A Contrarian Take on High-Yield Plays

 | Aug 22, 2013 | 12:30 PM EDT
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The high-yielding real estate investment trust (REIT) and energy master limited partnership (MLP) sectors have taken it on the chin over the past three months as interest rates have risen sharply. The 10-year Treasury yield is quickly approaching the 3% level. So, I am taking this opportunity to add to my allocation in both sectors.

Stocks within these and other high-yielding sectors have declined 10%, 20% and even 25% in reaction to rising rates and are offering much more attractive entry points for income investors than they were three months ago. I also believe interest rates will plateau or pull back over next few months as I just don't think our anemic economic and job markets can withstand higher interest rates.

Here are three selections I have either added to or established new positions in this week.

RAIT Financial Trust (RAS) is a multi-strategy commercial real estate company incorporated as a real estate investment trust. The company operates in three core areas: It originates commercial real estate loans, purchases commercial real estate properties and invests in commercial mortgage-backed securities.

The stock has dropped some 25% from its levels three months ago. I believe investors are lumping this in with the average mortgage REIT, which it is not. In addition to lending, it also owns and manages commercial properties. The company did miss slightly on earnings during its last report, even as it beat on revenues.

The company showed confidence in its prospects by bumping its dividend by 8% in late June. RAS is now yielding 7.9%. The stock sells at less than book value, just over 4x this year's expected earnings, and insiders have been net buyers of the shares in 2013. I doubled my position in the stock Wednesday.

Fly Leasing (FLY) acquires, finances, leases and sells commercial jet aircraft worldwide. It's another stock that has retreated some 25% from its highs in July on the back of recent interest rate hikes and a $160 million capital raise. Thanks to the decline, the equity now yields about 6%.

It sells at less than book value and is priced at less than 8x this year's expected earnings. FLY also has good long-term technical support, about $1 below its current price of about $12.85 a share. Analysts are starting to get positive on the shares after its recent decline. RBC Capital initiated the stock as an "Outperform" last week. Cowen and Deutsche Bank also reiterated their "Outperform" and "Buy" ratings in July, respectively. I started to build a position in FLY this week.

ONEOK Partners (OKS) is a limited partnership that owns and operates natural gas gathering, processing, storage and transportation facilities in the U.S. The company is well-positioned to benefit from the continued growth of domestic natural gas production and its use as a fuel. The company's former CEO just picked up more than $600.000 in new shares after the stock had declined some 20% from its highs a couple of months ago.

OKS now yields close to 6% and is trading near a two-year low. Despite the recent decline, consensus earnings estimates for both 2013 and 2014 have ticked up over the past two months. Revenue growth is expected to accelerate from the low teens this year to more the 20% in 2014 as new projects come on line. The company will continue to benefit from the U.S. energy boom, and I started to build a stake in the stock this week and look forward to it being a core allocation in my income portfolio.

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