In this article we presented our list of the 10 best dividend stocks under $20. Click to skip ahead and see the 5 Best Dividend Stocks Under $20.
As passive income plays a key role in asset growth and portfolio risk optimization, it should be integrated to any portfolio and must be understood by all investors. On this ground, we attach utmost importance to the dividend paying stocks. In our previous article we focused on the companies that have been increasing their dividends annually for the last 25 years and presented the list of the 10 Best Dividend Stocks for Passive Income.
There are a lot of high quality and cheap dividend stocks that don’t have a 25-year history of dividend increases. That’s why in this article we decided to focus on cheap dividend stocks with upside potential. This time we will talk about dividend stocks that are priced under $20. Before starting the analysis, let us briefly explain why we need dividend stocks and why this might be the right time to buy cheap dividend stocks.
First of all, investing in dividend stocks is similar to investing in fixed-income securities, from which you collect coupon payments on regular intervals. There are a large number of companies which pay dividends to their shareholders and create a predictable stream of income for them. Of course there is a higher risk of capital loss when you are invested in dividend stocks compared to fixed income securities. If the share price goes below your purchase level and you sell your stock holdings, you will experience permanent loss of capital. But if your investment horizon is long enough, it is highly likely that the opposite of this will happen. You will not only collect predictable dividend payments, the value of the underlying stock holdings will also increase, delivering you large capital gains. This is especially true if you put together a well diversified portfolio of undervalued dividend stocks.
Second point in investing in dividend stocks is the opportunity cost. Nowadays using savings accounts and investing in long-term government bonds bring almost nothing. Negative interest rates and inflation might even end up reducing your the “real” size of your nest egg. Therefore investing in stocks with decent dividend yields can be a good alternative. The 10-year Treasury bonds yield about 0.92%. This means if you invest $100,000 in these bonds today, your investment will grow to $109,590 by the end of 2030. Average inflation rate in the United States was 1.81% in 2019, 2.44% in 2018, and 2.13% in 2017. As you can see, the headline inflation rate was running around 2% in recent years and during those years the Federal Reserve was increasing the short-term interest rates. Today, we are almost guaranteed to have zero interest rates until the end of 2023. On top of that the Congress is on the verge of approving another $900 billion stimulus package. The combination of ultra-low interest rate policy and accommodative fiscal policy will potentially push the inflation rate much above the 0.9% rate that is offered by the Treasury bonds. That’s why we believe investing in low risk bonds isn’t a prudent decision.
We really believe the best alternative for income investors is buying the best dividend stocks. But how do we find the best dividend stocks? At Insider Monkey we follow the stock picks of more than 800 hedge funds. We aren’t doing it because we like hedge fund managers personally. They are mostly greedy people and try to enrich themselves by charging an arm and a leg for their services. We follow hedge funds because there are a few extremely talented hedge fund managers who really deserve to get paid large sums of money. In our monthly newsletter we analyze the promising stock picks of these hedge fund managers and recommend a portfolio of about 20 stocks to our subscribers since March 2017. Our stock picks returned 145% during the last 3.5 years and outperformed the S&P 500 Index ETFs by 78 percentage points. You can download a sample issue of our newsletter here. Since, we were able to beat the market by a large margin, we believe hedge fund sentiment data can also be used to identify the best dividend stocks.
Most hedge funds don’t invest in dividend stocks only for their dividend yield. They invest in undervalued companies that have large upside potential. It is usually just coincidence that some of these undervalued companies also pay dividends. By following these hedge funds into these stocks we invest in undervalued companies that are on the cusp of delivering large gains and we get paid fat dividend checks while we wait for these stocks to appreciate.
Now if you let me, I would like to shed light on our methodology on this study in a nutshell: Our stock selection process is based on dividend yields, stock price and positioning of hedge funds on these stocks. We initially identified dividend paying stocks that are trading under $20. We only considered mid and large-cap stocks to avoid crowding into small-cap stocks alongside hedge funds. In other words we selected companies with a market capitalization of more than five billion dollars. Finally we identified the 10 most popular hedge fund stocks among this group of companies. We believe these are the 10 best dividend stocks under $20.
So, let’s take a closer look to the 10 best dividend stocks under $20.
10 – VALE S.A. (NYSE:VALE)
In addition to being the world’s largest producer of iron ore, pellets, and nickel, Vale is also the largest producer of manganese in Brazil. By holding approximately 70 percent of the national market in its domain, the company has a strong ditch. On the cost efficiency side, Vale generates 54 percent of the consumed energy by its own resources. Vale’s only specialty is not mining. Logistics – railways, ports, terminals and infrastructure – , energy and steel making fall also at the company’s business area.
Vale had a total of $10,7 billion net operating revenue disclosed in its recent filing and posted a $2,9 billion net income from that figure. The Board of Directors declared a $0.69 annual dividend and that corresponds to a 3.99 percent dividend yield. Although investment sum by the hedge funds did not change from second to third quarter of this year, number of hedge funds increased from 29 to 35. This is a good example of how the hedge fund sentiment works. When many managers think in the same way or realize a potential, they eventually benefit from the price hike. At the beginning of the November, share price was around $11 and on Thursday 17th December it was $17.23. That makes almost 70 percent increase in a month, which is incredible.
9 – Parsley Energy, Inc. (NYSE:PE)
PE ranks 9th in our list of the 10 best dividend stocks under $20. Parsley Energy is a Permian-focused independent oil and natural gas company, which was founded in 2008 and located in west Texas and south-eastern New Mexico. PE is focused on the acquisition, development, exploration and production of unconventional oil and natural gas properties. Without surprise, Covid-19 had negative effects on the company, and in forward looking statements volatility in the oil prices and drastic changes on the demand for companies products seen as main risk factors.
