With uncertainty lingering about the direction of the stock market's next big move, getting cash out of one's investments sooner rather than later can add comfort. But what's an income investor to do to help winnow the "safe" yield plays from the merely seductive ones? Insiders can be extremely helpful in guiding the way.
At InsiderInsights, we generate special screens on our website that combine insider data with various fundamental and other metrics to get a suitable subset of stocks to research further. Searching for high-yielding stocks that also have insiders buying is a popular starting point.
To the extent a dividend reduction has to be voted on, large purchases by board members of a high-yielding stock would certainly make them less interested in voting "yes". And for other income-generating securities that pay out a percentage of profits, insiders buying into their high yields would seem to indicate that any anticipated reduction of distributable cash flow won't be as bad as the market expects.
Even for stocks with more mundane 3% or 4% yields, the fact that academic studies and plenty of anecdotal experience have found that stocks with significant insider buying tend to outperform the indices also makes this screen worthwhile for investors more interested in total returns than income alone.
I ran a screen for stocks with at least 3% indicated yields, and insiders accumulating at least $100,000 worth of shares since the beginning of March, generating a list with 52 securities. That's a very manageable subset of stocks to deal with.
Next, I enhanced the quality of this screen's results further, by overlaying an advanced filter to only include stocks that also have significantly bullish activity according to InsiderInsights Company Ratings. With that filter in place, the list is concentrated down to an even more useful (and likely more profitable) population of just 25 securities.
It's a common misuse of insider data to assume that if execs trade big dollar values of their shares that it automatically must be significant. Many who use insider data as a tertiary indicator, or who only recently began using the data in their investment process make this mistake-and get burned when they rely on some high-dollar transaction as part of their final investment decision. Don't fall into that trap too. No self-respecting growth investor would blindly throw money at a company without further researching the quality of the seemingly spectacular EPS growth it just recorded. Insider data needs deeper research beyond any headline appeal as well.
Don't forget the common sense
Even with a significantly bullish InsiderInsights Company Rating, however, common sense should reign when digging into this screen's results for investment ideas. First of all, it is only a first screen to determine where you should concentrate further analysis, not a buy list. But as far as first screens go for income investments, it's the best I know.
Also, the maxim of "if something appears too good to be true, it probably is" still applies. So when I see securities on my insider screen with indicated yields north of 15%, I'm more suspicious than salivating. Fundamental data sources only update their indicated yield fields for companies after a change is made. Knowledgeable traders are much quicker to react to risks to yield, and usually bid a stock down long before the actual news hits the tape. Indicated yields become outsized in the meantime.
In any case, there are no obviously outrageous yields on the screen results below. Just a slew of decent enough names to research further to see if they're appropriate for your portfolio. My firm has actually been in Two Harbors Investment (NYSE:TWO) for close to two years now, and more recently decided to bite again on Annaly Capital Management (NYSE:NLY).
Disclosure: I am long NLY, TWO. 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.