Investors seeking dividend income have typically relied upon a group of industries that dependably issue payouts. But these industries are under siege and are taking the broader market down. Banks, mortgage REITs and specialty finance firms have been the worst culprits when it comes to displaying a high-indicated yield that turns out to be either unsustainable, or much too meager to offset the subsequent capital loss from sinking shares.
So what's an income investor to do to help winnow the "safe" yield plays from the merely seductive ones? Once again, insiders can be extremely helpful in this endeavor.
I run a screen every month in
TheStreet.com Insider Insights
newsletter that notes high-yielding stocks that are also being supported by insider buying. While an indicated yield can become artificially high as a stock trades lower in anticipation of a payout-destroying event, such a reduction seems less likely -- or, at least, less devastating -- if insiders are buying in.
If a board of directors is deciding whether to maintain or cut a dividend, they would be less inclined to cut the dividend if they are also buying shares. And for other income-generating securities that pay out a percentage of profits, insiders buying into their high yields would seem to indicate that any anticipated reduction of distributable cash flow won't be as bad as the market expects.
Don't Forget the Common Sense
The maxim of "if something appears to be too good to be true, it probably is" still applies. So when I see securities on my insider screen with indicated yields north of 20%, I'm more suspicious than salivating.
As a result, I am passing on
, which has a 24% yield -- tops on the insider yield screen from the Form 4s Filed at the SEC in May (see table below).
Any yield from this stock has obviously been negated by the capital loss it has handed investors trying to catch this falling knife. Taking a flyer on a stock like this isn't why I look for a yield play to begin with. I do so to find a solid income flow for my portfolio. MBIA is obviously too much of a crap shoot, and doesn't fit the bill. It's an easy pass.
High-Yielding Securities with Insider Buying
So far this year, I've also consciously avoided jumping into the specialty finance and mortgage-REIT-related names that make up a good part of these monthly screens. If I had at least a two-year investment horizon, I could probably justify piling into all of them. But I need to show solid monthly and quarterly performance. That's led me to avoid companies that are overly reliant on crunched credit markets, rickety real estate and/or crimped consumer activity.
The insider buying in these maligned groups has been constant since the market began melting down last year. Insiders' opinion is clear: the U.S. banking and real-estate markets are going to survive. For all the nasty news flow in the financials, this simple fact is worth keeping in mind. There will come a time when jumping into this sector with both feet is going to be a very smart play for the short-term, as well as the long-term.
Reasonable minds can differ on when that will be, of course. And if you do think the bottom is close at hand for this leper of a sector, go ahead and follow the insiders sooner rather than later. Buy into big 'ol
Bank of America
, or pick up some
. Ditto for commercial mortgage REITs, like
JER Investors Trust
For my money, energy related limited partnerships provide high and relatively safe dividend yields. This group may not have as high a yield on average as the finance and mortgage-related businesses on my screen, but neither do they have such squirrelly price charts. The relative stability is due to the bullish trend supporting this group.
And I'm not talking about skyrocketing energy prices. These mainly midstream plays don't rely on rising commodity prices for their distributable cash flow. But they have indirectly helped the group. With oil and gas prices so high, once unprofitable sources of these necessities -- like tar sands and shale formations -- are suddenly attractive. These new sources need links to end markets, which has led to a building boom in the midstream industry. And that should increase the volume of product these partnerships move for years to come. More product means more cash flow -- and more cash to distribute to unit holders.
So even though
Enterprise Products Partners LP
Kinder Morgan Management LLC
"only" have indicated yields of 6.7% and 6.9%, respectively, they are more appropriate for the needs of income investors who are looking for relatively safer yields. Expected 10% capital appreciation in these names over the coming year seals the deal for me.
These are pretty conservative choices, but that's what I usually look for in an income play. If you want a bit more excitement with your yield, go for it. But whatever risk level you are willing to shoulder for your yield, using insiders to make your short list of potential income investments is the way to go.
If you like this piece, Jonathan Moreland provides further insights and commentary through his " Insider Insights" newsletter
At the time of publication, Moreland had no positions in the stocks mentioned, although holdings can change at any time.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback;
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