Everyone is searching for yield. Even the bond king, Bill Gross of PIMCO, is talking about high-yield stocks. Investors see a dividend yield, like the idea of that check coming in and buy the stock often forgetting they are buying a company, and a stock, that has to perform in the real world and in the market.
This adds up to a high-yield bubble, as evidenced by the historical low dividend payout ratio for the S&P 500. Dividend stocks have been bid up so much yields continue to fall.
If this is true, what are you supposed to do to generate reasonable monthly, quarterly or annual income?
Invest in high-yield plays… just make sure they are the right ones. Income investors should look at the company first, the stock second and then the yield and go for growth first, income second.
Here are five of my favorite high-yield plays that I found using this approach.
1) Annaly Capital
Annaly Capital (NYSE:NLY) is a mortgage REIT darling of many income investors – but is also a well-managed company with significant growth possibilities.
The yield is north of 13% and Annaly is probably done shrinking its balance sheet.
The source of its profits and dividends and the number of mortgages being created and guaranteed by Uncle Sam can only go up as we slowly crawl out of the housing Depression.
2) Calumet Specialty Products
Calumet Specialty Products (NASDAQ:CLMT) is a little-known outfit that yields around 9% and makes specialty products based on hydrocarbons . Unlike most companies in that industry — specialty refining — Calumet is not overly exposed to oil prices.
More importantly, it is buying other outfits’ refineries in the Midwest, where all that fracked oil is coming through, and expanding its business. Check its chart against that of the price of oil and you will see how it has escaped that volatility.
3) Entertainment Properties Trust
I like going to the movies; did you know if you enjoy a good movie there are no calories in the Snickers bar or the popcorn? Entertainment Properties Trust (NYSE:EPR) is a REIT that owns mostly movie properties with some amusement parks thrown in. I believe the stock has put in a bottom, as has the company. Movie-going increases during a recession, so the 6.7% yield, while low, has to be viewed alongside serious growth potential in the next three years.
4) Martin Midstream Partners
The oil and gas that comes from fracking- -the use of water, chemicals, sand and some other stuff to crack open oil and gas fields under the surface — is dirty, nasty stuff compared to regular oil. It has to be cleaned up — and there is more and more of it to be cleaned up every day. That is what Martin Midstream Partners (NASDAQ:MMLP) does — it cleans up natural gas, stores it, extracts stuff like sulphur and sells it and basically turns a sow’s ear into a silk purse — a purse that yields 9.2%.
5) Terra Nitrogen
This maker of fertilizers is exposed to two great market realities. The first is growing demand for its product. Farmers are using more and more land, which means a greater need for fertilizer to make that extra acre more productive. The second is the flood of natural gas coming out of fracked oil and gas fields.
Did I mention that Terra Nitrogen’s (NYSE:TNH) feedstock is natural gas? And did I mention the yield is roughly 8%?