Two Very Different Companies, a 7 Percent Combined Yield

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Whatever the outcome of today's Fed meeting, there is one thing that is for sure. Those who depend on a yield from their investments for income will still be caught between a rock and a hard place. Whether bond purchase reduction begins now or later, and whatever the effect that decision has on stock and bond prices, the ultra-low interest rate policy that the Fed is currently pursuing will remain in place.

The problem this presents is that income from investments is, by definition, a reward for risk. When Treasury and CD rates are low, therefore, income seekers are forced to take on more risk in order to receive sufficient returns. The key to managing that risk is diversification, so I try, every once in a while to identify opportunities outside the mainstream that can be used to "juice" overall returns.

I like to look for stocks that offer a decent yield, but also have some chance at growth and capital appreciation. If you read that quickly, it sounds easy, but of course it isn't. That said, there are a couple of opportunities that I believe fit the bill that, combined, offer around a 7% annual return. There is, as I said, always a risk associated with that kind of return. Both are fairly new issues, so there is no long track record of dividend payment or growth, but in both cases that may be a risk worth taking.

One word of warning, though; both of these stocks, as dividend payers, are subject to short term fluctuations based on the Fed's decision. Waiting for that announcement may make more sense than piling in today.

Coatamare (CMRE)

chart

Costamare is a Greek shipping company. I know that sounds scary, even now, but the "Greek" part can largely be ignored. Where the company is from is largely irrelevant. They own vessels and lease them (usually on long term contracts) to shipping lines. They operate in a global market and an investment is predicated on a belief that recovery from the financial crisis will continue to grind on.

Management at CMRE certainly believes that to be the case. They have continued to grow following their IPO in late 2010. They took delivery of two new ships in August and September of this year that immediately went on long term leases to Evergreen (2603:Taiwan) and are awaiting delivery of two more as the result of a joint venture with York Capital Management. York aren't the only ones to express faith in CMRE; JP Morgan (JPM) recently upgraded the stock to "overweight."

They have consistently beaten analysts' forecasts for EPS, yet have a forward P/E of around 9, significantly lower than the market average, and a yield of around 6%.

StoneCastle Financial Corps (BANX):

BANX is a recent IPO, having begun trading on November 7th this year, and price action has been uninspiring so far. The company has been quite well received by analysts s, however, with both Robert W Baird and KBW rating it "outperform."

StoneCastle is a Registered Investment Company, which means that they pass profits through to investors before taxes. They have a reasonable expense and management fee of around 1.75%, but what makes them of interest to me is the business that they are in. BANX provides capital to regional banks in the form of preferred equity, capital that they need for expansion, whether by growth or acquisition.

This is an underserved area that StoneCastle has some expertise in. The team that will be advising BANX has over 10 years of experience and established relationships. These perpetual preferreds have a decent rate of return, allowing BANX to pay an initial dividend that equates to around an 8% yield.

As you can see, an investment split equally between BANX and CMRE would yield an average of around 7% and satisfy the requirement of diversification, being focused on two very different sectors, shipping and financials. They are not, however, without risks. As stated, most notably anything that is regarded as a dividend stock will suffer in a rising rate environment as the value of the dividend falls relative to bonds. Whenever the Fed begins to exit QE the price will be affected, but for income seeking investors, that caveat applies to anything they buy right now. I don't know about you, but to me that risk seems worth taking for a 7% yield.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Business , Stocks

Referenced Stocks: BANX , CMRE , JPM

Martin Tillier


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