Stocks That Will Let You Sleep at Night

 | Aug 20, 2013 | 3:00 PM EDT
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One of the longest ongoing discussions about investing around Chez Melvin is about income investing. Most of us who congregate around here, either electronically or in person, are engaged in some worthwhile endeavor that provides cash flow to meet our daily needs. We may like dividends and income investments, but we do not need that money to live on a day-to-day basis.

But we all have parents, siblings, aunts, uncles or friends who do need the income, and who are struggling to earn the return they need. I am surprised we have not seen a gray-panther assault of the Federal Reserve and Capitol buildings in response to the semi-permanent zero-interest-rate policies that have hit savers so hard.

It is even harder now as yield-seeking investors have pushed prices to silly levels in dividend-paying blue-chip stocks, large real estate investment trusts, utility stocks and other income stocks. Mortgage REITs have gotten crushed by rising rates, and although I've continued holding the ones I've bought -- and taken a beating in the process -- you really can't buy them until asset values stop collapsing. Wall Street's sales machine is in overdrive ginning up income products, but most of them carry stiff fees and uncertain prospects at best, in my opinion. If you need income from your investments, this is a very difficult and dangerous time. 

I spent some time searching for relatively unknown, boring stocks that could help income investors solve some of their problems. These are issues pretty far off the radar screen of the big funds and ETFs. I don't think these will end up begin huge winners as far as capital appreciation, although they could meander higher over time. Still, in a bad market, you probably won't get hurt too much in a bad market with these -- though you have to understand these are not bank products and will fluctuate in value. My best advice is to collect the dividends and ignore the day-to-day price changes in these securities.

Star Gas Partners (SGU) is in a really basic business, selling propane to customers in the Northeast and the Mid-Atlantic. Over time it has grown by buying up many of the mom-and-pop propane dealers in the region, and it currently sells propane to roughly 416,000 residential and commercial customers and gasoline, heating oil and diesel fuel to an additional 48,000 customers. The company does a little better when the weather is really cold and earnings, and stock price can fall a bit when we have a warmer year.

Insiders own almost 25% of the company, while the large Wall Street institutions own just 37%. Star Gas is buying back its shares under an ongoing repurchase program, having bought back a little over 20% of the company over the past few years. The dividend yield comes to 6.8% at the current share price, and that should give investors decent income for as long as people use propane to cook and heat their homes.

Beyond that, I am a big fan of shipping stocks, and I think income investors might do well to consider Capital Product Partners (CPLP) right now. The shipping industry appears to have bottomed, and this company should provide a steady flow of dividends as the global economy slowly improves. The firm owns 27 vessels right now, and recently did a secondary offering of 11,900,000 units to finance the purchase of three container ships. All of its current vessels are under contract at this point, and the shares yield a very generous 10.8%.

Given the number of older ships being scrapped -- and the fact that large private-equity players such as Oaktree (OAK), Carlyle Group (CG) and Wilbur Ross are entering the industry -- I believe shipping is in the process of improving, albeit very slowly. Capital Products stock may bounce around with the market, but investors will enjoy a great dividend yield and the prospect for an improving stock price over the long term. Insiders own 30% of the shares, while institutions hold less than 25%.

If you need income from your investments, you need to focus on areas that others don't notice. When you own the same stocks and assets whose prices other folks have pushed higher in their scramble for income, that is not a recipe for long-term success. On the other hand, a portfolio made up of lots of small positions in off-the-radar, boring stocks and assets should meet your needs and allow you to sleep at night.

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