Dividends are my friend

In the last 4 years I've put most of my investment dollars into residential (rental) real estate, shifting it away from stocks & mutual funds. Of course I'm always looking for a good return and have always liked dividend stocks, especially those that have a company-sponsored DRIP.

One such stock is NovaStar Financial (NFI), which I've been purchasing for the last 3 years and in whose DRIP I participate. I'm reminded of NovaStar because they just paid out another dividend and issued their November production numbers today.

NovaStar is a mortgage real estate investment (mREIT) company offering nonconforming loans. Because of their mREIT status, they must pay out 90% of taxable income to remain a REIT and 100% of taxable income to avoid income tax. It's odd, but tax accounting is totally different than "real" or "GAAP" accounting, which is why the company can pay out 100% of its taxable income and still continue to operate. In the 3 years I've been buying NovaStar, this payout has consistently resulted in a 20~25% dividend. 2005 dividends were $5.60 per share, which equates to a 19% dividend based upon NFI's current stock price of ~ $30. Despite higher interest rates and an earlier Thanksgiving than normal, their November non-conforming production was up from $690 million in November of last year to $714 this year along with WAC (weighted average coupon = the average interest rate customers pay NFI) rising from 7.65% in 11/04 to 7.9% in 11/05, and the average FICO (credit score) going from 623 in 11/04 to 636 in 11/05.

The stock is trading about 40% off its 52-week high, and if you read the Yahoo message board for NFI, you'll find a lot of discussion about naked short sellers bearing the blame for this. While I think their arguments have merit given the stock is consistently on the failure-to-deliver or SHO list, I also think that the complexities of understanding the difference between GAAP vs. taxable income spook many investors, including those who do so professionally.

The purpose of discussing NFI isn't to promote the stock, though--it's to promote DRIP investing. In fact, being a DRIP participant, I prefer the stock to remain depressed as long as the company continues to crank out dividends. One good resources for finding other companies that sponsor DRIPs is at Computershare.