Two Good-Yielding Unconventional Income Stocks

It’s not easy to be an income investor nowadays. Interest rates and yields are low, and when you do finally locate a decent yield, you’re met with warnings that could make a Navy Seal quake with fear. Still, with a bit of strategic creativity, opportunities can be uncovered.

For those who want to get right to the dessert, the stocks are Moelis & Co. ($MC), and investment-banking firm whose stock yields 4.32% and Orchids Paper Products ($TIS), a producer of paper products (mainly paper towels and bathroom tissue), whose stock yields 4.90%. I’ll discuss each company below. But there’s a very important topic I like to cover up front.

Why I’m Writing About These Stocks

I use a strategy that I described here and which will be available shortly (after a mandatory 90-day new-strategy incubation period) on Portfolio123 as the Smart Alpha Equity Income strategy. Like many non-speculative approaches, this one avoids the highest riskiest “junk”-level yields. As to the rest of the income-investor’s universe, the model deemphasizes garden-variety income-strategy metrics (dividend growth, payout ration, etc.) and instead evaluates the riskiness of dividend streams based on a broader but rigorous set of fundamental factors and with market sentiment. In tests, the model has shown itself able to substantially outperform a hypothetical portfolio consisting of three popular equity-income ETFs; Vanguard Dividend Appreciation ($VIG), iShares Select Dividend ETF ($DVY), and Utilities Select Sector SPDR ($XLU).

Table 1 compares the model to the ETFs in terms of basic Portfolio123 rankings for Quality, Value and Momentum.

Table 1

Average score of holdings per Portfolio123 rank for . . .
Quality Value Momentum
Smart Alpha model 67.58 31.34 63.77
VIG 70.81 47.23 59.50
XLU 51.40 16.46 47.88
DVY 58.66 28.97 49.39

In assessing how we should react to these scores (scale is 0, worst to 100, best), Table 2 summarizes some of the initially data presented on October 24th.

Table 2

  Annual % return based on backtest covering Yield % (as of 11/19/15)
15 years 3 Years
Smart Alpha model 11.81 20.24 4.11
Three ETFs as portfolio 5.90 11.90 3.05

What we see is that the model is good in terms of Quality, as it was designed to be and noticeably above two of the ETFs in this respect. But what’s really interesting is Momentum, a ranking system that includes price-based factors as well as others relating to analyst sentiment. That’s important as a gauge of future dividend prospects since it incorporates judgments about the future that cannot be captured by data.

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Disclosure: None.

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