My 5 Favorite Dividend Investments Of 2017 (2024)

This research report was produced by Colorado Wealth Management Fund with assistance from Big Dog Investments.

My portfolio includes 5 great dividend stocks purchased this summer.

I believe these dividend stock are worth buying today.

Target

Target (TGT) was thrown on the clearance rack several times over the last year. Analysts struggled to provide any intelligent forecasts for earnings because they often duplicate management’s estimates. If analysts did their own due diligence, they might have realized Target was in better shape. In the second quarter, Target saw an increase of 1.3% in comparable sales, compared to prior expectations of declining sales.

Investors and analysts alike made the mistake of talking about bathrooms instead of doing fundamental analysis. The chart below shows the trend in sales, segment EBIT, and adjusted EPS from continuing operations:

Guidance indicated these trends should fall apart in 2017, but the company continues to beat estimates. The massive share buyback program is strengthening earnings per share and making the dividend even easier to sustain. Rapid growth in online sales should be a strong tailwind for the company over the next few years.

Altria Group

Altria Group (MO) regularly sees growth in their quarterly adjusted diluted EPS. Analysts expecting anything else would be making fools of themselves.

Altria Group saw shares fall dramatically after the FDA announced their intention to increase regulation on cigarettes. Investors would be wise to consider Altria Group’s role in crafting the final regulations. The FDA takes input from other parties into consideration. The strongest of those parties is Altria Group. When the FDA provided their update, they were careful to indicate that tobacco use should be viewed on a continuum of risk. Where have we heard about the risk continuum before?

The language the FDA uses matches the language used by Altria Group. The FDA did not introduce these plans until Philip Morris (PM) was able to demonstrate the success of the IQOS product line. It appears the FDA would like to see Americans switching over to IQOS. In the United States, IQOS will be exclusively marketed by Altria Group. Some investors believe tobacco is dying, but the real picture is a shift in how tobacco is consumed.

Simon Property Group

Simon Property Group (SPG) is a behemoth in the mall REIT sector. They own and operate “Class A” malls. These malls have exceptionally high levels of sales per square foot. Simon Property Group is working with exceptionally strong tenants. The space they control is high demand. The area around the malls is already heavily developed which prevents new competition.

The company’s fundamental performance over the last several years is excellent. Their debt to total market capitalization is extremely conservative. The share of net debt to net operating income is entirely reasonable. Their FFO payout ratio is conservative. Their FFO has grown significantly year after year. The net operating income from comparable properties has grown year after year.

The only reason investors can buy Simon Property Group at such an excellent price is because too many talking heads have repeated the narrative “malls are dying.” When a narrative can be expressed in three words or four syllables, it catches fire. The share price today is not concerned with the accuracy of the narrative. It is simply a function of the story being repeated until investors accept it as a fact that does not require checking.

Tanger Factory Outlet Centers

Tanger Factory Outlet Centers (SKT) is one of my favorite choices today. The price dipped under $25.00, which makes it an exceptional dividend growth stock. The REIT operates outlet malls. This is a small niche market where SKT is the dominant player. Their returns over the last two decades have been exceptional. The company trades at less than 11x FFO guidance for 2017. They have a 5.57% dividend yield which is easily covered by FFO.

Their dividend growth story is exceptional. They made it through the great recession without reducing dividends. They even managed to maintain a small growth rate through that period. The company focuses on maintaining a conservative balance sheet and a reasonable FFO payout ratio. That combination allowed them to increase their dividends every year for over 20 years.

During the second quarter, the REIT repurchased a substantial amount of their common stock. The company’s total market capitalization was materially less than the value of their properties. By repurchasing stock they are able to drive FFO growth higher and the conservative balance sheet gives them plenty of room to work.

Granite Point Mortgage Trust

Granite Point Mortgage Trust (GPMT) is a new IPO. They are a REIT investing in commercial real estate loans. This subsector has been exceptionally profitable for peers like Blackstone Mortgage Trust (BXMT). Unlike BXMT, investors can still buy GPMT for less than book value. The company has two main activities. They originate commercial real estate loans and they hold onto the loans for interest income. The loans usually carry floating rates, so when short-term interest rates increase, the company earns more net interest income. The chart below demonstrates the demand for these loans and the profitability of real estate investments:

In the bottom left corner, you can see the high level of NOI growth and lower vacancy rates across most markets and property types.

Within GPMT’s portfolio 96.9% of the loans are floating rate. If the Federal Reserve raises rates again it would increase net interest income for GPMT. Over 90% of the portfolio is first mortgages. The first mortgages have less credit risk than second mortgages. The weighted average yield on the portfolio is LIBOR + 5.26%. Because the company is using leverage, the net interest income should be higher. By my estimate, the company should be able to earn between 8% and 9% on equity. When the company declares a dividend, I expect it to be around $0.42 per share per quarter. Based on recent prices, that is an 8.8% dividend yield.

Buy ratings

I currently have a buy rating for TGT, MO, SKT, SPG, and GPMT.

Possible future buy ratings base on price

I specialize in the mortgage REIT and equity REIT sector, but I am also keeping my eye on some defensive companies. I like their fundamentals, but I’ll wait on a price dip to purchase them. I own WMT, but would not add to the position at current prices. Here is the list:

I placed these stocks into CPMS and ranked them based on 7 metrics. GPMT wasn’t available yet because GPMT is a very new IPO.

The weights were:

36% for dividend yield

18% for beta

18% for market capitalization (bigger tends to be safer)

18% for EV to EBITDA

4% for trailing P/E

4% for price to sales

4% for price to cashflow

The reason earnings is given such a low ranking is because I wanted to include the REITs and I don’t want to be punishing them for depreciation expense (which is merely a tax shield for REITs).

You may notice Wal-Mart is near the top of the screening results also. I already own a position in WMT.

Conclusion

The dividend stocks I currently own were purchased when I believed the company was undervalued. I would feel comfortable doubling my position in 3 of the 5 stocks. Given the size of my position in Target and GPMT, I would increase the position but would avoid doubling it.

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Colorado Wealth Management Fund

Colorado Wealth Management is a REIT specialist who began his decades-long investment career in a family-owned realtor office before launching his own company and embracing his drive for deep-dive REIT analysis. He holds an MBA and has passed all 3 CFA exams. He focuses on Equity REITs, Mortgage REITs, and preferred shares.

He leads the investing group The REIT Forum. Features of the group include: Exclusive REIT focus analysis, proprietary charts and data models, real-time trade alerts posted multiple times a month, multiple subscriber-only portfolios, and access to the service's team of analysts and support staff for dialogue and questions on the REIT space. Learn more.