Trio with Double-Digit Yields

06/03/2016 9:00 am EST

Focus: STOCKS

Tim Plaehn

Investment Research Analyst, Investors Alley

With plenty of free cash flow, these three double-digit yielding stocks are secure and will be great bargains if the market slides this summer states Tim Plaehn, editor of Investors Alley.

For me to recommend a stock, the cash flow per share must provide adequate coverage of the current dividend rate and also be trending higher. I look at quarterly cash flow results with the goal of finding steady quarterly and year-over-year growth.

One type of high-yield stock that I look for are what I call “diamonds in the manure pile.” These are companies with high-quality cash flow streams, but operate in market sectors where the majority of the companies have much less stable business models.

This has the effect of the market pricing the diamonds to have high yields similar to their less stable sector mates. Here are three stocks that have much more stable cash flow business models than their yields would indicate.

Communications Sales & Leasing (CSAL) is a one-year-old REIT that owns telecommunications infrastructure assets – fiber and copper wire lines.

CSAL yields 10% because of its dependence on a single customer; it was spun-off by telecom services provider Windstream Holdings (WIN) as a strategy to monetize some of their fixed assets.

The diamond side of CSAL is that the company can acquire similar assets to diversify the customer base.

Meanwhile, the new REIT has a 20-year triple net lease agreement with Windstream, so the cash flow stream to pay dividends is secure.

Ship Finance International Limited (SFL) gets lumped in with the entire shipping industry market sector. Over the last decade, a lot of wealth has been lost chasing high-yield shipping stocks.

While many of the 2005–2006 high-flyer shipping stocks have gone bankrupt, the Ship Finance business model has allowed the company to survive, grow cash flow, and steadily increase its quarterly dividend rate.

The company has increased its dividend by 5% in the last year, and is only paying out 68% of free cash flow, yet the shares are priced to yield 11.8%.

New Residential Investment (NRZ) is a finance REIT, so it gets lumped in with agency mortgage-backed securities (MBS) REITs which often use massive amounts of leverage.

These companies can suffer massive losses when interest rates change even modestly. In late 2012, a modest 1.2% increase in average mortgage rates led to dividend cuts and 40% share price declines for the agency mREITs.

In contrast, New Residential owns targeted, specialty investments that support the mortgage servicing industry. These investments pay high yields, and will get stronger if interest rates increase.

The company has grown its cash available for distribution per share by over 20% in the last year. NRZ currently yields 14%.

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By Tim Plaehn, Editor of Investors Alley

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