Chasing Yield

As is well documented I like a stock with a good dividend yield. There is something about knowing that even in the event that the stock remains flat you will be collecting some return. In the past I have named favorites like Altria Group (MO) with its healthy +5.8% yield, and AT&T (T) with its equally enticing +5.7% yield. Additionally I have talked at length about the integrated oil companies like Royal Dutch Shell (RDS.A) offering +4.5% yields.

Preferred stocks also offer great yields, but at the expense of stock growth. In the past I was lucky to add preferreds from Deutsche Bank, ING Bank, Ford, and Bank of America all while they were below their call price. More often than not the purchase of these preferred shares is the other way around (see my post from Jan2011), and you actually give up principle for a fixed return over a fixed duration. These can be a great vehicle for fixed income investors (those after retirement), or you can choose to use them as a supplement for low yielding savings accounts. Key point being a savings account is FDIC insured, and these have the risk of 100% loss. (Not a trivial fact!)

So as I scour through the preferred stock listings I have come across a couple that interest me, one with lower risk, the other with much higher risk. As you might have guessed the total returns will reflect those risk levels.

Natl Westminster Preferred (NW-C) is a typical non-cumulative preferred issued at $25/share with a 7.76% coupon rate. The stock is currently trading at $24.01 and can be called at any time (for $25). This gives an effective yield of 8.08%. The troubling thing is that I have been unable to verify if they are in-fact currently paying out the dividend. That makes this a bit of a dice role, I would stand to make $0.99/share if they just buy this back, but I'm really looking to make the dividend of $1.94/yr.

The second option is even more risky. National Bank of Greece Series A (NBG-A) is also typical non-cumulative preferred issued at $25/share with a 9.00% coupon rate. National Bank of Greece carries only a B- credit rating. Unless you've been living under a rock, you are probably aware of the economic troubles in Greece itself. What this has done, is to create an atmosphere of fear (perhaps rightfully so) around this preferred. It is currently trading at only $19.95 Its call date is 6 June 2013, so there is still some time to collect on the dividend. As far as I can verify they did make the last dividend payment. Given the current pricing the actual yield for this more risky play is 11.28%. Moreover, if they were to buyback the preferred shares you would also get about a 20% gain on the principle investment.

There is no doubt that NBG-A is an attractive stock, but the risks are fairly high. This is not an FDIC insured account, and its not even a classic blue-chip stock. There is certainly a fair amount of risk here, and that is reflected in the pricing. Most of the perceived "less risky" preferreds are trading at a premium, so anything trading at a discount must have higher perceived risk. Even NW-C which has a slightly higher credit rating (BB-) is trading at a discount. If the yields were not this big it would be understandable, but the low prices and big yields are a strong indicator of the risks here.

Whiting Petroleum Corp

Whiting Petroleum Corp (WLL) is an E&P Oil and Gas operations company, with primary activates in the continental US. This week Cramer named 3 stocks of companies engaged in exploration in the North Dakota area, which he called an “amazing story”. In 2010 North Dakota produced 113 million barrels of oil, this number is more than double 3 years earlier.

Hot on the heels of my success in Oasis (OAS), I have been looking for another small domestic oil company. I checked out all three Cramer recommendations; EOG Resources (EOG), Whiting Petroleum (WLL), and Continental Resources (CLR). In the end I decided to let the lowest P/E be the deciding factor. EOG had a P/E of 184.09 with and EPS of 0.64, CLR had a P/E of 72.30 on 0.99 EPS, and WLL had P/E of 30 on 2.33 EPS. Picking a growth stock based on lowest P/E is probably not a sound formula for huge success, but the best EPS and lowest P/E of the three jumped out at me and appealed to my “value investor” ideals.

If the trend of higher oil prices, and more demand for local oil continue, then all three of these stocks will likely be winners.