Recently I was asked to identify two high-yield stocks with some growth potential that would be suitable for a novice investor. Some additional constraints were as follows:
- yield greater than 6%;
- stock dividends paid for at least 5 years non-stop; and
- stock price greater than $2.
When faced with this type of problem I generally turn to one of my favorite stock analytical tools: the Portfolio123 stock screener.
Using the screener, I created a stock ranking system that would identify high-yield stocks. The main yield criteria used was:
- top 5% of all (non-OTC) U.S. stocks;
- average yield for the 4 years previous in the top 10% of all U.S. stocks; and
- very highest yielding stocks (top 0.7%) eliminated as they are usually anomalies.
With these rules alone I found that the backtest results were not particularly impressive. So I introduced a few extra factors to boost the backtest performance. These factors included:
- Quarterly return on investment
- Short interest ratio
- 5-year dividend composite growth (%)
- 5-year net income composite growth (%)
- 5-year payout average (%)
- 5-year gross margin average (%)
In addition to the above ranking system criteria, I used two screener rules:
- yield greater than 6%
- minimum average daily dollar-volume (price*volume) greater than $1M.
The ranking system, screener rules and backtest results are shown below.
| Ranking System | Backtest Results |
(click to enlarge) | (click to enlarge) |
| Stock Screen Rules | |
(click to enlarge) |
The screener top 20 picks are listed below.
(click to enlarge)
I reviewed each of the 20 stock picks using the website Yahoo Finance, which I consider to be an excellent source of company fundamentals.
All stocks from the list that had a payout ratio greater than 100% were eliminated. Then I reviewed the dividend history and deleted all stocks that didn't progressively increase dividend payments over time.
After completing this exercise I was left with four stocks: Triangle Capital Corp (TCAP), Legacy Reserves LP (LGCY), Linn Energy LLC (LINE), and Alliance Resource Partners LP (ARLP).
(click to enlarge)
| Symbol | Name | Industry | Recent Price | Market Cap | Yield | Yield (5 yr) | Payout Ratio |
| TCAP | Triangle Capital Corp | Asset Mngmnt | 25.75 | 702.69M | 8.2% | 11.5% | 77% |
| LGCY | Legacy Reserves LP | Oil&Gas | 29.00 | 1.39B | 7.8% | 10.5% | 65% |
| LINE | Linn Energy LLC | Oil&Gas | 41.25 | 8.23B | 7.2% | 10.1% | 59% |
| ARLP | Alliance Resource Partners LP | Coal | 63.50 | 2.34B | 6.7% | 6.7% | 52% |
My final initiative was to eliminate two of the four remaining stocks, thus leaving two stocks for recommendation to the novice investor.
I first examined each company's operating cash flow and noticed that the cash flow for TCAP was negative. In addition the short interest (% of float) was also higher than I would have liked. A high short interest usually means that speculators are betting against the company's stock price. These two parameters were enough for me to strike TCAP from the short list.
| Symbol | Operating Cash Flow | Short % of Float |
| TCAP | -128.40M | 5.00% |
| LGCY | 182.05M | 1.00% |
| LINE | 92.51M | 1.70% |
| ARLP | 568.07M | 1.00% |
Two of the three remaining stocks, LGCY and LINE, are in the oil and gas industry, while ARLP is engaged in production and marketing of coal.
I decided that one of the two oil and gas stocks had to go, thus providing some diversification of investments. My final decision involved one of my favorite fundamental indicators: Net Income Available to Common / Market Capitalization.
This indicator provides a factor representing how much income is available to the investor based on the current investment (market cap). Higher values represent a better investment.
| Symbol | Market Cap (1) | Net Income Avl to Common (2) | (2)/(1) |
| LGCY | 1.39B | 156.91M | 0.112 |
| LINE | 8.23B | 873.86M | 0.106 |
LGCY came out slightly ahead: 0.112 versus 0.106. Thus my two recommended stock picks were as follows:
| Symbol | Name | Industry | Recent Price | Market Cap | Yield | Yield (5 yr Avg) |
| LGCY | Legacy Reserves LP | Oil&Gas | 29.00 | 1.39B | 7.8% | 10.5% |
| ARLP | Alliance Resource Partners LP | Coal | 63.50 | 2.34B | 6.7% | 6.7% |
Given the Federal Reserve's recent actions designed to ignite inflation, the price of resources such as oil, gas and coal should rise over time. I believe that both of these investments will perform very well into the future. I know I will sleep well making these recommendations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
