The Fed has spoken. Risk-free yields are going to be low for at least another three years — and when I say low, I mean zero. The high-yield market — bonds — is frothy and the high-yield market — stocks — may be getting there. The best evidence is a recent spate of MLPs that have come public and would not have been bought by investors a year ago.
- Northern Tier Energy (NTI) went public without management committing to a dividend. No kidding.
- Hi-Crush Partners (HCLP) provides the specialized sand required for fracking of oil and gas fields. That is it.
- PetroLogistics (PDH), which processes propane, is down one-third since going public.
Says it all, doesn’t it?
6 things to look for
So what should you look for that the crowd has become bored with or is ignoring?
- Quality. A real established company with a real track record, a real balance sheet and a real dividend.
- A solid sector. Pick a name or names inside a sector with good short-term and long-term prospects. Oil, alternative finance, mortgages, selected tech.
- Best in class. If you like a sector, such as mortgage REITs, buy the best, not the highest yield, such as Annaly Capital (NLY) within the mortgage REIT space.
- Growth. Always put growth before the absolute yield. If the company grows as expected, so will the value of the shares and that appreciation, combined with the yield, is what all investors should crave.
- Dividend yield. Shoot for 8% or more, maybe a little less but not too much less.
- And, of course, what the crowd on Wall Street has wrong or is missing.
Attractive sectors and companies
What looks good right now? I like the second-tier specialty refiners – not the companies subject to vicious swing in the oil market but often lumped together with traditional refiners, companies like Calumet Specialty Products (CLMT). And I like agriculture. There is a play here: fertilizer producer Terra Nitrogen (TNH). And among tech outfits, I like Verizon (VZ) – yes, I consider VZ a tech outfit – but with a yield less than 5%, you also need to sell calls on this name to get the income you really want. Why Verizon? Simple answer: Do you think high-margin data usage is going to increase or decrease with the introduction of the iPhone 5 and all the new tablets from Google (GOOG) and Microsoft (MSFT) and whomever? A VZ position that you sell calls against four to size times a year will produce double-digit gains before the appreciation of the stock.
The crowd, for some reason, does not do this. All the more reason you should.