There is always room in a portfolio I manage for something that has a high yield that does not correlate highly to the U.S. stock market.

Last week Babcock and Brown Air ( FLY) debuted. This company will take the proceeds from its IPO to buy a fleet of 47 planes that it will lease to airlines all over the world.

The idea is to have leases of varying lengths and terms and then pay sizeable dividends to its share holders. FLY will pay a dividend of $0.50 per quarter, which works out to an 8.7% yield.

While I may be the last to know, it turns out there are several other public companies in essentially the same business.

Your first thought might be that the airline industry is a mess. While that is true in the U.S., it is a different ballgame in India, China and South America. Short flights in these places are now accessible to many more people than in the past and the airlines serving these markets need airplanes. Leasing them from FLY and its competitors ties up less capital than buying a whole fleet.

In addition to FLY, I was able to find three other companies that lease planes to airlines, although there may be others.

All three are fairly new companies, but the oldest is Aircastle ( AYR), which debuted in August of last year. As of year-end, AYR had a fleet of 69 planes leased to airlines in countries as disparate as Iceland, Turkey and Sri Lanka, among many others.

Like all of these companies, AYR has a lot of debt, just over $2 billion compared to its $2.25 billion market cap. It yields 7.7% but earns less than the dividend it pays out (this is not unique in this group of names) and last week it filed for a secondary offering, which knocked the stock down 5%.

AYR has a 0.386 correlation to the S&P 500.

Genesis Lease ( GLS) has slightly fewer jets, 43. GLS is the smallest company of the three, with an $896 million market cap, but has comparatively large debt load of $1.5 billion. It yields 7.6%. Again, the company's earnings don't quite cover the dividend payment. This is a new company and, candidly, none of its numbers look very good.

However, General Electric ( GE) owns an 11% stake. While it is tough to say what kind of stock GLS will be, GE didn't invest because it thought GLS is a bad company.

GLS has a 0.398 correlation to the S&P 500.

The stock I find most promising is AerCap Holdings ( AER). It has the largest fleet of the bunch leased to 88 clients in just about every country you can think of (the company's Web site lists all of its clients).

Like the others, it has a lot of debt: $3 billion, compared with a market cap of $2 billion. It trades at a much more conservative valuation of two times sales, compared with eight times sales for AYR and five times for GLS.

AER has a 0.442 correlation to the S&P 500.

The reason I think AER is promising is that it pays no dividend and has no plans to pay a dividend. Aircraft leasing is a complicated and capital-intensive business. AER benefits by not having to return more than it earns to shareholders as a dividend the way that AYR and GLS do. Simply put, AER appears to be a more conservative company.

All three stocks are volatile -- really volatile.


Turbulent Skies
Aircraft leasing stocks are volatile
Click here for larger image.

The market panic that occurred this summer was a great stress test; it showed just how rough things can get for heavily indebted companies when fixed-income market seize up. It stands to reason that debt-intensive companies could be in real trouble if they cannot access interim financing. Whether this was perception or reality, all three stocks dropped 25%-30% in about six weeks (bottoming out on Aug. 16).

So far, they have come back about half way. Interestingly, AER, my favorite, has lagged on the way back after missing estimates for second-quarter earnings by a penny.

All three stocks seem to be very well liked by the few analysts who cover them. Earnings and revenue estimates all look to be quite healthy as well. What makes investing in this space difficult is the fact that these companies are starting out with so much leverage, but the expected growth of air travel in the markets where they operate are very compelling.

It's estimated at 6%-11% a year compared with below 5% in the U.S. The dynamic between debt and growth should make for continued volatility as the space matures.

Given this volatility, I would suggest anyone interested in any of the names take a very small position.
At the time of publication, Nusbaum was had no positions in any of the four companies in this article, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.