There have been many articles lately discussing which investment theory is best to build a portfolio that will support your needs in retirement. Is it DGI, total return, high current yield or some combination of all three? In my previous article, I discussed my high-income portfolio ideas. So if you think there is room in your portfolio for high current yield, this article presents three smaller cap high-yielders that you may want to consider. Many high-yield companies performed badly in 2008-09. Some went under, while others drastically reduced or eliminated their dividends. These three stand out as not only maintaining, but actually increasing their payout at that time.
PennantPark Investment Corporation (NASDAQ:PNNT) is a BDC, and as such, distributes most of its free cash flow to the shareholders. It derives income from debt and equity investments in middle market companies. Its highly experienced management team was able to steer it through 2008-09 and maintain its dividend pattern. Last year, it had an impressive increase in earnings and has a high profit margin. Currently, the dividend is $.28 per quarter (9.7%) and has been the same since the December quarter of 2011.
It has shown a pattern of steady, small increases dating back to 2007. The last few years it has traded narrowly between $9 and $13. This is why I consider this a "dull" company. Not much growth in price or dividend, just paying you about 10% a year while you yawn. I would consider adding to my position at about $10.50. The dividends of BDCs are taxed as regular income, so they would be best in your IRA.
Compass Diversified Holdings (NYSE:CODI) is organized as a partnership and derives its income from acquisitions, buyouts and investments with the goal of gaining controlling interest in the companies it invests in. It was formed in 2005, and has made distributions since then. Like PNNT, the increases have been small, and the price range has been between $11 and $19 the past few years.
It raised the distribution slightly in 2009, and has paid $0.36 per quarter (8%) since March of 2011. It is a "dull" company and invests in other dull companies. You get a K-1 from CODI. Last year, about half of the distribution was taxable interest. It is currently trading at the high end of the price range ($18.08), but is down from its high of over $19 earlier in the year. I would look to add to my position under $17.
Alliance Resource Partners LP (NASDAQ:ARLP) is an MLP that would appeal to DGI. It has raised its distribution every quarter since November 2007. The last raise made it 8% higher than last year. It is currently paying about 5% as of the last raise. It is in the "dull" industry of coal mining, but its performance is anything but. It is one of the few miners that has been able to show a profit lately. It has contracts out a few years, and even with lower prices, its earnings keep increasing.
The price tanked in 2012 along with dropping coal prices, but has been on a tear since then. It is now trading close to its all-time high, but like other DG companies, rising earnings and rising distributions should support a higher price. It recently split 2:1, and although we know that doesn't change things, the "lower" price should appeal to the individual investor. As an MLP, it issues a K-1 and would best fit in a taxable account. I think ARLP would be a buy under $44.
I have presented a quick overview of three lesser-known high-yield companies in my portfolio. Please do your own due diligence to see if they may fit into your plans now or in the future.
Disclosure: The author is long PNNT, CODI, ARLP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.