The Low Price/High Yield Portfolio

Today, I want to talk about my little low price/high yield portfolio that I started last summer. It came about because I had some money invested last spring in some short term private corporate bonds that were yielding 7% and matured in three months. Not a bad deal - until I got a notice last summer that the next series were only going to yield 5%. I said to myself, surely I can do better than that with some nice dividend paying stocks. The idea was to find some stocks that would give me at least the 7% yield I had been getting on my bonds and also potentially provide some capital appreciation. That would be icing on the cake.

So I did a stock screen for stocks that yielded 7% or better, had at least 300,000 average volume, were priced under $6, and were technically oversold. The volume is important because it helps narrow spreads and assures you of some liquidity. Why low price? Simple - choosing low price stocks allows me to buy more than one round lot of each and that gives me more flexibility in how to play the trade. I can buy or sell fractional positions that way as the price changes. My little trading account is too small to do that with a $50 or $80 stock.

So here's what I came up with, back in July (the prices and dividends are as of today):

Symbol Price Dividend Name

AOD 5.83 11.32% Alpine Total Dynamic Dividend Fund
CIM 4.02 17.91% Chimera Investment Corporation
RSO 6.54 15.29% Resource Capital Corp.
NRF 4.12 9.71% NorthStar Realty Finance Corp.
SPIL 5.13 15.80% Siliconware Precision Industries Co. Ltd.

A financial, a property management, two REIT's and a tech. That's fairly diversified and avoids putting all my eggs in one basket. And it yields an average of 14.01%. That's not quite the 35% return I'm getting on my swing trading, but it handily beats the 7% I was getting with those bonds. Plus, since buying these last summer, I now have just over 6% of my original investment in capital gains, which increases my yield even more, and provides some cushion against market downturns. Even if all these stocks do is break even, I'm still making money.

Since last summer, I've added three more names to the LP/HY portfolio: DHY, JRO, and ANH.

Here they are:

ANH 6.91 13.31% Anworth Mortgage Asset Corporation
DHY 2.95 10.78% Credit Suisse High Yield Bond Fund
JRO 11.83 6.59% Nuveen Floating Rate Income Opportunity Fund

Another REIT and two bond funds. And technically, JRO, trading at 11.83 isn't all that "low price", but it rates as an honorary member of the portfolio because it pays its 6.59% dividend monthly rather than quarterly. And as we all know, it's always better to get paid sooner than later.

Of course, with dividends averaging well north of 10%, you might wonder if this portfolio is risk-free. Of course not. With this kind of return, there's always a risk involved. The risk comes in two flavors: one, the company could decide to issue new stock, thus diluting existing shareholders. CIM recently in fact did just that dropping from 4.04 to 3.86 in one day. Interestingly, however, two days later it was trading right back at the level it had been before the announcement.

The other big risk is that a company will cut its dividend. That hasn't happened yet here, but I think I now have enough diversity and profit to guard against that. Unfortunately, both of these risks tend to pop up suddenly and without warning. On the other hand, risk and profit go hand in hand. Going for higher yields always implies taking higher risk. That's why I'm not 100% invested in CIM, the highest yielder of the group.

And if my trading generates a better yield than this, why bother with this particular strategy? Because this portfolio doesn't care if I had a good week or bad - the return is always there (obviously modulo the caveats above). I'm not saying to buy any of these, but they're all at least worth a look. Just some food for thought.