Hail This Taxi Dividend Stock for a 6.9% Yield Â

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There are some stocks whose underlying businesses are just so clever that I have to love them, especially if they involve any kind of creative financing product. It's even better if it's a solid and sustainable dividend stock.

That's the case with Medallion Financial Corporation (TAXI). This neat little company is primarily focused on the financing of taxi cab licenses in major cities like New York. It does other specialty lending as well — such as asset-backed loans for luxury vehicles like boats and art. But its bread and butter has been the taxi business.

Most cities in the U.S. only permit a limited number of taxicab licenses. That’s about as anti-free-market as you can get. The result of limited supply of anything is that the price will rise. In the case of taxicab licenses, the price in New York is more than a million bucks. So unless someone has their own financing, such as a taxi fleet owner, then they will need to get that license financed.

Medallion is just such a financier. Even better, the collateral is as solid as you'll find. It's a license in a business sector that has enforced restricted supply. It isn't the taxi car itself, it's the license. The income generated from interest payments is incredibly solid, making TAXI stock a reliable dividend stock.

There are only two threats to the business model. First, if the pricing of medallions should fall, new supply could drive the price down. In that case, the interest that TAXI collects on loans would decline over time, unless it bumped up its LTV ratio. The company could likely do this, however, because the default rate on medallion loans is at an all-time low — a primary reason why the dividend yield is reliable.

And pricing isn't likely to be an issue. NYC just held an auction recently and medallion prices hit record levels.

The second threat would be if some kind of competition threatened the revenue generated by taxi services. If revenue were to fall, then interest and principal interests be jeopardized, and the overall value of a medallion would also fall, because expected lifetime revenue would decline. Thus the yield of this dividend stock might also be in trouble.

Uber could be that competition.

Except Uber isn't really providing competition to TAXI stock's model. Of TAXI’s medallion loans, 78% are based in NYC. UBER, however, is not real competition for NYC taxis. Instead, the e-hail company is targeting the privately-dispatched cars that are often used by those in other boroughs. UBER's pricing in Manhattan is often multiples of what cabs charge. They may see an upsurge when weather is bad, but that's because all the cabs are occupied.

There is only one thing about TAXI stock that I don't like. Management has made investments in Richard Petty Motorsports, and a minor league lacrosse team. These investments make absolutely no sense at all. I see no connection between these investments and anything involving specialty lending. President Andrew Murstein has always wanted to own a sports franchise, but I don't see why he's using stockholder money to do so.

With a stable portfolio of medallion loans, and a growing specialty lending business, including for taxi repair facilities, TAXI stock is in great shape. It just raised its dividend yield to 96 cents per year from 88 cents, up to a 6.9% dividend yield. So if you’re looking for income, you’ll have a tough time beating this dividend stock.

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As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities, but he does love NYC cab drivers. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.