3 Safe High-Yield Stocks on Sale Today

Most of the time when we think of dividend stocks we gravitate to traditional dividend paying sectors such as Utilities or Consumer Staple stocks like General Mills (NYSE: GIS). The income moniker also conjures up traditional blue chip buy and hold stocks like Microsoft (NYSE: MSFT). Rarely, however, do investors focus on and target small cap companies for dividend income. This is unfortunate as, thanks to the recent bear market in small caps as well as real estate investment trusts, there are some good bargains to be had in overlooked areas of the market right now.

As my regular readers know I am very optimistic about the lodging REIT space right now as many quality names in the sector are down some 25% to 35% from highs made last summer. Although RevPAR (Revenue per available room) is slowing somewhat, growth should still be solid both in 2016 and 2017. Given that the ten-year treasury yield is below two percent, the yields and valuations in this space are very attractive right now. We have recently added both Chatham Lodging Trust (NASDAQ: CLDT) and Diamondrock Hospitality (NYSE: DRH) to our 20 stock Small Cap Gems portfolio. Both are cheap and yield between 5.25% and 6.5%. M&A activity might pick up in the space as well. Just this week, China’s Anbang Insurance Group has agreed to acquire Strategic Hotels & Resorts for $6.5 billion, as the owner of New York’s iconic Waldorf Astoria further expands its U.S. hotel portfolio. Blackstone had just taken Strategic private for $6 billion three months ago.

Pebblebrook Hotel Trust (NYSE: PEB) is another lodging REIT I have added recently to my own income portfolio. The stock is down some 40% from its 52-week highs and appears to have great value at its current level of around $28.00 a share. Its market capitalization is right around $2 billion.

The company was incorporated at a very opportune time, December 2009, to pick up real estate assets for significantly below their replacement value after the financial crisis. PebbleBrook concentrates on properties located in or near urban markets in major United States gateway cities. Most of its hotels are on the East or West Coast. The company owns 31 hotels outright and has ownership interests in six more through joint ventures accounting for some 8,300 rooms overall. The stock has been punished unfairly on concerns that overseas travel will curtail thanks to a strong dollar and tepid worldwide economic activity.

In late February, Pebblebrook beat both top and bottom line quarterly expectations. It also guided to 10% growth in FFO (Funds from Operations) in 2016. On top of this, it announced a $150 million stock buyback program. In the middle of March, the company boosted its dividend payout by over 20% and now will yield over 5.5%. The company has now more than tripled its dividend payout since 2011 and the stock trades at a cheap valuation of 10 times this year’s expected FFO per share.

Investors do not usually find too many solid yield plays in the manufacturing sector, but railcar maker Greenbrier Companies (NYSE: GBX) is the exception to the rule. The stock has become an accidental high-yielder thanks to its stock being cut in half over the past six months or so. The shares now yield approximately three percent. Greenbrier sells for just north of $27.00 a share and has a market capitalization of just under $800 million.

The sell-off in the shares is a buying opportunity and the stock has behaved better recently, rallying some 15% over the past couple of weeks. The company last reported earnings in early January and handily beat both the top and bottom line consensus. Earnings came in at $2.15 a share, more than 50 cents a share above expectations. Revenues were up over 60% year-over-year.

The driver behind Greenbrier’s decline and for all other railcar makers for that matter is that demand for oil tank cars has dried up completely thanks to the implosion in crude prices. Investors are missing the bigger picture on Greenbrier. The company has over six quarters of order backlog right now. 80% of that backlog comes from industries outside of energy such as railcars for carrying autos and chemicals. In addition, new regulations mean approximately 90,000 oil tank cars will need to be retrofitted or replaced by the end of 2019, so orders will eventually pick up even if crude production does not.

The company used the last downturn in the railcar industry to capture market share from its competitors, going from 13% to 32% in market share. I have confidence it will weather the current slump in the energy sector just fine as rivals have fiercer struggles. The company has guided to $5.65 to $6.15 a share for earnings in 2016 and the consensus has Greenbrier earning $6.00 a share in FY2016. This is pretty much in line with FY2015. The manufacturer bumped up its dividend payout by a third late in 2015. Given its extremely low payout ratio, I would expect Greenbrier to deliver another large dividend hike sometime in 2016.

For our final small cap dividend pick we go back to the REIT space, this time for the owner of skill nursing home facilities called Care Capital Properties (NYSE: CCP).

Care has a market capitalization of approximately $2 billion and sells for just over $26.00 a share. Most REIT investors probably have never heard of Care, but they probably know its previous parent Ventas (NYSE: VTR), a $20 billion behemoth in the health care real estate trust space.

Care Capital Properties was spun out of Ventas in August of last year. Despite spin-offs historically outperforming the overall market over time, they usually go down when first spun off from their parents; this is a common and shortsighted move that has been repeated by investors for decades.  This REIT was no exception and is down some 20% from its spin-off price, but the shares have started to rebound of late.

This REIT’s tenants are primarily in the post-acute/skilled nursing sector. 325 of its 358 properties are skilled nursing facilities. The company’s top five tenants account for just 50% of its overall revenue. The company’s properties are well diversified geographically. All of the company’s leases are net lease. In addition, most of its assets are structured in pool multi-facility master leases with additional structure enhancements, such as cross-collateralization, security deposits, and parent guarantees. The company also has well-balanced lease expirations.

The company has a strong balance sheet and good liquidity. Management has provided guidance for 2016, within a range $2.85-2.95 of FFO per share for fiscal 2016. At the midpoint of that range Care Capital Properties sells at just over nine times forward FFO and has a yield of more than eight percent as well. I also find it very encouraging that two insiders bought over $500,000 in additional shares near the end of February. Not coincidentally this is right about the time the stock seems to have bottomed.