I have a simple screen when looking for high-yielding stocks. I look for stocks with a dividend yield of 7% or higher. After that, it’s all leg work to cull the good from the bad. Some companies that recently got my attention are Atlantic Power Corp (NYSE:AT), Compressco Partners LP (NASDAQ:GSJK), and Fifth Street Finance Corp. (NASDAQ:FSC).
Seven
There are two sides to dividend investing, looking for a growing dividend and looking for a high yield. The high yield option is usually the most difficult because there’s normally a good reason why a stock has a high yield. That means that these stocks generally come with greater risks. Thus, finding worthwhile high-yield investments requires extra research.
That’s why my high-yield screen only looks for yields above 7%. After that, I have to do the rest of the work. There is no variable that I’ve found that can consistently differentiate between a turnaround situation and a falling knife.
A recent run of my high-yield screen turned up over 200 companies. Three that caught my eye were:
Fifth Street Finance (FSC)
Fifth Street Finance Corp. (NASDAQ:FSC) is a business development company (BDC). BDCs operate similarly to REITs, except that they provide loans to small and medium sized businesses. This is a unique niche because the companies that turn to a BDC are too small to interest a bank and not big enough to tap the public markets. This gives BDCs a great deal of leverage on the interest rates they can charge.
Fifth Street Finance Corp. (NASDAQ:FSC) came public after the 2007 to 2009 recession hit. That allowed the company to start investing as a public entity in an opportunistic market. In the last two years alone, the company has more than doubled the size of its portfolio and the interest income it receives. IT services and healthcare are the two largest sectors (16% and 13%, respectively) in its broadly diversified portfolio.
Fifth Street Finance Corp. (NASDAQ:FSC) has an investment grade credit rating, which is unusual in the BDC space. It claims to have been one of the top ten lenders in the private equity space in 2012. These two factors highlight its market position and relative financial strength.
The 10% or so dividend, paid monthly, is enticing. However, as a portfolio of high-yield corporate debt, Fifth Street Finance Corp. (NASDAQ:FSC) has to constantly manage and reinvest. Thus, a good portfolio today could quickly weaken in a downturn. This one’s not for the risk averse, but could make a nice option for those looking for a private equity like investment.
Atlantic Power (AT)
Atlantic Power Corp (NYSE:AT) just cut its dividend. While that might immediately turn off some investors, more adventurous types should get to know the company a bit better. For starters, it is an independent utility company focusing on bringing environmentally friendly energy, like wind farms, to market. Government mandates around this will create demand.
Secondly, with several long-term contracts set to end, Atlantic Power Corp (NYSE:AT) was recently faced with a quandary. Since new contracts would be less generous than the old ones, it chose to sell the effected assets and refocus on the environmental angle. This should position it well for the future, but required short term pain—a dividend cut.
The dividend cut brought the company’s dividend payout in line with its financial ability to both grow its business and continue to pay a dividend. That said, the cut, which was only recently announced, led to a steep sell off. That makes now a relatively good time to pick up a pretty boring utility positioning itself well for the future.
It may take some time for this 7% plus yielder to prove its worth, but you’ll be paid well to wait.
Compressco Partners (GSJK)
Compressco Partners is a limited partnership that sells equipment and services to the oil and natural gas drilling industry. Its machines increase the pressure in wells and, thus, increase their output. For a driller, this means making more money from each well.
Compressco Partners’ IPO was in mid-2011, so it is a relative newcomer. However, it was spun out of TETRA Technologies, a drilling services company with a pretty good history in that cyclical industry. As of the end of 2012, the partnership had 3,149 compressor units, up 8% from a year earlier.
For 2013, management expects revenues to hit $132.5 million, up notably from $108.6 million in 2012. That, coupled with a near 9% dividend yield (the distribution was increased in the fourth quarter), could make this a good option for more aggressive investors looking for pick and shovel companies in the oil and gas industry.
Odd Balls
When you look at high-yield companies, there are usually quirks to each one. Finding the right companies means understanding those oddities. Fifth Street Finance, Atlantic Power, and Compressco Partners all have big dividends, big risks, and big potential, making it worth the time to understand each one’s quirks.
The article Big Yields, Big Risks, Big Potential Returns originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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