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Safe, High-Yield Investments Are Scarce

ByTim Melvin, RealMoney.com Contributor

You can color me mildly surprised. I was looking for more aggressive income ideas to write about and I set to work early running my usual screens searching for safe and cheap stocks that have generous dividends. As I sipped my coffee, I found that the pickings in this class of equities are very slim right now. The rapid run-up in the stock market since September has carried many of my old standby income stocks above asset value and they are no longer cheap enough to buy. Names such as Invesco Mortgage and Solar capital have done well for income buyers this year but they no longer trade below asset value. Both of these former favorites have recently taken advantage of the strength in their share price to raise capital above net asset value. So for now, I think income-oriented investors will have to wait for a chance to enter these stocks. Fly Leasing , formerly known as Babcock and Brown Air, has been on my income list for some time now. This stock is still trading at just 80% of tangible book value, so it can still be bought. At the current price, the shares yield a little over 6%. The company is doing a lot of things right. Management has raised cash flow by 50% in the last year and sold several older aircraft to build the cash on the balance sheet; they also continued to buy back stock in the open market. Plus, 55 of the company's 59 aircraft are under lease with the average lease having another 4.4 years until renewal. I like this company, but let Mr. Market work for you. The company's cost of repurchased stock is lower than the current price, so I would suggest you wait for a little bit of a pullback before adding this name to your portfolio. Moving on, I ran a modification of my basic Schloss screen -- in addition to looking for stocks that trade below book value with reasonable dividend yields. This was only slightly more productive. One of my favorite stocks for the year ahead made the list. Shares of American National Insurance are still cheap enough to buy at current levels. The company trades at just 60% of tangible book value and has a yield of 3.7%. Kansas City Life still makes the cut as the stock is priced at 50% of tangible book value and is yielding 3.3% at current levels. I expect to see a mergers-and-acquisition (M&A) wave work its way through the insurance industry next year and that should raise valuations across the board. In all, there were fewer companies on this list that I can recall since the late 1990s. I decided to venture further afield and steal from my fellow contributors in the search for income ideas. Jonathan Moreland wrote an excellent column here on RealMoney not too long ago in which he suggested buying the high-yielding shares of Chimera based on positive activity by the insiders and the stock's very high yield. He pointed out the market Chimera trades in, residential mortgage backed securities, simply has to keep from getting much worse for the high dividend payout to provide a positive total return. I agree with him, and with the stock yielding almost 18%, I would buy some shares for my income portfolio. American Capital Agency is in the same business and has also seen some insider buying in recent months and yields 18%, so I would buy a tiny position here as well. These were the only two high yielders that have seen positive insider activity. Keep these positions very small as there is more risk with these than other income investments. The net result of screening for income ideas the past few days has led me to the conclusion that conservative income investors need to be very cautious right now. The recent surge in the market has eliminated many of the opportunities that existed six months ago. Chasing stocks' prices or reaching for dividend yields can be equally dangerous to your net worth. Using the large-cap dividend stocks I outlined yesterday and mixing in small positions in the more aggressive ideas I talked about today can provide a start on boosting returns. For the bulk of your portfolio, holding cash and exercising patience are probably the best idea for conservative investors right now. The opportunity to invest safely at high yields will come to us. It always does. The hard part is waiting for this to happen.