Think Outside the Income Box

 | Jan 24, 2014 | 3:00 PM EST
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One of the biggest problems facing investors is the search for income-producing stocks. Even though the Federal Reserve is tapering its bond purchases, it has also said it will keep rates low for an extended period and it remains very difficult for investors to find investments that produce an adequate income stream. Traditional fixed-income investments have very low yields, and dividend-paying blue chips have been pushed up to levels that many, including me, consider unsustainable. The larger real estate investment trusts have seen indiscriminate buying of exchange-traded funds and asset allocators, as well as yield-seekers, pushing them to levels that are also dangerously overvalued.

I write a lot about income-producing alternatives and dividend-growth stocks that can be combined in a portfolio that can provide a stream of income to fund retirement and other income streams for yield-starved investors. Generally, I combine the regular valuation measures such as price to tangible book value to find potential income alternatives, but I also find that it sometime pays to think outside the box when looking in the nooks and crannies of the market.

I ran a screen with just two inputs: I looked for securities paying at least 7%, and the underlying business earning an F-score of 7 or higher. I have found the F-score to be incredibly reliable in identifying companies with improving fundamentals and finances, and it just might help us build an income portfolio with securities that can appreciate in price as well as provide a steady stream of generous dividends.

The first company on the list is an old friend. When I first ran across BGC Partners (BGCP), it was a brokerage firm specializing in electronic trading of bonds, currencies and equities. It still has that business, but it has pushed into real estate by acquiring real estate brokerages and consulting businesses. This trend continues as the company just announced it is buying Cornish & Carey Commercial, a California-based full-service commercial real estate company. BGC continues to add to its energy-trading business, buying HEAT Energy Group, an independent over-the-counter energy brokerage focused on regional power markets and natural gas swaps.

The stock does not qualify as traditional value stock but the company earns an F-score of 7 on a scale of 0 to 9 and its yield is 7.3%. Management has made smart acquisitions and taken the business in a direction that has the potential for enormous growth over the next decade. They are also committed to the dividend for the foreseeable future. I have done well with this stock over the past few years, but I expect to do even better over the next decade with my shares of BGC Partners.

NTELOS Holding (NTLS) is a telecom with regional wireless voice and data services, primarily in Virginia, West Virginia and portions of Maryland, North Carolina, Pennsylvania, Ohio and Kentucky. It reported a spectacular third quarter with more than 100% year-over-year earnings growth, and its financial and fundamental factors improved enough to earn the company an F-score of 7. At a current price around $20, the company yields about 8%.

Ferrellgas Partners LP (FGP) is in the propane business, which is becoming popular with the current nationwide cold snap. It is involved in all aspects of the propane business, delivering propane distributors, tanks on customers' premises, and to portable propane tanks delivered to retailers. The stock currently yields about 8.3% and the company earns an F-score of 7, so it looks like a solid inclusion for income portfolios at this level. Insiders agree, as the CEO and COO bought shares of the company in December, and that usually bodes well for the future stock price.

Finding adequate income investments continues to be a difficult task for investors, and until we see a significant rise in bond yields or substantial decline in equity prices, it will remain so. Thinking a little outside of the box can help find alternatives that not only have high yields but also have the possibility for decent appreciation driven by improving finances and financial conditions.

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