3 Stocks Offering High Income And Captial Appreciation

Includes: OAK, SFL, TICC
by: Matthew D. McCall

A recent drop in bond prices has pushed the yield on the 10-year Treasury to the highest level in 11 months. The most recent yield on the bond is 2.03%. This may be the highest in nearly a year, but it is still much closer to historic lows than the highs and it is barely keeping up with inflation.

Investors not only have to deal with the low interest rates on fixed income, they also have a stock market that is not far from the same level it was when it began the 21st century over a decade ago. This has led to investors searching out high-yielding investments to help supplement their income during low a low interest rate environment.

The one mistake investors are currently making is seeking out investments with yields above 5%. While the return is not bad considering the last 10 years, it could leave investors missing out on one of the strongest bull markets in the last few decades. The combination of a high dividend and the potential for capital appreciation is not easy to locate in a low interest rate environment.

My goal was to find stocks that have extremely high yields (over 8%) and also had a solid business model that will attract money during a bull market. The three stocks at the top of my scan are listed below and each has the ability to rally with the overall market because they are tied to the overall global economy. But at the same time in the event of a market pullback or a sideways environment, they will be juicing investors portfolios with yields above 8%, creating a buffer.

Oaktree Capital Group (NYSE:OAK) is a global investment firm that focuses on investing in alternative markets. The chairman of the company, Howard Marks, is a legend on Wall Street when it comes to debt investing and the action of the stock recently reflects that success. The stock, which went public in April of last year, is up 14% in 2013 and that does not reflect the current dividend yield of 8.3%. What makes the stock even more intriguing is the PEG of 0.90. Based that metric and a forward P/E ratio of 11.1, the stock is not only a momentum and dividend play, but also a value stock. I will caution that the stock is at a high; therefore buying on a pullback would be the best strategy.

TICC Capital Corp (NASDAQ:TICC) is a business development company (BDC) that operates as a closed-end investment company. The firm invests in public and private companies as well as debt from technology-related companies. The chart of TICC is not as impressive as OAK, but it has been consolidating for the majority of 2013 near a multi-year high. A close above the $11 area would be a breakout and a major buy signal. In the meantime as the stock consolidates between $10.25 and $10.75 it is paying an 11.1% dividend.

The company's recent earnings report earlier this week saw a miss in earnings, but for the year there was significant growth. Net investment income for 2012 was $37.2 million versus $30.0 million one year earlier. A increase of 24%. The PEG ratio is a not too high, at 1.78, but also keep in mind the BDC's typically are not valued in the same manner as a typical common stock. There are always risks with BDC's, but I do like the way they are diversified among a bevy of smaller companies. With TICC the added risk is its heavy concentration on technology companies. This could be a positive or negative depending on the current environment.

Ship Finance International Ltd (NYSE:SFL) owns and leases a fleet of vessels that includes oil tankers, chemical tankers, container vessels, as well as some buildings and rigs. The shipping sector as a whole has been a laggard as shipping prices fell during the global recession and have yet to recover to where they were in 2007. But within the sector, SFL has been one of the bright spots and is currently trading near a 52-week high. Fundamentally the company is similar to a rollercoaster when analyzing the yearly earnings.

Earnings per share are expected to come in at $1.50 in 2013 before rising to $1.75 in 2014; both estimates are below the $2.31 in 2012. Based on 2013 earnings estimates the stock is trading at a reasonable P/E ratio of 11.3 and it falls to 9.6 when using 2014 earnings. The dividend of 9.3% and the upside potential for the global shipping industry to pick up make SFL an interesting opportunity. Of the three, I would rate SFL as the riskiest because a global slowdown will affect this stock directly.


The dividend yields of the stocks mentioned are eye catching, however investors must realize with such high yields comes added risk that the payouts could be lowered at some point in the future. If that were to happen it would likely send the stock price much lower, wiping out the large dividend payouts. The three that I chose were stocks that I felt had a good business model and hopefully can avoid such a scenario. But just as an investor should do with any investment, weighing the potential risks with the potential rewards is the key to success.

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.

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