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Thursday, May 22, 2014 - 10:30

This Legendary Guru Is Focusing On Double-Digit Yielders

Thursday, May 22, 2014 - 10:30am

If you are hoping to be a savvy stock picker when you're in your 70s, I've got good news for you. Seventy-one-year-old legendary fund manager Leon Cooperman, who I profiled last year, remains on top of his game.

As I noted then, Cooperman was wrapping up a successful year of investment returns in 2012, and I decided to see how his February 2013 investments turned out. Excluding his investments in yield plays Linn Energy (Nasdaq: LINE), Kinder Morgan (NYSE: KMI) and Atlas Pipeline Partners (NYSE: APL), which are in the portfolio for income and not capital appreciation, the rest of his top holdings are handily beating the market.

Cooperman's Hot Hand
Yet recent adjustments in his portfolio suggest Cooperman now views the market in a different context. According to recent filings, Cooperman appears to be eschewing growth stocks and chasing yield -- very high yield. Three of his picks sport dividend yields in excess of 10%. Here's a closer look.

1. Atlas Resource Partners (NYSE: ARP)​

When I looked at Cooperman's portfolio 15 months ago, he owned roughly 3 million shares of Atlas Pipeline Partners, the master limited partnership (MLP) that controls the oil and gas pipelines of Atlas Energy (Nasdaq: ATLP). He has since sold off that position, and now has a 7.3 million-share position in Atlas Resource Partners, another captive MLP under the Atlas Energy umbrella. This MLP owns development rights to various natural gas fields in key shale regions.

It's quite obvious why Cooperman owns this MLP. The current dividend of $2.32 a share reflects an 11.8% yield. That kind of yield often suggests caution as investors may doubt whether such a dividend can be sustained. In 2013, ARP's divided coverage ratio was 1.03, which means that the MLP only had 3% excess cash flow set aside. If cash flow dipped in 2014, the coverage ratio would move below 1.0, implying an expected divided cut.

Management is aware of the concern, and analysts at MLV & Co. suggest that "ARP will look to provide additional distribution security beyond 2014 through acquisitions that deliver incremental accretion." If they're right, and the dividend stands firm, then look for shares to rally 15% or more as the high current yield attracts fresh buyers that deem the yield to be safe. In effect, Cooperman's pick offers the best of both worlds: a strong yield and potential capital appreciation.

2. Chimera (NYSE: CIM)

This company is built to profit from the current environment of low interest rates. It borrows funds at low rates and then buys higher-yielding mortgage bonds. The profit spread differential is returned to shareholders in the form of a dividend, which currently yields 11.7%.

Unlike Atlas Resource Partners, which has a path to sustainable dividends, Chimera is not well-positioned for the long term. Indeed, the dividend has already contracted from $0.69 a share in 2010, when mortgage bonds could be bought at a sharp discount, to a recent $0.36 in 2013, as mortgage bonds are no longer trading as semi-distressed assets. Cooperman, who now owns 66 million shares after recent additional purchases, is likely assured that Chimera's mortgage bond portfolio is worth about 5% more than the current $3.2 billion market value, so there isn't much downside risk here.

3. New Residential Investment Corp. (NYSE: NRZ)

I focused on this mortgage real estate investment trust (REIT) a few weeks ago, noting that it had considerable insider buying. Cooperman has joined them, buying 3.6 million shares in the first quarter to boost his total holdings to 11.4 million shares.

NRZ is a fairly young business, as operations only began in late 2011 and the company's IPO took place around a year ago. The business was built to profit from a nascent industry trend of "mortgage servicing rights," which enables buyers of mortgages to pay a discounted upfront cost to gain access to future mortgage payments. As long as we don't have another mortgage default crisis, it should prove to be a durable business model.

Still, the initial response from investors to this business model has been underwhelming: Shares are off 10% since the May 2013 IPO, while the S&P 500 has risen 20% in that time. Cooperman and insiders are betting that the pullback won't last, creating that juicy yield, and shares will rise in value as the business model develops a longer operating history.

Risks to Consider: Double-digit yields often suggest that the divided at risk. So it pays to do some extra research into the underlying cash flow dynamics of the business to be sure that the dividend can be sustained at current levels.

Action to Take --> Cooperman appears to have done his homework on these. None of these stocks appear poised for robust dividend growth, but they do appear positioned to support the current payouts. Of the three, I am most enamored of Atlas Resource Partners, especially as natural gas prices are now likely to stay above $4 per thousand cubic feet (Mcf) for the foreseeable future.

P.S. High-yielding stocks that have plenty of cash for dividend growth are the foundation for my colleague Amy Calistri's "Daily Paycheck" investing strategy. To see how she's used this strategy to earn more than $60,000 in dividend checks since 2010, click here.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.