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Gordon Pape: Two ideas for cash flow at a reasonable risk

A possible $790-million dollar buyout for Canadian water heater giant EnerCare Inc. by its largest shareholder isn’t good enough, the company says.

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With interest rates in this country showing no signs of moving higher any time soon, investors continue to search the stock markets for investments that offer decent cash flow at a reasonable risk.

Finding yield isn't difficult. It's the risk part of that equation that often trips up investors.

Consider the energy sector. Two years ago, there were many companies that were paying dividends of 5 per cent and more. Most looked solid and secure, and they were – as long as the price of oil stayed above $100 (U.S.) a barrel. When the bottom fell out, the revenue these companies depended on to pay off investors fell dramatically. Most energy companies were forced to cut or even eliminate their payouts. Share prices fell across the board. What appeared to be a safe source of cash flow suddenly turned sour.

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It was a reminder that there is no such thing as a risk-free investment. A company that looks good today may be torpedoed tomorrow, sometimes by events completely beyond its control. With that caveat, here are two yield stocks I think look reasonably safe in the current environment.

Enercare Inc. (ECI-T)

Type: Common stock
Current price: $18.99
Annual payout: 92.4 cents
Yield: 4.9 per cent
Risk: Moderate

Enercare is one of North America's largest home and commercial services and energy solutions companies with approximately 3,800 employees. It is a leading provider of water heaters, water treatment, furnaces, air conditioners, and other HVAC rental products.

The stock has enjoyed a nice upward move in recent months, driven higher by good financial results and investors seeking low-risk, high-yield securities.

Second-quarter revenue increased by 81 per cent year-over-year to $244.1-million, driven mainly by a contribution from the acquisition of Dallas-based Service Experts, which provides HVAC repair, maintenance, new equipment sales, and related services to residential and commercial customers in 29 U.S. states and three provinces in Canada.

The $340-million (U.S.) deal closed in May and gives Enercare a major presence in the U.S. market.

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Although the acquisition has boosted revenue, it has not had much effect on the bottom line so far. Profit for the second quarter was $16.1-million (Canadian) or 17 cents a share, down from $16.2-million (18 cents) in the same period of 2015. For the first six months of the fiscal year, profit was $24.2-million (26 cents a share) compared with $24.1-million (also 26 cents) the year before. However, acquisition-adjusted EBITDA improved in the second quarter to $74.7-million from $61.4-million in 2015. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)

The company raised its dividend by 10 per cent at the time of the Service Experts acquisition, to 7.7 cents a month (92.4 cents annually). The stock yields almost 5 per cent at the current price.

Enercare has an almost recession-proof business with good growth prospects as a result of acquiring Service Experts. However, I would not chase the price much beyond the current level.

Firm Capital MIC (FC-T)

Type: Mortgage investment corporation
Current price: $13.92
Annual payout: 93.6 cents
Yield: 6.7 per cent
Risk: Conservative

There is nothing exciting about this mortgage investment corporation. It just keeps spinning out cash flow, much to the satisfaction of investors.

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Profit for the second quarter was $5.4-million (24.6 cents a share), up 13 per cent from $4.8-million (23.7 cents) in the same period of 2015. For the first six months of the fiscal year, profit was $10.4-million (49.2 cents a share), an 8-per-cent improvement from $9.6-million (47.7 cents) last year.

The company's investment portfolio rose by $9.3-million to $412.2-million, compared with $402.9-million at the end of 2015.

Firm Capital's objective is to exceed the yield on a one-year Canada Treasury bill by 400 basis points. It is well in excess of that target. (A basis point is 1/100th of a percentage point.) Profit for the second quarter represented an annualized return on shareholders' equity (based on the month-end average shareholders' equity in the quarter) of 9.09 per cent, which was 856 basis points a year over the average one-year Government of Canada Treasury bill yield of 0.53 per cent.

During the quarter, the company completed an equity offering of 1.71 million new shares, priced at $12.90. The market quickly absorbed them and the share price today is well above that level.

In another move that will please investors, the company has raised the discount on new shares purchased through its dividend reinvestment plan (DRIP) to 3 per cent, from 2 per cent previously. That means you can acquire additional stock at 3 per cent below the market price with no commissions. Very few companies offer that good a deal. You can review details of the DRIP plan on the company's website.

The greatest risk would be a rise in interest rates, which would depress the share price and hit the bottom line. But since Canadian rates aren't going higher any time soon, that's not a concern at present.

Ask your financial adviser if either one of these stocks is right for you.

Disclosure: The author owns shares in both companies.

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Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.

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About the Author

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. More

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