3 High-Yield Stocks To Hedge Expected Volatility In 2015

As the Fed signals the end to its interest rate manipulation program and consequently encourages risk-taking, market performance will no longer be determined by Washington’s policies and Fed intervention. The stage seems set for a reversion to “normal,” but it’s a new “normal” that will probably not support high future returns. The basic focus will return to corporate earnings and other fundamentals.

Safety in Dividends

Amid all this, investors who wish to ride out the imminent market volatility with safe, stable returns see an income desert. Fed intervention has rendered bond yields so low that they can barely keep up with inflation, let alone provide any meaningful returns.

In this scenario, dividend stocks assume greater importance as they usually generate a stable and consistent source of income, in contrast to stock prices that fluctuate daily.

However, it is a cumbersome task to sift through thousands of dividend-paying stocks and determine which ones to add to one’s portfolio. Furthermore, important considerations such as sustainability, growth prospects and valuation should be factored in while choosing the stocks.

3 Exclusive Dividend Plays for 2015

Here we have selected three dividend stocks for you that have yielded north of 15% in 2014, and are undervalued relative to peers. Banking on a favorable Zacks Rank and high dividend yields, these stocks look solid income bets now.

AES Tietê S.A. (AESAY)

AES Tietê S.A., an independent energy producer in Brazil, generates and distributes electric power. This utility company has a consistent dividend history and is undervalued relative to its peers in terms of Price/Cash Flow (P/CF) ratio. Its strong cash flow generation capacity, combined with a high payout ratio, bodes well for its future dividend paying capacity. Poor hydrology and rising rationing risks have put pressure on the stock this past year, and the current price seems like a good entry point to take advantage of the potential upside in this stock.

2014 Dividend Yield =16.9%
P/CF Ratio = 2.2 (Industry P/CF Ratio = 8.6)
Zacks Rank #3 (Hold)

Oxford Lane Capital Corp. (OXLC)

Oxford Lane Capital is a closed-end fund that holds highly leveraged tranches of collateralized loan obligations (CLOs). It buys CLOs at substantial discounts, with a roughly 3% spread under clauses that leverage them up to 8-9 times. This generates returns of roughly 30%, of which 14%–15% is returned to shareholders. The fund has an impressive track record of solid performances and a consistent dividend history.

2014 Dividend Yield =16.3%
Zacks Rank #3 (Hold)

Prospect Capital Corporation (PSEC - Snapshot Report)

Prospect Capital is an investment company that lends to and invests in private and micro-cap public businesses. The company has been attempting to lower its risk profile by increasing its allocation to the relatively-safer first-lien loans. The company recently cut its dividend by almost 25% to reflect its improved risk and return profile. However, despite the cut, the company’s consistent dividend payment history and good valuation relative to peers make it a good investment opportunity. Prospect Capital has also been seeing substantial buying from company insiders, which reinforce the company’s future prospects.

2014 Dividend Yield =16%
P/CF Ratio = 6.9 (Industry P/CF Ratio = 13.2)
Zacks Rank #3 (Hold)

To Conclude

As 2015 unfolds and the market processes the complex factors at play, investors can take the back seat and enjoy stable returns with these proven dividend picks.

Note: P/CF Ratios have been calculated for the most recent fiscal years of the respective companies.

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