For any of you who have read Sir Arthur Conan Doyle's
"Sherlock Holmes" stories, you know the famous detective uses the
power of observation, deductive reasoning, and extensive research
to solve complex mysteries.
But the fictional detective also occasionally relied on a
group of street children that the public mostly ignored. Holmes
called them "The Baker Street Irregulars."
I bring this up because Wall Street has its own version of
these ignored "street urchins," stocks that the public mostly
ignores, but are invaluable to those who use them.
I call them "Wall Street Irregulars," and like their
namesakes, they tend to stay under the radar.
It's a group of high-yield income investments that pay a
modest dividend every quarter, but also have a track record of
paying a significantly higher "irregular" dividend one quarter
out of every year.
But many everyday investors have no idea about these stocks
because of the way brokerages and financial website calculate
For the "Wall Street Irregulars," the yield investors see
often underestimates the true annual yield of the stock. Below
I've listed some irregulars, showing the "posted" yield -- the
yield you'll see listed on a financial website -- versus the
trailing yield -- the yield based on the company's actual
dividend payments over the last 12 months.
As this table shows, "posted yields" can be deceiving. In
fact, these stocks have actually been paying dividend yields that
are three or four times higher than what financial websites are
When I search for a potential holding in my
advisory, I normally look for a security with a predictable and
frequent dividend stream. But if you have some flexibility, there
are some advantages to owning an "irregular."
RLI Corp. (
for example. RLI is a specialty insurance company with a stellar
track record, delivering profits for the past 17 consecutive
years and paying a dividend for 148 consecutive quarters. RLI has
been paying an irregular dividend payment for the past three
The latest irregular dividend was $5.32 per share, up a smidge
from the $5.30 it paid the previous year. If RLI maintains both
its regular and "irregular" distributions, shareholders will see
a yield of 7.6% at today's prices.
There is no guarantee that RLI will pay as generous an
"irregular" dividend as it did last year. But the last three
years have set a precedent that I believe management would like
Most of the irregulars, like RLI, pay their large dividend
near the end of the year. Predictably, investors flock to these
stocks when the size of the large dividend is declared, driving
up the share price. Investors can get a better price -- and a
better yield -- by getting a jump on the crowd. So this is an
especially good time of year to shop for irregulars.
A few months ago, I wrote about the scores of new investors
flooding into traditional dividend-paying stocks. Who can blame
them, when a savings account is yielding less than 0.5%?
As a result, however, the prices of traditional
have risen -- and the yields have fallen. In many cases, these
stocks have been priced for perfection. And there can be downside
risk when these companies deliver less than perfect results. For
instance, shares of consumer staples company Procter & Gamble
) tumbled 6.6% on April 24, after the company projected lower
profits than Wall Street expected for the quarter ending June
When traditional income investments get crowded, there is an
advantage in looking beyond what everyone else is looking at. In
March, for example, I told my
readers to look at the technology sector, which had been all but
ignored in this year's market rally.
Now, I'm looking at dividend stocks that aren't normally
noticed for their income potential. They represent diverse
businesses that pay much higher dividend yields than what's
posted on mainstream financial websites. The one thing they have
in common is their rising "irregular" dividend payments -- which
gives them "hidden" yields of 6.1%, 7.7%, 10% or higher.