In the eight decades prior to 2010, dividends accounted for a whopping 44 percent of the total return of the stock market. When investors are able to spot an undervalued stock that pays a consistent dividend, that is “double whammy” in the investing world. First, depression of value implies that there is possibility for capital appreciation of the shares—the share price could rise. Second, as the price of an asset that pays a dividend goes down, the dividend yield of that asset goes up. This is quite like how bond yields move opposite their price.
This article pulls together some dividend gems from the bargain bin by considering dividend yield, classic valuation metrics, and the company’s capacity to sustain dividend payouts. In a time when the market is trading at its richest valuation in three years, we are in both a stock picker’s and a dividend-lover’s paradise.
After topping third quarter earnings estimates, BP plc (NYSE:BP) has upped its dividend by 12.5 percent. The company’s dividend yield is already at 4.6 percent. After the Macondo oil spill accident in 2010, followed by a steady stream of legal issues, Europe’s second largest oil company has had issues instilling confidence in its investors; the company’s shares are trading at a mere 7.5 times forward earnings, which is below the energy sector average of 9. We have a positive outlook on the oil industry and, particularly, on super majors with a strong market position. Secular demand for oil over the next 5 years is set to increase, and there are a number of factors (extinction rates and Iran, for example) that could begin to hinder oil supply. We suggest waiting for the upcoming court ruling to take place, which will be delivered over the next two or three weeks, before initiating a position in BP—a negative ruling could put BP into the bargain bin. At present levels, though, we are still optimistic about BP as an income asset.
An international energy, gas, and electricity company, National Grid plc (NYSE:NGG) is one of the most consistent players in an already stable business—energy infrastructure. The company is likely trading near fair value at 13.8 times forward earnings, but it also boasts a 5.5 percent trailing dividend yield, which is expected to be over 7 percent according to forward consensus earnings estimates. Shares of the company also have a beta of 0.6, indicating that the company’s performance is not very market-dependent, and the company’s debt is rated A- by S&P. A total of 95 percent of the company’s revenues are regulated, and the other 5 percent is under contract, making its business model rather low-risk. With most of its capex likewise going towards infrastructure in the United Kingdom, this is an attractively low-risk income play. Billionaire Jim Simons’ Renaissance Technologies has a $23.3 million stake in the company according to second quarter filings (view his portfolio here).
People’s United Financial, Inc. (NASDAQ:PBCT) reported third quarter income of $62 million, compared to $51.5 million for the third quarter 2011. The company’s dividend yield of 5.3 percent makes it an attractive income investment in the financial sector, and a stable share price over the past several years (beta=0.3) also makes it an attractive “set and forget” buy. Though, as S&P notes, the company’s shares are trading at a premium at 17 times forward consensus estimates, People’s United Financial has earned this premium through its higher capital levels and growth prospects. The company’s shift towards national commercial banking has positioned it to expect its highest earnings ($0.72 cents per share consensus) in over 10 years.
The Dow Chemical Company (NYSE:DOW) has consistently issued a quarterly dividend for over two decades, and it presently yields 4.3 percent. The company recently announced significant cuts, including the closure of 20 plants. Additionally, The Dow Chemical Company will be writing down the value of its lithium battery assets amidst overcapacity and sluggish battery demand (particularly in hybrid cars). That said, these events have led Dow shares 13 percent lower over the past 6 months. Given its position in global plastics and its ability to procure significant government grants, now would be an opportune time to initiate a long-term position.
Finally, Regal Entertainment Group (NYSE:RGC) is an ideal stock to add a hint of diversity to an income portfolio. The company recently reported earnings of $0.15 per share, which was below the analyst consensus value of $0.17. However, the company was able to effectively control cost even as top-line growth was sluggish, says Wedbush Securities’ Michael Patcher. He notes that the present valuation of the company reflects a “stable business with low growth” prospects with an enterprise value of 6 times EBITDA. The demand for movie theater entertainment does wax and wane with the health of the economy, but there is a certain “baseline” demand for Regal Entertainment’s offerings. With a dividend yield of 5.5 percent, this makes for a solid dividend pick.
Disclosure: Brian has no positions in any of the stocks mentioned.