Investors relying on stock prices for their profits, go through an anxiety attack whenever there is any news regarding their stock, because it's indeed a risky investment. On the contrary, those investing in stocks for the sake of dividends, get a good night's sleep without constantly worrying for their stocks, because they get sure shot returns.
A company that pays dividend from its earnings is typically an illustration of more mature and profitable company. These companies earn profits and out of these pay the shareholders dividends as an incentive to keep them investing in the company. Usually mature companies who have lower growth opportunities left or who have reached the point where share prices are not going to appreciate exponentially, pay out dividends to retain the interest of the shareholders. However, growth companies essentially reinvest their profits in the company in the hope of stock appreciation.
Dividends are important for the investors, as they are a sure return, whereas stock prices fluctuate on trivial to major news and give either instant profits or instant losses. Dividends are a signal of the companies continued success and are not deceitful, they either increase or decrease or are entirely not paid. They don't depend on the predictions and ratings of the analysts as is the case of stocks, a negative article regarding the future of the stock may cause the stock to plummet. Hence, dividends are steady and sure stream of income, and isn't subject to volatility.
Here we discuss the dividends of three small-cap companies, and vote out the best amongst them. Even though small caps paying dividend is a sporadic phenomenon, but still they exist.
1. Centrais Electricas (ERB)
Centrais Elétricas Brasileiras SA (Eletrobrás) is a company focused on generating, transmitting and distributing electricity in Brazil. The company along with its six subsidiaries, and six distribution companies, has 29 hydroelectric plants, two thermonuclear plants and 15 thermoelectric plants. The company recently posted $393 million quarter loss, following the adaption to the government mandated tariff reductions.
The company has a trailing dividend yield of 7.6%, and a forward annual dividend yield of 14.9%. The net dividends paid by the company have gradually decreased, approximately $0.455 in a year. The total dividends paid in the second quarter were $1466.5 million with a $72.2 million net income, making the payout ratio as an irrelevant measure of assessing dividend sustainability.
Therefore, to better assess the viability of the company's dividends, we should focus on its CFO yield. The company has cash flow from operations of $0.87 billion, as of June 30, 2013, a 46.69% decrease from the previous quarter. The CFO yield for the company is approximately 94.6% which is way above the forward annual dividend yield. This shows us that despite having negative income, the company does have the ability to sustain dividend through cash flows. The misses at the bottom-line are due to tariff reductions and will not force the company to cut dividends in the short run due to massive CFO inflow.
2. CYS Investments Inc. (CYS)
CYS Investments is a specialty financial company with the aim to achieve consistent risk adjusted investment income, by investing residential mortgages pass-through securities in U.S. CYS has chosen to be taxed as a real estate investment trust, which entails that the portion of the net income distributed to the shareholders will not be subjected to corporate income tax.
The company has a dividend yield of 16.44% as compared to the industry yield of 2.50%, with a dividend of $0.34. The dividend growth has been negative for the past five years at 9.22%. The third quarter dividend of $0.34 shows a $0.11 decrease from the third quarter dividends of 2012. The company had net income of $30.6 million in third quarter, $63.3 million of dividends; payout was above the net income.
CYS has a CFO of $2.18 billion, as of September 30, a massive increase as compared to the previous quarter. The market capitalization of the company on November 18 was $1.38 billion, which gives us a CFO yield of around 157%. This shows that while the payout ratio is pretty high, the company is generating enough cash from its core operations to justify and finance a 16% dividend yield.
3. Hatteras Financial Corp. (HTS)
Hatteras is a real estate investment trust (REIT), an externally managed mortgage. The company primarily invests in single-family residential mortgage pass-through securities issued or guaranteed by a U.S. Government Agency, or a U.S. sponsored entity. The company is taxed as a real estate investment trust.
The company has a dividend yield of 12.75% with a dividend of $0.55, as compared to the industry yield of 2.50%. The dividend growth has been negative for the past three years at -9.82% and a -15.38% for the past year. The dividend for the third quarter has decreased $0.25 from the comparable period of 2012. The net income in the third quarter was $265.25 million, and dividends paid were $74.66 million, with a payout ratio of 0.28. The company has a CFO of $114 million ($456 million), as of September 30, a 10.0% decrease from the previous quarter. The market capitalization is $1.68 billion and $97.91 million shares outstanding. Using the annualized CFO, we can estimate a CFO yield of 27.1%. These calculations show that the CFO yield is almost twice the dividend yield which is an assurance that dividends are safe. Hatteras is my top dividend pick due to its high large enterprise value (almost 12 times market capitalization), stable dividends and a high CFO yield.
Conclusion
The companies that have better dividend yield supported with a high operating cash flow are a better investment as they provide better returns. Assessing from the dividend yields and the cash flows of the above three companies, I would suggest that the HTS is a super dividend play at these levels due to high CFO yield, low payout ratio and very cheap valuations. ERB and CYS are paying more in dividends than they are earnings which makes their dividends slightly risk. However, as can be seen from then calculations above the companies have pretty solid CFO yields, indicating that dividends are under no immediate threat.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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