I am a big fan of beaching it on Father's Day, so we packed up yesterday and headed over to our favorite little Central Florida beach town. I love being able to drive on the beach and just pull into a spot and set up camp without all the hassle of lugging everything from a parking lot a few thousand yards across hot asphalt and sand. Within minutes, I had the tent and chair set up, the kids were off to chase waves and I was relaxing with a cool drink and some light reading. Among my pile was a study done by Jack Vogle of Alpha Architect, LLC that addresses high-yielding stocks.
He sorted stocks by yield and isolated those in the top 20%. He then used EV/EBIT ratio to sort the stocks again, and bought the best 50%. He limited the universe to larger companies to eliminate small-cap effects from the results. The resulting portfolio crushed the market from the start of 1964 to the end of 2014, earning 15.24% on average per year. By comparison, the S&P 500 averaged just 6.67% over the same timeframe.
This is a pretty simple screen to set up, so when we got back last night and I was done slathering all over the sunburn resulting from my "of course I have enough sunscreen on" approach to the beach, I ran the numbers to see what stock would fit into the mix today. I set my yield threshold at 3%, so we only looked at stocks yielding more than the 10-year Treasury, and ranked the results by the EV/EBIT ratio. It is a pretty interesting list of stocks with some ideas that long-term income oriented investors might find useful.
Carlyle Group (CG) is one of the world's largest private equity and alternative asset investment firms. I am a huge fan of private equity-style long-term investing, and this company has proven to be among the very best practitioners. Because of a very generous dividend policy that plans to "pay a quarterly distribution of approximately 75% of Distributable Earnings per common unit, net of taxes and amounts payable under the tax receivable agreement," for the quarter the shares pay a very nice 4.6% yield. As earnings are based on management and incentive fees for performance, the payout should rise over the years as long as the company successfully raises money and its investments perform well. The stock has an EV/EBIT of 2.1, so they are c heap at the current price.
I was delighted to see that one of my favorite stocks was also on the list. I acquired my holding of Brookfield Property Partners (BPY) when the REIT bought out my stake in Brookfield Office Properties, and I have been a happy shareholder ever since. This is one of the best collections of global commercial real estate that you can buy, and it is trading for 80% of unit holder equity per share. It has an EV/EBIT ratio of just 4.3.
Parent company Brookfield Asset Management (BAM) owns about 68% of the firm, so it has plenty of skin in the game. Brookfield Asset has been an incredibly successful asset manager and has a 100-year history of investing in assets like property, renewable energy, infrastructure and private equity. I am very comfortable putting my money in alongside theirs. At the current price, the stock is yielding 4.64%, and management has said they hope to raise the payout by at least 5% annually going forward.
One of the more intriguing stocks on the list is National American University Holdings (NAUH). It's no great secret that I have been sour on for-profit education stocks for years now, and have been relentlessly and continually short Apollo Education (APOL) since Steve Eisman gave his presentation in the industry back in 2010.
However, when I look at this company's recent presentations and consider things like continued enrollment, graduation rates and placement rates, they appear to be doing something unique to the industry. They are actually running a school and helping graduates get jobs in their chosen career. With a 5.81% dividend yield and the shares trading with an EV/EBIT ratio of just 3.6, the stock is not only a good fit for an income portfolio. There could be substantial upside for this stock over the next few years as well.
Mr. Vogles' study could be an enormous help for investors looking to assemble an income portfolio in a yield-starved world.
