High Yield Trumps Volatility

 | Feb 08, 2013 | 12:00 PM EST
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In times of uncertainty like these, high-yield stocks are a hedge against market volatility. I just screened for high yields, which I define as stocks offering a dividend yield of 6% or more, and found three worth a closer look. All three get high grades from my guru strategies, which I created by automating the strategies of well-known investors who have written about how they invest.

Deutsche Telekom (DTEGY) is Germany's largest telecom company and operates in about 50 countries. In the U.S., it owns T-Mobile USA, which, last October, combined with MetroPCS. The strategy I created from the writings of James P. O'Shaughnessy indicates that Deutsche Telekom is worth buying based on its huge market cap ($51 billion), positive cash flow per share, large number of shares outstanding (4.3 billion) and massive sales ($79 billion). The strategy takes all the stocks that pass the previous tests and then picks the top 50 based on yield. With a 7.46% yield, Deutsche makes it into this elite group.

Strayer Education (STRA), operator of Strayer University, earns the respect of my Joel Greenblatt strategy. Aimed at working adults, the company operates 100 campuses in 24 states. The stock's yield is just under 7%. I have a strategy that mirrors the thinking of Joel Greenblatt, and this strategy gives Strayer straight A's. Greenblatt uses only two variables. Earnings yield is one, calculated by dividing earnings before interest and taxes by its enterprise value, which includes market cap plus debt. Strayer's earnings yield is 17.7%, which ranks Strayer 45th among the thousands of stocks in our database. Return on total capital is the second variable. That is strong at Strayer, ranking it 47th among all stocks. When combining the two variables, Strayer really shines. Among all stocks, it is ranked sixth.

Another high-yield stock worth a look is Colony Financial (CLNY), which yields 6.5%. This is a commercial real estate finance company. The Peter Lynch strategy rates Colony highly. It focuses on the PEG ratio, which is price to earnings relative to growth. This ratio must be no higher than 1.0. Colony's PEG is a strong 0.60, which means the investor is not paying a high price for growth. Also desirable is a high equity-to-assets ratio of 84% (5% is the minimum acceptable) and a 6.2% return on assets.

With high-yielding stocks, you want solid financial performers. Otherwise, a high yield may indicate the yield is a function of a low stock price due to poor performance by the company. These three companies have high yield and solid performance, as shown by their selection by my guru strategies.

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