by Tim Melvin | May 16, 2014 6:00 am
The search for income is getting more difficult by the day. We have a fair amount of retirees in my neighborhood, and just about every gathering or party around here has people talking about the difficulty of finding income investments to fund day-to-day expenses.
Many of the traditional alternatives such as blue-chip stocks and REITs have seen their prices pushed up to very high levels as a result of yield chasing the past few years. Income investors are going to need to be more involved in the management of their portfolios to reach their goals.
One approach to income investing is to find stocks with high yields that also have Piotroski F-scores that are in the top third of the 9-point scale. Companies with above-average F-scores are seeing improvements in their fundamental business conditions and their financial strength is improving. This should give us a portfolio of stocks that can outperform the market as well as provide high levels of dividend income.
I would suggest buying stocks that qualify and holding the shares as long as the F-score stays the same or improves, and selling if the score declines below 6. It is more of an active strategy, but it should provide cash flow and keep your capital invested in stocks with solid fundamentals. Although our major concern is income, I don’t want to overpay for shares so I would limit my purchases to those that traded for less than their Graham number valuation.
Oaktree Capital (OAK) is one of the best investment management firms in the world today. CEO Howard Marks has proven himself to be a brilliant investment manager, WHICH has helped the firm grow to more than $74 billion in assets under management.
Oaktree specializes in distressed assets, high-yield bonds, real estate and equities. The company currently earns an F-score of 6 and yields 7.7%, so the stock is an excellent fit for our active income portfolio. The stock trades at a slight discount to its Graham number valuation of $54. Oaktree is a best-in-class investment manager and has the potential for solid appreciation in addition to the high yield.
Capital Products Partners (CPLP) is a Greece-based shipping company that is involved in both petroleum products and the dry goods business. It currently has a fleet of 30 vessels comprised of 22 tankers and 8 dry bulk and container vessels.
CPLP reaffirmed its commitment to paying the dividend of 93 cents per share going forward, and at that level the shares yield 8.65%. The F score is 7, so conditions are improving for the company and the stock is actually trading at a more than a 35% discount to its Graham number valuation of $16.
Courier Corporation (CRRC) publishes and prints books that are distributed through a variety of retail outlets. It publishes books on things like landscaping, gardening and home improvement that are found in many of the leading home and garden stores. Courier also publishes more than 700 test preparation and study guides for teachers and students as well books for religious institutions.
Courier isn’t the world’s most exciting company, but we’re looking for dividends, not excitement. The stock yields 6.2% and has an F-score of 7 right now. The stock trades at a discount of about 15% to its Graham Number valuation of $15.25.
Income is getting harder to find. Using F-scores and the Graham number should help investors find cash flow producing stocks that are reasonably valued and can meet their income needs.
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As of this writing, Tim Melvin was long CPLP and CRRC.
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