%. This means growth with that dividend. And the dividend yields a nice 7.32%.
Hercules Capital (HTGC)
Hercules Capita is a venture capital company set up as a business development company (BDC) under both the Investment Company Act of 1940 and the Small Business Investment Incentives Act of 1980. This means that it also avoids general corporate income taxes.
It funds technology companies in various stages of development and works with them on development on their way to their exit strategies that might include a sale or initial public offering (IPO). And its track record has plenty of bold-faced named companies that are not titans of tech.
Its portfolio generates high income from finance and equity gains from transactions. And the stock has returned 95.70% over the trailing five years for an annual equivalent of 14.35%.
Controlled debt and huge net interest margins along with a phenomenal efficiency ratio for a financial (meaning that it costs a fraction to make each dollar of revenue) all work to make a compelling well-run company.
The dividend yields 11.34% on an annual basis including regular special dividends. And those distributions keep rising over the years. Tech with income and growth makes Hercules one of the great dividend stocks right now.
Sixth Street Specialty Lending (TSLX)
Sixth Street Specialty Lending is another company set up as a BDC with the advantage of avoiding general corporate income taxes. It is very skilled at providing business and corporate financing to well-qualified companies in targeted businesses and markets.
Like for Hercules, it has ample net interest margin (the difference between financial costs and revenue running at 9.9%. And it also is very efficient on costs with an efficiency ratio of 14.90% which means that it only costs 14.9 cents to make each dollar in revenue.
Debts are low and well-managed making for good credit. And the stock performs not just with dividends but also with gains. It has returned 96.16% over the past five years alone for an annual equivalent of 14.41%.
And the dividend yields an impressive annual rate of 10.88% including regular special dividend distributions. And with potential changes in traditional bank regulations over the coming years, it is an under-the-radar company that avoids traditional regulatory scrutiny given how it is incorporated.
Big yield, stock gains — another proven big dividend stock to be thankful for and to buy now.
About Neil George:
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.