David Sterman

Whenever you find a stock with a 15% dividend yield, remember the adage: "It's too good to be true."

This kind of ultra-high yield invariably means that most investors anticipate a major cut in the dividend. Otherwise, it would attract so much buying interest that the yield would get pushed sharply lower anyway.

But some of these high-yielders can present real bargains if you're willing to do some math. I've been looking at a pair of high-yield stocks that are actually undervalued, despite the likelihood of a dividend cut.

Here they are...

1. Inergy L.P. (Nasdaq: NRGY
Current yield: 17.4%

This propane distributor, which is structured as a master limited partnership (MLP), fell into a classic trap. Management grew addicted to a steady annual boost in the dividend, aiming to attract investors and provide them with extra income even as the company's operating fundamentals were deteriorating.

The slump in operating income can be chalked up to four factors. First, Inergy invested in a natural gas storage depot, known as Tres Palacios, where early returns have been weak because a glut of gas reduced profitability for storage facilities. (Many gas producers are selling on the spot market or lining up futures contracts because it doesn't pay to simply store gas.) Tres Palacios is currently at 71% of capacity, well below management's earlier targets.

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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