Triple Play for 7%+ Yields

10/29/2004 12:00 am EST


Paul Tracy

Editor, The StreetAuthority Market Advisor

"One effective way to make money in a flat or declining market is to find companies that have proven their ability to pay and grow dividends over time," says Paul Tracy in StreetAuthority Market Advisor . "Here, we look at three stocks yielding over 7% that meet our strict criteria."

"CharterMac (CHC ASE) is a statutory trust that distributes the majority of its annual income as dividends. CHC buys revenue-backed bonds from state and local governments that are used to finance the construction of multi-family and lower-income housing. CHC doesn't actually own bonds or speculate on property. Instead, it simply earns a fee for managing money. We are very impressed with CHC's track record of steadily raising dividends over time. The firm has hiked dividends 13 times since going public in 1997 -- equivalent to about an 8% annualized increase in its dividend payout. For tax purposes, CHC is treated like a partnership. However, much of its income is tax-exempt. As a result, a very significant portion of any dividends received can be excluded from federal (though not state or local) income tax. This boosts the actual value of the dividend yield significantly. For example, consider an investor in the 30% federal tax bracket earning an 8% yield on an investment exempt from federal tax. This tax-exempt investment is actually earning a taxable equivalent yield of over 11%.

"BP Prudhoe Bay Royalty Trust (BPT NYSE) is run by integrated oil giant BP PLC. Royalty trusts, like real estate investment trusts, are exempt from certain taxes and are required by law to pay out the lion's share of their income as dividends for shareholders. BPT has a very simple business model. Its earnings come from the Prudhoe Bay oil and natural gas fields in northern Alaska, one of the largest fields currently being exploited in the US. In an environment of geopolitical risk, its  reserves are even more valuable because they represent domestic production.BPT currently delivers an annual dividend yield of around 11%. Thanks to recent spikes in energy pricing, the trust's dividends have shot up from around 67 cents per quarter earlier this year to $1.30 now. However, it's important to remember that the company simply passes along its earnings to shareholders. As such, if and when crude prices drop, then BPT could reduce its dividend payments. Of course, over the long term we see little downside risks to energy prices. As a result, the trust's dividend payments should stay safe in the long run.

"The pending merger of US Restaurant Properties (USV NYSE) with privately held CNL Restaurant will make the combined entity by far the largest restaurant-focused REIT in the US. The company's tenants include Arby's, Popeye's, Burger King, Pizza Hut, and Chili's, as well as Shell and Phillips' 66 service stations. USV conducts sale/leaseback arrangements, which help restaurant owners who don't want to sit on piles of non-performing real estate assets. Meanwhile, from USV's standpoint, these sale/leaseback arrangements are an effective way to deploy capital. The stock delivers a solid annual dividend yield of nearly 8%. USV trades at roughly 11 times 2005 earnings and analysts expect the firm to grow at a +10% clip over the next two years. Back in 1999-2000, issues with a few of USV's tenants forced a dividend cut and a series of profit warnings. The stock slumped from 1998 highs around $30 to lows around $7 by early 2000. We'd look for perceptions to change once USV completes the CNL merger and pushes forward with restructuring efforts. The company's P/E could eventually climb to an industry-average 15 times earnings, implying a target price of around $22."

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