Finding High Yield Stocks

Posted by Don on December 28, 2009

In an article written a while back I discussed the rule of 72 and how high yielding stocks could help smooth out returns in a down market.  I talked about a REIT that I had purchased at almost double the current price, but due to the large yield I was receiving I had actually earned approximately a 3% yield.

In doing a stock screen on Yahoo Finance the other day I found several stocks that appear to be decent values and meet my requirements for both high yield investments and have in my opinion a margin of safety as professed by Ben Graham.  First screen for items with yields in excess of 10%.  These yields are supposed to be based upon the prior twelve month period.  Then screen items with a price to book value of less than 3 and a Price to Growth ratio of less than 1.5.  This should sort out companies that have paid a large dividend, but don’t have the assets or growth to back up the return.

This should give you your preliminary list of stocks.  Then you should check their dividend history.  I like to only purchase stocks that have paid a dividend in the last quarter.  A lot of these will more than likely be closed end funds.  You really don’t want to necessarily purchase these unless the most recent SEC filing has come out so you know what the fund is holding.  However, you can really uncover some gems every now and then.  Three stocks that I found very interesting were NRF – Northstar Realty Finance, KCAP – Kohlberg Capital, and GAIN – Gladstone Investment.

NRF is a REIT that specializes in commercial real estate debt.  Why would you want to invest in this when the commercial real estate market is hurting?  It is easy when you are getting it for $.21 on the dollar.  The book value of this stock was $15.93 a share at the end of the last quarter.  If you still are worried then there are also two preferred issues NRF that are higher in the capital structure but still have good yields.  The common has paid a dividend of $.10 per quarter this year which gives it a yield of approximately 12% right now.

KCAP is a private equity and venture capital firm.  They are having some trouble right now and their auditors have changed their opinion on some asset valuations and they have filed a complaint against their previous lending parties for canceling their line of credit.  There is more risk in KCAP, but they are currently trading at approximately $5 per share and as of the end of Q2 they had a Net Asset value per share of $11.  However with the auditors requiring revaluation it appears they will have to take asset write downs for Q3 and possibly Q4.  This could pull the asset value down more in line with the share price.  KCAP recently announced a dividend of Q4 2009 of $.20 so there is still income being generated by their portfolio.

GAIN is a public investment firm who focuses on recapitalizations and buyouts.  I believe that companies that provided capital in the last year will stand to earn a great return when the economy turns around.  The current book value per the most recent quarter was $8.25 while the stock is currently trading at around $4.50.  So again you are getting assets at a reduced price which provides a margin of safety.  The net asset value per share has gone from $10.57 on Sep. 30, 2008 to $8.25 now so the value of the assets can continue to decrease, but this is more of a play on the yield that what you receive in yield will offset any asset value reductions until the economy recovers.

Again please read the disclosure.  The information presented is the opinion of the author only and is not meant as a recommendation to buy or sell the mentioned securities.  At the time of the writing I hold long positions in KCAP and NRF.