In my quest to diversify my Roth IRA, I ran across a few contenders.  Not one of them fits all my requirements for my search, but sometimes you’ve got to give a little in order to take a little.

Here is a quick synopsis of what I’ve found so far, and I’ll follow up with a more detailed analysis at a later date.

NovaStar Financial (NFI)
NovaStar Financial, Inc (NFI: chart, web) is a specialty finance company. The company originates, purchases, invests in, and services residential nonconforming loans in the United States.

NovaStar stock offers a 16.5% yield, paid out quarterly and has paid out fairly consistently back to 2002 when they started paying out each quarter.

They have a 38% profit margin and maintain a slightly lower operating margin.  They hold a balance sheet with $154 million in cash, and $3.61 billion in debt, which is to be expected with a financial lender.

A sizable drawback to this stock is that their payout is upwards of 193%, which means they are paying out more than they are bringing in. I can’t predict how much longer this strategy can last, but to be sure, it won’t last forever.

In addition, this is a company who is in a sector that is about to take a beating if it hasn’t already.  The housing market is slowing, and it is anticipated that the number of new loans will drop significantly.  In addition, the Fed just stopped raising rates (as evidence from the stock chart clearly shows), which is detrimental to financial and lending institutions.  These points alone make the risk levels in NFI somewhat unattractive.

New Century Financial Corp. (NEW)
New Century Financial Corp (NEW: chart, web) is in much the same position as NovaStar.  The company operates as a real estate investment trust (REIT) in the United States. It originates and purchases mortgage loans through both retail, and wholesale channels.

New Century, much like NovaStar, produces a healthy 16.3% yield and distributes on a quarterly basis.  The payout history dates back to 2002, and has risen consistently from inception.

The company has $364 million in cash, and holds nearly $25 billion in debt.

New Century has a higher institutional holding percentage at just under 75%, which means the individual investor is at the mercy of the larger holding companies.

The payout ratio is much more reasonable at 88%, which leads me to believe the company is more stable from a dividend point of view than NovaStar.

While the numbers are more attractive, the company is still positioned in a sector that is standing on the edge of a cliff.  A slowdown in loans, housing, and interest rate hikes do not bode well for the company in the near term.  Much like NFI, the company stock took a beating upon word that the Fed would pause on interest rate hikes, as seen in the chart.

Frontline Ltd (FRO)
Frontline Ltd (FRO: chart, web) engages in the ownership and operation of oil tankers.  The company primarily transports oil, but also in ore and other solid raw materials.

Being aligned with the oil sector, Frontline has turned a healthy profit recently and maintains respectable profit margins, although no where near the Exxon numbers.

Frontline is paying just under 14% in terms of dividend yield and distributed quarterly, however the number has ebbed and flowed with the price of crude oil back to 2001.

A payout ratio of 109% does not bother me too much, as the company is clearly never hesitant to change the dividend.  While the ratio is a little heavy, the weight is not significant considering the sector they operate in, and thereby the risk is lower than two companies I mentioned above in the financial and lending industry.

While my intentions are to diversify away from stocks leveraged to oil and gas, I believe the demand for oil (and natural gas) transportation will be high for many years to come.  Frontline is well positioned (in the Middle East Gulf, Europe, and South East Asia) to take advantage of global economic growth stemming from China and India.  However they also have ties to the American oil patch through the Louisiana offshore oil port.

Harvest Energy Trust (HTE)
Harvest Energy Trust (HTE: chart, web) is a Canadian investment trust engaged in the acquisition, development, and production of crude oil, natural gas, and natural gas liquids.

Like many other CanRoys (Candadian Royalty Trusts), HTE pays a respectable 12.5%dividend and distributes it monthly, although it has not been around nearly as long as some other trusts, with inception in 2005.

Harvest Energy holds a payout ratio of approximately 80%, which is a moderate number compared to other royalty trusts with higher ratios.

To be honest, I like the idea of HTE, but following my emphasis to get away from pure oil and gas investments, I haven’t put too much time into HTE research, but it’s definitely an attractive contender for a Roth IRA.

Comments
I’ll keep digging on candidates for a high-yield Roth, but at this point, the REITs and companies weighted in finance and lending are really at the highest risk for a downside slide due to economic influences. 

While I want to get away from oil and gas stocks, Frontline looks attractive in the freight and oil transport sector, and while the stock does move with the price of oil, demand for shipping will not go away until the demand for the product goes away.  Maintaining business in high oil demand parts of the world is also attractive.

To be continued…

Disclosure: I own none of the companies mentioned in this post.

Additional Resources
Trust Intelligence Forum (Canadian Royalty Trust Forum)

Leave comments below. Subscribe to Comments