3 High Yield Stocks That Are Likely to Outperform the Market

Includes: OXSQ, SDRL, TGP
by: Patrick Young

The current environment is dominated by uncertainty. Uncertainty about:

  1. The strength of bank balance sheets and how they would fare in another credit default crisis precipitated by sovereign debt defaults.
  2. The rate of growth in emerging markets.
  3. The supply of oil.

All of these concerns are real, and should make investors very nervous. It is a distinct possibility that a crisis in banks, China, or oil supplies could precipitate another crash of the September, 2008 variety. However, I am inclined to believe that fear in the marketplace is overblown because of the recent slaughter. Investors have parked a lot of money in bonds because of this fear and, as a result, rates on 10 yr treasuries briefly dipped below 3%. With such low yields, and the distinct possibility of a precipitous crash in bond prices as investors run for the exits, where will these nervous investors park their money?

I argue that high-dividend-paying stocks and MLPs will fare well in such an environment. Because nearly all assets will tank in a credit crisis, investing in stocks with high dividend yields allows the investor to be paid for taking the risk. Again, bonds have become quite risky as well, so investors would likely seek higher yields in the equity markets than the paltry ones they reaped in the bond market.

Here are a few high yield stocks that I recommend:

TICC Capital Corp (TICC) is a business development company that provides capital (makes loans) to businesses in the technology sector with market capitalizations less than 300 million dollars. Though I am not an expert on the credit markets, I believe there should be a good market for specialty "banks" to provide credit to small-mid cap companies as the larger banks are still struggling with unwinding their credit markets. It is trading at 9.84, with a P/E of 4.86 and has a dividend yield of 10.17% and a good track record of growing the dividend payouts.

SeaDrill (NYSE:SDRL) is an offshore drilling contractor for the oil and gas industry. It operates 36 ships, rigs and submersibles, and have several new rigs under construction. Demand for drill rigs has increased considerably, and daily rates for drill rigs have nearly doubled since 2008 in some cases, so SeaDrill looks poised to make a lot of money over at least the next two years. Beyond that, one must be vigilant of the supply of new drill rigs which could push rates down, but until that time, SeaDrill should be able to continue paying it's outstanding dividend yield of 8.39%.

Teekay LNG Partners (NYSE:TGP) are operators of tankers that carry Liquified Natural Gas as well as crude oil. The company has 15 LNG carriers which are contracted on routes for 20 - 25 year periods. This means the company has a very stable cash flow in a growing market, and should be able to continue paying the outstanding dividend yield of 6.66%. Impressively TGP has increased it's dividend by 10 - 20% every year since it went on the NYSE in 2005.

As money flows from bonds into the stock market as fear abates, investors will seek yield to get paid to take the risk in the equity markets. The companies above simply pay better than the blue chips.

Disclosure: I am long TICC, SDRL, TGP.