One of the areas of the investment world that has been gaining in popularity in the last five years ...
Alesco Makes All the REIT Moves
02/27/2007 12:00 am EST
Ticker symbol: AFN
Bryan Perry, editor of The 25% Cash Machine, finds a REIT he thinks will offer good risk-adjusted returns and a nice dividend that could get even fatter.
Not all real estate investment trusts (REITs) are created equal, and in the midst of the subprime market meltdown some mortgage REITs became highly exposed.
But Alesco Financial Inc. ($11, NYSE: AFN) exhibits sustained growth and appears to be a strong prospect for rising dividend payouts.
Unlike many REITs that own real estate directly, Alesco makes investments in real-estate-related (and other) securities. Alesco's portfolio is made up of investments in trust preferred securities (TruPS), mortgage-backed securities and corporate loan obligations.
Alesco's management structure--combined with its portfolio strategy--should provide investors with good, risk-adjusted returns and cash distributions, coupled with the tax advantages that go hand in hand with REIT investments.
Alesco just declared its first quarterly dividend for 2007 of 30 cents per share. Extrapolating that out we get an annual dividend payout of $1.20 per share. With the stock currently trading at $11.10, we are getting a current yield of 10.8%. (Management has communicated to the investment community that it plans to increase the dividend payout as the most meaningful way to enhance shareholder value.)
AFN now holds a rich portfolio of structured notes paying interest to the REIT, and is underpinned by strong commercial real estate assets and a growing portfolio of loans issued to good, stable, medium-sized businesses.
The basket of securities owned by AFN generates more than enough income to pay the $1.20 annual dividend, which is why I believe a hike in the payout is likely later this year, and I believe these pools of money are not well-understood by investors.
In the midst of an uneasy 2006 US housing market, the US REIT market managed an impressive average return of 35%. The overall US REIT industry performance exceeded major US benchmarks for the seventh straight year, beating the Russell 2000 at 18.37%, the Dow Jones Industrial Average at 16.29%, the Standard & Poor's 500 at 15.79% and the Nasdaq Composite index at 9.52%.
2007 should continue to show gains as substantial commercial real estate deals are already making advances in the New Year. Opinions vary, but industry experts suggest an overall strengthening in the areas of office space, apartments and self-storage.
I recommend buying Alesco Financial Inc. (AFN) up to $11.50 per share. Alesco trades ex-dividend this Thursday (March 1). So, try to own it by the closing bell on Wednesday (Feb. 28) in order to be entitled to the dividend that gets paid out on March 15. My one-year price target for the stock is $15.
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