Findings stocks that have low to zero Wall Street and institutional coverage is a great way to find mis-priced stocks; this technique also happens to be a great way to generate alpha. The five stocks below pay a high dividend, and all yield close to 6% or higher.
A number of financial and real estate stocks have been pressured regardless of their fundamentals; they have been dragged down by industry weakness. Colony Financial CLNY is one of those. The company pays a 6.3% dividend yield and is a real estate investment and finance company. Its key focus is to acquire and manage real estate-related debt instruments with a focus on commercial mortgage loans and other commercial real estate-related debt investments.
Colony is also a small cap stock with a $1.44 billion market cap, which adds to the potential for mis-pricing. For 2012, Colony managed to raise its revenues 64% year over year, and despite the strong price performance over the last twelve months, Colony is still offering investors an impressive dividend.
The trends moving Americans from owning to renting single-family homes will continue into the foreseeable future. This phenomenon, which has been developing for nearly a decade now, has been exacerbated by the financial crisis and housing price volatility. Colony's move to capitalize on distressed property, including foreclosures, short sales, etc, and profit through near-term rent capture and hopefully longer-term price appreciation is a savvy move, in my opinion.
Another note that he makes is that the company had debt to average assets in the low to mid teens in 2012, a big positive for companies in this industry; this will allow the companies to easily expand and build assets going forward.
Main Street Capital Corporation MAIN pays a 5.95% dividend yield and is a principal investment firm focused on providing customized debt and equity financing to lower middle market companies, with a concentration on lower middle market companies that have annual revenues between $10 million and $150 million.
Main has managed to beat EPS expectations in each of the last four quarters and currently only trades at 8.7 times earnings. For 2012, Main Street managed to grow revenues 37% and increase net income 66% year over year. Main is also able to make impressive returns for investors, with a return on assets of 11.78% and return on equity of 19.91%. Main also has a low beta of only 0.72.
SA writer Factoids makes an interesting distinction when considering investing the business development company that is Main Street.
Because most BDCs have a payout that is overwhelmingly taxed as income, it is good tax planning to put your holdings in this sector in a tax deferred vehicle like an IRA. MAIN is atypical in that a larger share of its payout qualified for taxation as long-term capital gains. For 2012, 46% of MAIN's dividends will be taxed as long-term capital gains. For 2011, 26% of the payout qualified. This taxation attribute gives you flexibility in your asset location decision. I will probably regret not putting MAIN in my Roth.
Hedge fund interest is generally not robust in small-cap stocks, but Main Street did have a couple of billionaires owning the stock at the end of 2012, including Ken Griffin of Citadel Investment Group and D.E. Shaw (check out how all the funds are trading Main Street).
Home Loan Servicing Solutions HLSS is a development stage company, with a focus on acquiring mortgage servicing assets, notably sub-prime and Alt-A mortgages. Home Loan Servicing also pays a 6.91% dividend yield, and is another small cap stock with a $1.3 billion market cap.
SA contributor Markus Aarnio notes that Home Loan Servicing Solutions has had impressive insider buying of late. Insiders have snatched up some 970,000 shares over the last twelve months; February 2013 saw the most insider buying since October 2012.
As far as valuation and recent performance go, Home Loan trades at only 1.46 times book value and 12.5 times forward earnings. The company has managed to beat EPS expectations in each of the last four quarters, and analysts expect the company to grow EPS by at least 5% annually over the next five years. In conjunction with last quarter earnings, company chairman, William Erbey, noted that
Reflecting on our first year of operations, I believe that we have delivered on our plan to provide our shareholders with earnings and dividends that are particularly attractive given the stability and low risk of our assets which the ABS markets are starting to reward. I am pleased with the continued support of our equity and debt investors and look forward to further growth in 2013.
Beyond financials and real estate, investors can also find high yielding stocks that trade as MLPs. Both of the stocks below are limited partnerships [LPS] and pay very generous dividend yields, the highest among the five stocks listed.
Atlas Resource Partners ARP pays an 8.1% dividend yield and is an independent developer and producer of natural gas and oil, with operations in the Appalachian Basin, Illinois Basin and the Rocky Mountain region. For 2012, Atlas Resource Partners managed to grow revenues 8% year over year on the back of an oil and gas production segment increase of 39%.
- Unlike most IPOs where you see a lot of insider selling in the first year as a public company, insiders have bought a total of 250,000 shares since coming public in February.
- The company should more than double its revenue in fiscal year 2013 thanks in part to a $255 million transaction that netted the firm over 250 wells and 88,000 net acres in North Texas. This acquisition was financed with over 80% equity, preserving the company's conservative capital structure. The acquisition was also complementary to their existing Barnett shale position. The acquisition will be immediately accretive to earnings.
Billionaire Leon Cooperman of Omega Advisors upped his stake over 88% in Atlas Resource Partners earlier this year (check out why Cooperman loves the stock).
CVR Partners UAN is an LP formed by CVR Energy (NYSE:CVI) to own and operate its nitrogen fertilizer business. The limited partnership produces and distributes nitrogen fertilizer products used by farmers to improve the quality of their crops. The company also pays a 7.55% dividend yield.
The company has notable tailwinds promoted by positives in the fertilizers and agricultural industry. According to the USDA's March 2013 report, farmers expect to plant 97.3 million acres with corn this year, driven by growth in global nutrient use from developing countries in Asia and Latin America. In reality, the increase should come from rising populations and income levels in these countries.
Other notable fertilizer company Terra Nitrogen has greater exposure to natural gas prices, which is a negative for them and positive for CVR assuming prices rise; CVR has pet coke cost advantages. The outlook for nitrogen prices should remain strong as farmers look to make up ground lost during last year's historic drought.
CVR's management has guided total distributions to come in between $2.15 and $2.45 per share for this year, a 27% increase (from the mid-point) over last year. At the mid-point ($2.30), the dividend yield would be 9.5%. CVR had little hedge fund interest at the end of 2012, but did see notable billionaire investor Jim Simon of Renaissance Technologies taking a new position in the stock (check out Simons' cheap stocks).
Just like the troubles in the companies dealing with finance and real estate investments, there are a number of housing and mortgage related companies priced below fair value. The stock price weakness has also created a number of high yielding stocks.
A couple of the best picks are usually found in beaten down industries, such as financials and real estate. Meanwhile, Both Atlas and CVR are solid LP picks. What's more is that all of these stocks are small-caps (sub $2 billion market cap), meaning they are sometimes less-covered by analysts and Wall-Street; this can lead to price discrepancies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.