Buy 2 Stocks For Income And Growth

by: Steve Auger

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
Stock Screen Rules

The screener top 20 picks are listed below.

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 (NYSE:TCAP), Legacy Reserves LP (NASDAQ:LGCY), Linn Energy LLC (LINE), and Alliance Resource Partners LP (NASDAQ:ARLP).

Symbol Name Industry Recent Price Market Cap Yield Yield
(5 yr)
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
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. 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.