As of this year’s third quarter PE announced a $24,7 million net income and $0.20 dividend per share, in annualized terms. Market price for the company’s stocks on 17th December closed at $14.18. Using this data, we calculated a 1.41 percent dividend yield for Parsley. There were 37 hedge funds with bullish positions on this stock. Deep Basin Capital stands on the top of the list with its $39 million shares of interest and Two Sigma Advisors follows it with a close sum. Hedge funds like Parsley Energy, but Pioneer Natural Resources also likes Parsley Energy and in the process of acquiring the company for $4.5 billion. We think it is a great deal for Pioneer.
8 – Sirius XM Holdings Inc. (NASDAQ:SIRI)
SIRI ranks 8th in our list of the 10 best dividend stocks under $20. SIRI is an audio entertainment company, and it has two main lines of business: SiriusXM and Pandora. Thanks to these two segments, the company reaches more than 100 million people each month with their audio products. According to third quarter results, we see a $272 million net income. In nine month terms net income has reached to $808 million level and this is $137 million better than last year’s same period. Moreover, the company increased the pace of its common stock repurchases in the third quarter 2020 to $486 million. With dividends, total capital returns for the third quarter were $544 million. Additionally, for the fourth year in a row, SiriusXM announced a 10 percent increase to its dividend. The Board of directors declared a $0.06 dividend in annual terms and that makes a 0.92 percent dividend yield.
Chief Executive Officer of SiriusXM Jim Meyer summarized these figures with the following statement: ”Against a backdrop of strong performance, we continued our record of returning capital to stockholders through share repurchases and by increasing our quarterly dividend. Over the summer, we also strengthened our balance sheet by refinancing debt with longer-dated maturities and lower coupons.”
It seems like hedge funds monitor the developments closely. At the end of third quarter there were 37 hedge funds with long positions in this stock. Warren Buffett’s Berkshire Hathaway is the largest hedge fund that is holding shares of SIRI, with a total investment of $268 million. This sum is more than twice the next largest holder. The other funds with large SIRI positions are Stuart J. Zimmer’s Zimmer Partners and Jim Simons’ Renaissance Technologies.
7 – Apache Corporation (NASDAQ:APA)
APA ranks 7th in our list of best dividend stocks under $20. In this list we have many energy, oil and gas companies, and Apache Corporation is one of them. APA is an oil and gas exploration and production company with operations in the United States, Egypt and the United Kingdom. APA has also exploration activities offshore Suriname. It was founded in 1954 and drilled its first well in Oklahoma. In years it developed its facilities, resources and expanded its circle with acquisitions and mergers.
The company reported a loss of $4 million at the end of third quarter. Declared dividends per share in annualized terms is $0.10 and that makes a 0.63 percent dividend yield. Apache’s CEO and president John J. Christmann IV depicted the situation in earnings call as such: “Apache made excellent progress on its cost initiatives and returned the majority of its curtailed volumes to production during the third quarter as commodity prices improved. This generated a substantial improvement in financial results compared to the second quarter. While significant macro headwinds continue to persist, our strategic approach to creating shareholder value remains unchanged: we are prioritizing long-term returns over growth; generating free cash flow; strengthening our balance sheet through debt reduction; and advancing a large-scale opportunity in Suriname.”
When it comes to the approach of hedge funds, recent data shows us that there were 42 managers, who think the stock has an upside potential. Their investment sum is roughly above half a billion dollars, and Citadel Investment Group is sitting at the top of the list with a $116 million investment. Share price for APA was around $124 in 2008, before the financial crisis hit, and closing price on 17th December was $15.75.
6 – Occidental Petroleum Corporation (NYSE:OXY)
Occidental is another international energy company in our list of the best dividend stocks under $20. OXY has operations in the United States, Middle East, Africa and Latin America. Founded in 1920, OXY is one of the largest oil producers in the U.S. Occidental Petroleum shares were trading above $47 earlier this year, but dropped below $9 as the market participants punished the company for its debt fueled acquisition of Anadarko back in 2019. The company’s market cap is under $20 billion, but its enterprise value is more than $67 billion. Investors who didn’t mind betting on a leveraged oil stock were rewarded handsomely as OXY shares more than doubled since the end of September. Multiple insiders purchases OXY shares earlier this year, some of whom paid as much as $33 for these shares. If the demand for oil and oil prices continue to recover, OXY shares could double again and still be cheaper than it was 12 months ago.
On the 2020 Q3 Earning Call company’s CFO Robert L. Peterson stated that: “Our operational excellence, repositioned cost structure, and capital discipline enabled us to generate $1.4 billion of free cash flow before working capital and exit September with $1.9 billion of unrestricted cash on the balance sheet. This represents our highest level of free cash flow in a quarter since 2011”. As a consequence, “Our enhanced liquidity position, ability to generate cash, and success in levelling our debt maturity profile have resulted in our improved financial position. As a result, our debt maturity profile had been de-risked to the point that we made a decision to pay the preferred dividend in cash on October 15.” he continued. Current dividend for the company is $0.04 and in annualized terms that corresponds to a 0.21 percent dividend yield.
On 17th December 2020, the share price was $19.18. At the end of the third quarter there were 43 big hedge funds positioned in this stock. Among these asset managers Carl Icahn’s legendary Icahn Capital sits at the top spot with its $872 million worth of stock. OXY is also a favorite of several quant hedge funds like Citadel Investment Group.
Click to continue reading and see the 5 Best Dividend Stocks Under $20.
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Disclosure: No Positions. 10 Best Dividend Stocks Under $20 is originally published at Insider Monkey.