Incoming income

It's not an ideal time to be seeking high yielders. How could it be with London's All-Share index closing in on its all-time high while the UK's economy stays grounded? Any new investments are likely to have momentum on their side but, almost by definition, they will offer less value for money than they did three, six or 12 months ago. In Bearbull's scheme of things, value for money always trumps momentum.

Still, seeking yield forces you to sniff around where share prices have been weak, since it is often the weakness that creates the high yield; and that's where market prices are least likely to reflect company fundamentals. So it is that prices of three of the five I have lighted upon - aircraft broker Air Partner, toys distributor Character Group and broadcaster UTV Media - are sufficiently far below their five-year high to encourage the thought that value could be on offer.

The five also make a nice contrast with the equity components of the Bearbull income fund, which is dominated by FTSE 350 companies. Three - Air Partner, Character and property fund manager First Property - have a market value of below £35m, meaning they are too small to get widespread City attention. And the activities of all five is both diverse and sufficiently different from the income fund's holdings to prompt the notion that including two of them will improve the fund's risk-return characteristics.

Shares in Hull-based telecoms provider KCOM look the most likely candidate, even though their price is nudging its five-year high. I like KCOM's progress since late 2008 when it booked £111m of pre-tax losses as it hacked back the carrying value of acquired businesses. It consistently generates more free cash than the cost of its dividends, which is largely why net debt has fallen for the past four years, and its bosses promise to raise the dividend by at least 10 per cent in the year about to end. If dividends rise at that pace for another couple of years, then settle down to growing at the long-run average of earnings growth, I should be on the way to making an acceptable return.

Meanwhile, Character Group, which makes dolls of kiddies' favourites such as Peppa Pig and Fireman Sam, is a recovery play. First-half results for the year to the end of August - due in April - will be miserable and City analysts expect little better than break-even for the full year. That will obviously put the dividend under pressure and it does not help that Character has a chequered record. True, its bosses were making confident noises about the second half and beyond at the annual meeting in January, and City analysts think the payout will be raised a touch this year and next. Sure, if profits recover in 2013-14 to the extent that analysts imagine - they have earnings bouncing back from zero this year to 21p - then the dividend will be okay, but brave assumptions may lie behind a quick return-to-normal scenario. So, with borrowings rising fast these past two years, most likely I'll give Character a miss.

Meanwhile, this week UTV Media - best known for its talkSPORT radio stations - announced results for 2012 that were studded with adjectives such as "robust" and "resilient". In a harsh environment for media - UTV also delivers ITV to Northern Ireland - that seems fair. True, pre-tax profits were down 10 per cent to £21m and operational cash flow dropped 34 per cent to £19.2m. Despite that, the group still generated over £10m of free cash - almost enough to cover the dividend twice. That's why it's feasible to see the payout rising, especially when trading improves. Given that the yield is 5.2 per cent on 2012's forecast dividend, now may be a good starting point.

Air Partner is a sort of specialised travel agent and a Bearbull favourite that fell on hard times. Sufficiently hard for its shares to drop into the high-yield category, even though its dividend has been almost halved since 2008-09. Times remain tough, but Air Partner is much leaner than it was three years ago. Thus underlying profits were largely unchanged at £1.3m in the first half of 2012-13, despite the loss of £18m of revenue and free cash flow - at £2m - was plenty to cover last year's final dividend. This implies that the payout - up 10 per cent at the half-year stage - may keep its upward trend, making the shares a possibility for my income fund, albeit a high-risk one.

At the opposite end of the risk spectrum stands First Property, a property fund manager that has long mandates to run funds invested in UK and Polish property. Ultimately, its fortunes depend on property markets, but institutions will always want specialists to select properties on their behalf. And First Property isn't completely dull - it puts some of its spare capital in the funds that it manages, which effectively gears its returns.

So I could, for example, choose a safety-first selection of shares in First Property with a high risk-return holding in Air Partner. But first some proper number crunching, starting with KCOM.