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Monday, October 7, 2013 - 11:30

The High-Yield Stocks Nobody Is Talking About

Monday, October 7, 2013 - 11:30am

For any of you who have read Sir Arthur Conan Doyle's "Sherlock Holmes" stories, you know the famous detective uses the power of observation, deductive reasoning, and extensive research to solve complex mysteries.

But the fictional detective also occasionally relied on a group of street children that the public mostly ignored. Holmes called them "The Baker Street Irregulars."

I bring this up because Wall Street has its own version of these ignored "street urchins," stocks that the public mostly ignores, but are invaluable to those who use them.

I call them "Wall Street Irregulars," and like their namesakes, they tend to stay under the radar.

It's a group of high-yield income investments that pay a modest dividend every quarter, but also have a track record of paying a significantly higher "irregular" dividend one quarter out of every year.

But many everyday investors have no idea about these stocks because of the way brokerages and financial website calculate yield.

For the "Wall Street Irregulars," the yield investors see often underestimates the true annual yield of the stock. Below I've listed some irregulars, showing the "posted" yield -- the yield you'll see listed on a financial website -- versus the trailing yield -- the yield based on the company's actual dividend payments over the last 12 months.

As this table shows, "posted yields" can be deceiving. In fact, these stocks have actually been paying dividend yields that are three or four times higher than what financial websites are reporting...

When I search for a potential holding in my Daily Paycheck advisory, I normally look for a security with a predictable and frequent dividend stream. But if you have some flexibility, there are some advantages to owning an "irregular."

Take RLI Corp. (NYSE: RLI) for example. RLI is a specialty insurance company with a stellar track record, delivering profits for the past 17 consecutive years and paying a dividend for 148 consecutive quarters. RLI has been paying an irregular dividend payment for the past three years.

The latest irregular dividend was $5.32 per share, up a smidge from the $5.30 it paid the previous year. If RLI maintains both its regular and "irregular" distributions, shareholders will see a yield of 7.6% at today's prices.

There is no guarantee that RLI will pay as generous an "irregular" dividend as it did last year. But the last three years have set a precedent that I believe management would like to maintain.

Most of the irregulars, like RLI, pay their large dividend near the end of the year. Predictably, investors flock to these stocks when the size of the large dividend is declared, driving up the share price. Investors can get a better price -- and a better yield -- by getting a jump on the crowd. So this is an especially good time of year to shop for irregulars.

A few months ago, I wrote about the scores of new investors flooding into traditional dividend-paying stocks. Who can blame them, when a savings account is yielding less than 0.5%?

As a result, however, the prices of traditional dividend stocks have risen -- and the yields have fallen. In many cases, these stocks have been priced for perfection. And there can be downside risk when these companies deliver less than perfect results. For instance, shares of consumer staples company Procter & Gamble (NYSE: PG) tumbled 6.6% on April 24, after the company projected lower profits than Wall Street expected for the quarter ending June 30.

When traditional income investments get crowded, there is an advantage in looking beyond what everyone else is looking at. In March, for example, I told my Daily Paycheck readers to look at the technology sector, which had been all but ignored in this year's market rally.

Now, I'm looking at dividend stocks that aren't normally noticed for their income potential. They represent diverse businesses that pay much higher dividend yields than what's posted on mainstream financial websites. The one thing they have in common is their rising "irregular" dividend payments -- which gives them "hidden" yields of 6.1%, 7.7%, 10% or higher.

If you want to learn more about these "hidden high-yielders" -- including how to start collecting some of your own before the rest of the crowd notices them, check out this special report

Amy Calistri does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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