Jim Cramer had an excellent piece Monday on these pages in which he extolled some high-yield plays while Washington moves us closer to a possible cataclysmic event. Most of the article was spent highlighting some solid plays in utilities, pharmaceuticals and telecom. As usual, I found his reasoning sound, and it mimics a good portion of my own allocation at the moment.
I don't think we will end up going off the debt-ceiling cliff, but I think an investor needs to plays it safe right now as both parties learn to act like adults. I also believe the Federal Reserve has put off any prospect of tapering stimulus until 2014, and that should put a ceiling on U.S. Treasury interest rates for the near term.
Following up on Jim's reasoning here are two solid picks with reasonable valuations, solid prospects and nice dividends as well. They come from different sectors from what was covered in the previous article. I am going to be adding to both on any further pullback triggered by the nonsense in D.C.
Summit Hotel Properties (INN) is a real estate investment trust that focuses primarily on upscale and upper-midscale select service hotels on a national basis. It has about 95 hotels throughout the country with more than 11,000 rooms. I must admit that I am partial to hotel REITs. I have done very well with positions in Chatham Lodging Trust (CLDT) and Diamond Hospitality (DRH) in 2013. In addition, the sector has seen continued gains both in revenue per average room (RevPAR) and in average daily rates (ADRs).
Summit offers a 4.9% dividend yield. The shares go for slightly less than book value. In addition, insiders have been net buyers of the stock so far in 2013. The company has grown rapidly via acquisitions, RevPAR increases and operational improvements, and it should grow its top line by better than 60% in the current year. Analysts believe another 20%-plus gain is in the cards in 2014.
The REIT is not expensive at less than 9x forward funds from operations (FFO is the key metric for REITs, instead of earnings per share). Summit has a solid balance sheet, as well, with the vast majority of mortgage debt possessing maturities past 2016. Finally, management has done an impressive job of acquiring properties in gateway cities, offering a common set of business amenities -- i.e., exercise rooms and free wifi -- and lowering operating expenses throughout the portfolio.
ConocoPhillips (COP) is, in my opinion, the best pick among the biggest domestic energy majors for long-term production and dividend growth. The company has shed its refinery assets and sold off some overseas assets as well. It is reorienting its operational focus by concentrating on growing its North American production. This lowers its geopolitical risk and allows it to be a bigger part of the huge energy boom currently occurring in the U.S. It also allows the company to lift the amount of overall production coming from crude oil.
The company is a major leaseholder in the Bakken, Permian and Eagle Ford basin regions. Approximately 60% of its capital budget is being allocated to growing production on its North American properties. The shares yield at 3.9%, and Conoco has more than doubled its dividend payout over the past six years. The company also consistently buys back a significant amount of stock annually.
Although I am as disgusted by the goings-on in Washington as anybody else, I am well prepared to add to these high-yielding plays should politics bring them down another 3% to 5%. "When given lemons, make lemonade," as my dad always used to say.