These Three Stocks Are Better Than High Risk Bonds

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investor demand for high-yielding investment options has led to the return of collateralized debt obligations (CDOs). These high risk, financially engineered products were partly to blame for the financial crisis. Investors willing to take on added risk for more yield would be better served looking at no-debt dividend payers like Garmin (NASDAQ: GRMN), Intersil Corporation (NASDAQ: ISIL), and Friedman Industries (NYSEMKT: FRD).

Too Much Risk

Interest rates near all time lows are leaving investors searching for yield. This trend has pushed up valuations on income-oriented assets. Wall Street doesn't let demand go unsatisfied, so the financial alchemists brought back collateralized debt obligations.

Essentially, these securities pool a collection of assets and break them into different parts. The highest risk aspects of the CDOs carry high yields, while lower risk pieces come with low yields. With yield in demand, investors have proven very willing to move up the risk spectrum.

Riskier and more complex bond-backed securities, however, probably aren't worth the effort. Investors tempted to reach for higher-risk fare in the fixed-income space should take a look at higher-risk dividend paying stocks that have no debt instead.

Getting There

GPS specialist Garmin's top line ballooned between 2003 and 2008, going from about $500 million to nearly $3.5 billion. The top line has since fallen back, however, and is now hovering around $2.7 billion. GPS demand isn't the problem. In fact, people love GPS products so much that they are being integrated into devices like cell phones. That's led to a drop off in demand for Garmin's stand alone offerings.

Car-based GPS devices make up around half of the company's business, so it is trying to work its way into the highly competitive auto supplier market. That would be a huge win, but is far from a certain success. In the meantime, the company has found traction in niche markets like sports gear. Plus, it still has pricing power because of its strong brand image. This should give Garmin time to figure out how to shift back into growth mode.

In the meantime, the company has been returning value to shareholders via dividends and share repurchases. An around 5% dividend yield supported by a debt-free and well-known company working through a tough patch should interest aggressive income investors.

Chip Troubles

Intersil is a chip maker. That business has seen a cyclical slowdown over the last year or so, but one that may be starting to turn. However, Intersil is something of a hybrid company. It makes the simple chips that are found in everyday items like remote controls and far more specialized chips for products like personal computers (PCs). On some level, it is like a much smaller version of Texas Instruments.

However, being smaller in the chip space isn't a good thing. Moreover, its exposure to the PC market is a drag since tablet computers like Apple's iPad and Samsung's Galaxy have led to weak PC sales. Revenue has fallen from $770 million in 2008 to $608 million last year, when the company lost $0.30 a share.

This is clearly not an investment for the feint of heart. However, it has reliably paid a quarterly dividend of $0.12 a share since the start of 2008. And, as of the first quarter, the company had no long-term debt. On the plus side, the company is restructuring to align production with lower sales levels. Assuming it can do that successfully, investors could lock in an around 5.9% yield.

The Piper Pays

Friedman Industries is in the steel industry. It makes and sells hot-rolled steel coils and steel pipe. It is a very small player in the industry, but has a long history. That said, with no debt on the balance sheet, it is actually in better financial shape than many of its larger peers.

Revenues and earnings took a hit in 2010, but have since come back strongly. Like all steel companies, Friedman is a cyclical business that goes through good times and bad times. That said, despite the tough market in 2010, the company still made money, which shows that having no debt is a big benefit in a tough market. The dividend, meanwhile, tends to rise and fall with the success of the business.

The company pays a quarterly dividend of $0.08 per share, which equates to a yield of around 3.2%. However, it also paid a special dividend of $0.50 last year. A special dividend of that magnitude in 2013 would more than double the yield.

Bond-Like Investments

If the low interest rate environment has tempted you to buy into higher-risk bonds, step back and take a second look at stocks. Finding higher-risk stocks without debt could be a better idea. GPS specialist Garmin is looking for ways to grow again, Intersil is revamping its chip business, and Friedman Industries chugs along in the steel industry. Having no debt gives them all staying power and ample backing to support their notable yields.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus