One of my favorite ways to pick income stocks looks a lot like my favorite methods of picking any class of stock. I like to buy names that trade for less than book value and have solid financials, and whose fundamental conditions are improving. One of my basic screens to uncover these stocks is identifying low price-to-book stocks that have Piotroski F-scores of 6 or higher. It is a pretty simple step to add a dividend component -- and, in this way, the screen uncovers safe and cheap stocks that are also high-yielding candidates for an income portfolio. As a bonus for income investors, stocks that meet these criteria are likely to appreciate quite a bit over the next few years as well.
When I ran the screen this morning, some pretty familiar names turned up. It is worth reviewing these, because not only are they great income stocks, but they are solid picks for any type of investor looking for high total returns over the next few years. The dividend factor just means you will be very well paid while you wait for the market to recognize the cheap assets and improving conditions.
I have owned shares of Arbor Realty Trust (ABR) since late 2008, and I do not see myself selling the shares anytime soon. The real estate investment trust invests in multi-family and commercial-real-estate-related bridge loans, junior participating interests in first mortgages, mezzanine loans, preferred and direct equity, discounted mortgage notes and other real-estate-related assets.
Arbor Realty shares trades at about 90% of stated book value, but management's estimate of real net asset value is much higher, and the stock is at just 72% of the adjusted book value. In addition to being a cheap high-yielder, Arbor stock offers something of a hedge against higher interest rates, as the loan portfolio is 29% fixed-rate and 71% variable-rate loans. The F-score is 6, so business and financial conditions continue to improve for this company, and that should continue to move the stock higher.
Summit Hotel Properties (INN) has carved out a pretty niche in the hotel market. The company engages in acquiring, owning, renovating, repositioning and asset-managing and selling premium-branded, limited-service hotels. Right now the company has a portfolio of 90 hotels with a total of 11,353 guestrooms located in 22 states.
Most of Summit's hotels are branded under market leaders such as Hyatt (H), Hilton (HLT), Marriott (MAR) and Intercontinental Hotels (IHG). The close relationship with these leaders often gives the company first look at properties that fit its niche when they first come on the market. Summit stock is currently trading at 95% of book value, and the dividend yields 4.97% at the current share price. The F-score is 6, so things are getting better for the company as the hotel market and economy slowly continue to improve.
Campus Crest Communities (CCG) is in the student-housing business, and it has 80 properties with more than 43,000 beds in North America. The company is involved in all phases of its project, including development, construction, real-estate management and asset management. Campus Crest reported results earlier this week, and funds from operations were up more than 29% year over year, so business is pretty good. The stock is trading at 75% of tangible book value, and the payout yields a very comfortable 7.67% at today's price. The improving business and financial conditions are reflected in the company's F-score of 6.
Preferred Apartment Communities (APTS) is another stock that recently showed up on my radar screen. The company acquires and operates multi-family properties in select targeted markets throughout the U.S. It also makes mezzanine loans that usually have an option to buy the project upon completion attached to them. The mezzanine-loan program is considered the key platform the company will use to acquire properties going forward.
Chief Investment Officer Dan Dupree commented on this approach recently, telling investors, "Our innovative mezzanine loan program enhances our acquisition pipeline by giving us the opportunity to acquire brand-new modern stabilized multifamily communities at super prices." So far it seems to be working, as Preferred Apartments is growing and the F-score of 6 indicates that it will continue to do so. The stock trades at 70% of book value and yields 7.9%, so it a too-cheap-not-to-own stock that pays very well.
Using the basic Piotroski value approach to find income-producing stocks can help you put together a portfolio that not only meets your cash flow requirements, but also has the potential for high levels of long-term capital appreciation.