It's exciting to see the majorstock indexes breaking through
to new highs. The icing on the cake?Dividend stocks are also
setting new records.
As anincome investor, I see only one downside to this rosy
picture: It's becoming much harder to find reasonably priced
stocks that are also high-yield bargains.
Whenmarket valuations soar to lofty levels, choosingincome
stocks by using traditional metric such as the price-to-earnings
(P/E ) ratio becomes more difficult. The
SPDR S&P Dividend (
fund , which closely mirrors the
S&P High YieldDividend Aristocrats Index
, is trading at a rich 17 timesearnings .
With the market at this level, nearly all dividend stocks
appear overpriced based on P/E. But there is a better tool that
investors can use when the market heats up. This ratio is similar
to P/E, but it takes information such as the company's earnings
growth rate anddividend yield into account.
I'm talking about PEGY.
This ratio is calculated by adding a company's earnings growth
) to its dividend yield (
), and then dividing the P/E ratio by the sum of the two: (P/E) /
(G + Y). A PEGY ratio close to or less than 1 generally indicates
a good value.
Last month, my StreetAuthority colleague Carla Pasternak, the
chief strategist of
, ran a screen for high-yield stocks that were also trading at a
reasonable PEGY. Carla calculated PEGY using a one-year projected
growth rate and a trailing 12-month P/E.
Here are some high-yield prospects Carla found to be modestly
priced based on PEGY.
Medallion Financial Corp.
Yield: 6% PEGY: 1.1
This specialty finance company operates in an unusual
Medallion (Nasdaq: TAXI)
is a leading financier for purchases of taxicab medallions,
which are required to license taxis in some cities.
For instance, in New York City, the country's largest
taxi market, taxi medallions sell for more than $225,000
each, and the value of all taxi medallions exceeds $3
billion. Medallion has an estimated 25% share of the New
York market and is rapidly expanding into other major
metropolitan areas. The company and its subsidiaries have
lent about $5 billion to the taxicab industry and other
Medallion is thriving due to its low cost offunds ,
strong demand forloans and a solidcredit performance, with
portfolio delinquencies at exceptionally low levels.
Lastyear , the company earned $24.5 million, or $1.21 per
share, up 28% from 2011. Medallion's managed assets also
hit an all-time high last year of $1.22 billion, and
delinquent loans fell to less than 0.5%.
With a return on assets of 2.9%, Medallion ranked in the
top 1% of all U.S. banks last year.Analysts expect
Medallion to deliver 5% growth next year and 10% growth in
each of the next five years.
In December, the company increased its dividend 10% to
an annualized rate of 88 cents, ayield of 6%. Medallion has
been a great holding in the past 10 years, returning on
average 24% a year to investors.
Yield: 5% PEGY: 0.9
Another niche financing company that PEGY shows to be a
FLY Leasing (
FLY is one of the world's leading lessors of commercial
aircraft. The company owns a fleet of 109 jets, which are
leased under multi-year operating leases to 55 airlines in
In the past two years, FLY has doubled the size of its
aircraft portfolio while bookinggains from the
opportunisticsale of older jets. As a result, the portfolio
now consists of modern, fuel-efficient aircrafts such as
the Airbus A319 and A320 and the Boeing 737-700/800.
FLY's lease utilization averages 94%. The company
profits from carriers replacing their aging fleet (the
average age of a commercial aircraft is 14 years). In
addition, Boeing's battery fiasco with its new Dreamliner
aircraft could benefit FLY by delaying purchases and
FLY posted impressive results for the first quarter of
2013.Earnings per share (EPS) rose 32% from the same period
a year earlier, to $1.37. At $38.5 million, income was 44%
higher than a year ago. In addition, FLY generated nearly
$200 million offree cash flow during the quarter, whichwill
be used to further expand its fleet.
FLY also boosted its dividend 10% last year to an
annualized rate of 88 cents currently yielding 5.4%. Payout
at 47% allows for more dividend growth. While
consensusanalyst estimates look for only 4% earnings growth
next year, FLY has handily beat estimates twoquarters in a
row. In addition, modest growth is priced into the stock,
which trades at a P/E of 7 and at a 20% discount tobook
value . FLYshares are up roughly 30% in the past 12
TAL International Group
Yield: 7% PEGY: 0.8
is one of the world's largest lessors of intermodal freight
containers. The company's fleet consists of 1.2 million
containers, which are used to ship manufactured components,
perishable items, building products and bulk liquids such
The company's first-quarter pre-tax income set a new
record at $54.7 million. Earnings improved 14% from the
same period last year, to $37.5 million, or $1.12 per
TAL is investing aggressively and recently purchased
$350 million of new containers for delivery this year.
Analysts look for 6% earnings growth from TAL next year and
annual growth averaging 10% for the next five years.
TAL increased its annual dividend by 3% in April to
$2.64 per share. This was the eighth dividend increase in
nine quarters. Payout is 60%, and shares yield 6.5%. In the
past five years, this reliable performer has nearly doubled
its share price.
Risks to Consider:
Medallion's status as a regulated investment firm requires
the company to distribute at least 90% of its income to
investors. That makes Medallion reliant ondebt orequity financing
for growth. FLY has been steadily reducing its financialleverage
, but the company's debt remains high at $2 billion and 78%
Action to Take -->
My top pick overall is Medallion. This company boasts an
industry-leadingmarket share in a profitable niche market and
industry-leading profitability. Income investors should consider
TAL for its frequent quarterly dividend hikes, and value
investors may find FLY the best bargain of the three.