They’re called dividend dogs. These are companies the markets hate – yet deliver attractive dividend income and give us the opportunity for a significant stock price increase as well.
If you’ve never heard of dividend dogs, you may be familiar with the Dogs of the Dow – a portfolio strategy based on buying companies with the highest dividend payout ratios of the 30 stocks in the Dow Jones Industrial Average (DJIA).
For investors looking to get a little more aggressive in their income investment strategy, dividend dogs can be an attractive way to add high-yield dividend returns along with capital growth to their portfolio.
Popularized by Michael Higgins, the Dogs of the Dow is an easily executed investment strategy that requires investors to buy the ten worst-performing stocks in the Dow Jones Industrial Average and rebalance these holdings annually. It works in part because of its value and contrarian oriented nature.
Dog investors are essentially buying stocks when they are out favor and selling them when they become popular again. The strategy works in part because of the financial strength that Dow companies typically have.
It’s worth noting that even the Dogs of the Dow strategy isn’t foolproof. Even blue chips can fail.
But by looking for similar dividend dogs outside the confines of the blue chips, we can use many of the same strategies to aggressively outperform the markets. Instead of high-yield and low-risk blue chips, we’re looking for higher risk and even higher yields.
That’s right. We’re looking to increase our risk – slightly. It’s where the biggest rewards are. (Click here to see the 101 Riskiest Dividend Stocks we won’t touch).
Atlantic Power Corp (NYSE: AT) owns and operates a large number of power generation and infrastructure assets in the U.S. and Canada. The company sells its power to utilities and large commercial customers through long-term purchase agreements.
The company is regionally diversified with 29 separate projects across North America with an aggregate power generation capacity of 3,397 megawatts. The best part is that the vast majority of these power generation assets are green and renewable. This includes four biomass, four hydro power, five wind and 15 natural gas projects.
The stock has been punished since last year because of aggressive growth targets not being met and a large amount of short-term debt – that has since been refinanced with lower terms and longer maturities.
In short the street lost faith in the management, and the company’s earnings went negative. But there are signs that things are changing. Atlantic’s last quarterly report included better than expected earnings and improved profitability.
When Atlantic’s stock dipped close to $2 a share many funds were required to reduce their holdings or dump the stock. As the price climbs back up, that trend is reversing as well. Institutional investments have increased over the past three months.
And since February of this year, the stock has climbed up over 70%. Take a look.
So Atlantic’s stock has come back from the dead, and it’s improving along with its financial results. Yet it’s still at a quarter of its stock price in 2013. We may have come off the bottom but we’ve got plenty of room left to run.
The stock still trades at a discount to the company’s book value of $4.65 – or a potential return of 29%, not including dividend income – if it were to come back just to full value.
But it might not get a chance to.
In May, the company announced it had hired advisors to look into a potential sale or merger of the company. If that happens, we could see an immediate price jump of 15%, 25%, even 75% depending upon the suitor.
There are a lot of acquirers who have the financial ability and desire to pick up Atlantic’s portfolio of green energy generation and gas fired power plants.
Electric utility heavyweights like Duke Energy Corp (NYSE:DUK), PG&E Corporation (NYSE:PCG), Dominion Resources, Inc. (NYSE:D) or Xcel Energy Inc. (NYSE:XEL) could pick up Atlantic with little difficulty. But they aren’t the only ones who might be interested. Many utilities are struggling to respond to state requirements for green energy.
It’s tantalizing, but our real interest with Atlantic is the dividend. The company currently distributes $0.0313 per share every month, representing a $0.38 annualized dividend and a yield at current prices of 10.4%.
We’ve always been fans of monthly dividend distributors because if you reinvest your dividend, it can add serious points to your return by compounding faster.
One of the biggest concerns for dividend dogs is whether the dividend is at risk. In the case of Atlantic, if the company can keep its balance sheet the same or better than it is today the dividend should be fine.
So yes, the dividend is sustainable. The company just reported better than expected cash flow numbers, but it aggressively paid down and reduced its long-term debt in the second quarter. So much so, that it left them with a small paper loss.
Short-term traders may have punished the stock for this, but we can see that management is looking out for the long-term investor through these actions.
Atlantic has some challenges to overcome in improving its net income and reducing their long-term debt load – both numbers that have improved in the second quarter. We believe that there has been enough improvement in Atlantic Power Corp’s earnings and financial metrics to warrant giving this dividend dog a second look.
The higher risk investors take on with Atlantic Power Corporation is rewarded with much higher dividend payouts and a great potential for the stock price to grow.
Of course, not all risky dividend stocks will reward you. In fact, our team at High Yield Wealth has produced a new special report on the 101 Riskiest Dividend Stocks. Are they in your portfolio? Get your copy right now to find out. And don’t worry, you’ll also get an exclusive report on the Top 5 Dividend Stocks to Buy Now so you have a better place to put your money.