Whether the Federal Reserve should or shouldn't raise U.S. interest rates, one thing is certain: If you're looking for income, the bond market is not your friend.
To pocket yield nowadays, you have to get creative. And while a lot of high-yield income investments are high-risk, a few stocks with fat yields look like big opportunities for investors right now. Here are my three favorite unloved income producers:
Fifth Street Finance Corp.
- Dividend Yield: 12.6%
- Industry: Business Development Company
- Market Cap: $830 million
- YTD Performance: -11% vs. 5% for the S&P 500 (.SPX)
Fifth Street Finance Corp. (FSC) is a business development company (BDC). In a nutshell, a BDC is a specialty finance company that lends to and invests in smaller companies, similar to how private equity firms operate. BDC stocks have been broadly coming into favor lately as the quest for yield continues, since the reliable cash flow from the debts and underlying investments often comes back to shareholders via huge dividends — as evidenced by the 12.6% payout of Fifth Street Finance, which actually is distributed monthly instead of quarterly.
The company's stock hasn't been such a slam dunk. Shares have drifted lower in recent years, and Fifth Street Finance currently trades for less than half of its 2013 highs.
BDCs have lost steam due to expectations of rising rates that began in 2015 and has continued with the recent FOMC meeting. Furthermore, a fear of credit issues sapping payouts is real for BDCs such as Fifth Street, which are comprised mainly of loans to small companies that could be hit hard by an economic downturn.
That said, investor fears likely are overblown when it comes to Fifth Street Finance at least. Not only does the stock's huge dividend yield give investors ample wiggle room, but the continued decline in the shares means the stock now trades at about 65% of book value. The majority of its portfolio is senior secured debt that gets a BBB- or better rating — making it investment-grade, not junk. Lastly, its portfolio is diverse, including loans to healthcare companies, aviation firms and even a cybersecurity company that does website authentication.
Brookfield Global Listed Infrastructure Income Fund
- Dividend Yield: 10.8%
- Industry: Infrastructure
- Market Cap: $180 million
- YTD Performance: +11%
Brookfield Global Listed Infrastructure Income Fund (BGLAX) is not a stock, but a closed-end fund. This particular fund invests in pipelines, airports, toll roads and other infrastructure that generates income.
An interesting thing about closed-end funds is that after they raise a fixed amount of capital with a limited number of shares via an initial offering, their performance is based on the value (or perception of value) of their portfolio of underlying investments. And right now, oddly enough, Brookfield is trading at a double-digit discount to its net asset value.
10 stocks yielding up to 4.3%
Some of this may be because investors are pessimistic about underlying energy infrastructure investments, since around 20% of the fund is invested in pipelines and another 17% of assets is committed to master limited partnerships (MLPs). But there's also a large percentage of the fund earmarked to relatively more stable investments including telecom infrastructure, water utilities, airports, and toll roads.
Shares of the fund are up so far in 2016, and the generous yield makes it worth a look for income investors. While there is volatility in energy, exposure to public infrastructure is one of the surest income streams available.
General Motors Co.
- Dividend Yield: 4.8%
- Industry: Autos
- Market Cap: $51 billion
- YTD Performance: -7%
Investors have worried about General Motors Co. (GM) for a while now, with concerns ranging from liability risks in the wake of its ignition switch recall to fears that the current car-buying cycle is post-peak.
But with new car sales volume in the U.S. running neck-and-neck with 2015's record year — GM is pacing between 17.4 million to 17.8 vehicles vs. 17.5 million last year — it's hardly like GM faces a drought. As MarketWatch's Claudia Assis reported a few weeks ago, automakers "don't want to push volumes for the sake of pushing volumes," so customers are not seeing deep discounts and incentives that would eat into GM's and other automakers' margins.
So why all the doom and gloom? GM beat expectations in both its April and July earnings reports, and the stock just got an upgrade from Morgan Stanley.
Plus, GM is no overvalued dividend stock with a risky payout. The shares sport a rock-bottom price-to-earnings ratio of less than 6.0, based on projected 2017 profits, and the company is set to pay out just 27% of its earnings in dividends.