Put in the Work for Income

 | Apr 05, 2012 | 4:01 PM EDT
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In addition to talking about baseball and trying to pretend to be interested in the Masters this weekend, many of my calls yesterday were about the concept of unconventional yield. No matter what my associates trade or their approach they all have a portion of their portfolio devoted to producing income, or have family that needs income from their investments.

The biggest question I got in the midst of the sport chatter was if I thought this was a good approach for income investors giving the higher volatility of these unpopular and mostly unknown names. I do but with a caveat.

It is not for everyone. It is not a set and forget it approach to income investing. Finding the names takes real work and effort to find those that have high yields that should be sustainable. You have to monitor the portfolio on a regular basis and review the financials to assess the risk and ongoing performance of every company in the portfolio. It is work and probably not the right approach for those who are used to just buying bonds or blue chips and forgetting about the whole thing. Unconventional yield portfolios have to be approached like a business.

The other question I often hear when discussing this approach to income investing is "how many stocks should I own?" The answer is a lot of them. I would have at least 25 different high yielding stocks in my portfolio to eliminate as much single company risk as possible. The more the merrier is my rule when building this type of portfolio. The other important principle to keep in mind is diversification. You have to make sure that as many different industries and sectors are represented as you can possibly find. Owing 12 REITs and 12 energy MLPs is not diversification, nor is having a portfolio of all oil stocks and drug shares.

To achieve a properly diversified portfolio you have to take your time. If you were to start putting together an unconventional yield portfolio today you should figure it is going to take about a year to get fully invested unless we have a total market meltdown. When natural gas is weak, look for natural gas names that have high dividend yields. When the news of the day pushes drug stocks to new lows and high yields look for drug stocks that fit the criteria. When a dividend-paying company like Radio Shack (RSH) is hitting new lows look to add that stock to your portfolio. Take your time and make Mr. Market work for you, not against you.

In addition to running screens for these ideas, I also look for unconventional yield candidates each week when I peruse the new lows list. No matter what type of portfolio I am assembling, I always want to be buying stocks much closer to 52-week lows than highs. I do this every week anyway so keeping an eye of unconventional yielders that are out of favor is not much extra work and often uncovers stocks I overlooked.

This week as I trolled the list, I found a couple of candidates for further research and possible purchase for a yield portfolio. Star Gas Partners (SGU) is hitting new lows recently as the home heating oil and propane business has been terrible due to warm weather in its core market. The recent quarterly comparisons are terrible for the company as the cold winter of 2010 had much higher demand than this year very warm winter weather in the Northeast and Mid-Atlantic regions.

The company has a negative tangible book value as they have acted as a consolidator of propane and heating oil companies buying smaller operations and folding them into the company. Given their strong presence in their core markets and long history of acquisitions I think the stock is a candidate for purchase in a yield portfolio in spite of this. Insiders think so as they have been consistent buyers of the stock. Star Gas is worth further research at this price.

So is Cash Store Financial (CSFS). The company is the largest payday lender in Canada with a 35% market share for the cash advance loan market in our northern neighbor. The company also has a presence in the UK. The company is hitting new lows as they recently were ordered to make refunds to certain customers for mandating a cash card as part of obtaining a payday loan advance. This one goes onto the research list as we need to know a lot more about the company and the regulatory environment in Canada, but at new lows with history of strong growth and high yields it is worthy of a deeper look. At today's price the stock yields over 8%.

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