It's exciting to see the major stock indexes breaking through to new highs. The icing on the cake? Dividend stocks are also setting new records.
As an income investor, I see only one downside to this rosy picture: It's becoming much harder to find reasonably priced stocks that are also high-yield bargains.
When market valuations soar to lofty levels, choosing income stocks by using traditional metric such as the price-to-earnings (P/E) ratio becomes more difficult. The SPDR S&P Dividend (NYSE: SDY) fund, which closely mirrors the S&P High Yield Dividend Aristocrats Index (SPHYDATR), is trading at a rich 17 times earnings.
With the market at this level, nearly all dividend stocks appear overpriced based on P/E. But there is a better tool that investors can use when the market heats up. This ratio is similar to P/E, but it takes information such as the company's earnings growth rate and dividend yield into account.
I'm talking about PEGY.
This ratio is calculated by adding a company's earnings growth rate (G) to its dividend yield (Y), and then dividing the P/E ratio by the sum of the two: (P/E) / (G + Y). A PEGY ratio close to or less than 1 generally indicates a good value.
Last month, my StreetAuthority colleague Carla Pasternak, the chief strategist of High-Yield Investing, ran a screen for high-yield stocks that were also trading at a reasonable PEGY. Carla calculated PEGY using a one-year projected growth rate and a trailing 12-month P/E.
Here are some high-yield prospects Carla found to be modestly priced based on PEGY.
| Medallion Financial Corp. Yield: 6% PEGY: 1.1 |
 This specialty finance company operates in an unusual niche. Medallion (Nasdaq: TAXI) is a leading financier for purchases of taxicab medallions, which are required to license taxis in some cities.
For instance, in New York City, the country's largest taxi market, taxi medallions sell for more than $225,000 each, and the value of all taxi medallions exceeds $3 billion. Medallion has an estimated 25% share of the New York market and is rapidly expanding into other major metropolitan areas. The company and its subsidiaries have lent about $5 billion to the taxicab industry and other small businesses.
Medallion is thriving due to its low cost of funds, strong demand for loans and a solid credit performance, with portfolio delinquencies at exceptionally low levels. Last year, the company earned $24.5 million, or $1.21 per share, up 28% from 2011. Medallion's managed assets also hit an all-time high last year of $1.22 billion, and delinquent loans fell to less than 0.5%.
With a return on assets of 2.9%, Medallion ranked in the top 1% of all U.S. banks last year. Analysts expect Medallion to deliver 5% growth next year and 10% growth in each of the next five years.
In December, the company increased its dividend 10% to an annualized rate of 88 cents, a yield of 6%. Medallion has been a great holding in the past 10 years, returning on average 24% a year to investors.
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| FLY Leasing Yield: 5% PEGY: 0.9 |
.gif) Another niche financing company that PEGY shows to be a bargain is FLY Leasing (NYSE: FLY).
FLY is one of the world's leading lessors of commercial aircraft. The company owns a fleet of 109 jets, which are leased under multi-year operating leases to 55 airlines in 32 countries.
In the past two years, FLY has doubled the size of its aircraft portfolio while booking gains from the opportunistic sale of older jets. As a result, the portfolio now consists of modern, fuel-efficient aircrafts such as the Airbus A319 and A320 and the Boeing 737-700/800.
FLY's lease utilization averages 94%. The company profits from carriers replacing their aging fleet (the average age of a commercial aircraft is 14 years). In addition, Boeing's battery fiasco with its new Dreamliner aircraft could benefit FLY by delaying purchases and deliveries.
FLY posted impressive results for the first quarter of 2013. Earnings per share (EPS) rose 32% from the same period a year earlier, to $1.37. At $38.5 million, income was 44% higher than a year ago. In addition, FLY generated nearly $200 million of free cash flow during the quarter, which will be used to further expand its fleet.
FLY also boosted its dividend 10% last year to an annualized rate of 88 cents currently yielding 5.4%. Payout at 47% allows for more dividend growth. While consensus analyst estimates look for only 4% earnings growth next year, FLY has handily beat estimates two quarters in a row. In addition, modest growth is priced into the stock, which trades at a P/E of 7 and at a 20% discount to book value. FLY shares are up roughly 30% in the past 12 months.
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| TAL International Group Yield: 7% PEGY: 0.8 |
 TAL (NYSE: TAL) is one of the world's largest lessors of intermodal freight containers. The company's fleet consists of 1.2 million containers, which are used to ship manufactured components, perishable items, building products and bulk liquids such as chemicals.
The company's first-quarter pre-tax income set a new record at $54.7 million. Earnings improved 14% from the same period last year, to $37.5 million, or $1.12 per share.
TAL is investing aggressively and recently purchased $350 million of new containers for delivery this year. Analysts look for 6% earnings growth from TAL next year and annual growth averaging 10% for the next five years.
TAL increased its annual dividend by 3% in April to $2.64 per share. This was the eighth dividend increase in nine quarters. Payout is 60%, and shares yield 6.5%. In the past five years, this reliable performer has nearly doubled its share price.
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Risks to Consider: Medallion's status as a regulated investment firm requires the company to distribute at least 90% of its income to investors. That makes Medallion reliant on debt or equity financing for growth. FLY has been steadily reducing its financial leverage, but the company's debt remains high at $2 billion and 78% of capitalization.
Action to Take --> My top pick overall is Medallion. This company boasts an industry-leading market share in a profitable niche market and industry-leading profitability. Income investors should consider TAL for its frequent quarterly dividend hikes, and value investors may find FLY the best bargain of the three.
P.S. -- We call them Retirement Savings Stocks. They can hand you a "second income" as much as 14 times what you can get with CDs, seven times higher than bonds, and as much as three times higher than brand-name Dow stocks. To learn more about them, go here.
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