You’ve heard the phrase a million times already, but we’re going to make it a million and one: Ben Graham is the father of value investing. His books “The Intelligent Investor” and “Security Analysis” are on the shelves of everyone from college students to Warren Buffett, and you probably know how important it is to track guys like Buffett.
Additionally, Ben Graham’s intrinsic value formula is the corner stone of many different investment strategies. If you’ve seen a Graham-themed article before, you probably know the quintessential “rules” that are typically set in place. If you haven’t, we’ve modified the top four a bit to fit our current market environment, but their essence remains the same: 1) a trailing P/E ratio below fifteen, 2) dividend payments for at least five years, 3) at least a thirty-percent growth in EPS over the past decade, and 4) a P/B ratio below two. The effectiveness of some of the other rules, like market cap and current ratio requirements are up for debate in the 21st century, so we’ll stick with these four for now.
With that being said, we did find four stocks that fit these criteria with the bonus of having a dividend yield of 5% or higher. Now, we’re not going to call these picks “Ben Graham stocks,” per say, because we modified his rules slightly (namely decreasing the length of time required for consecutive dividend payments), but we’re confident he’d think about investing in all four.
Let’s talk about deep-sea freighter Seaspan Corporation (NYSE:SSW) first. Seaspan might not be a stock you’ve heard of before, but the smaller cap name is up over 50% year-to-date and 106% over the past three years. Investors undoubtedly like this stock for its 5.1% dividend yield and strong history of payments, but it’s also cheap at 10 times trailing earnings despite the fact that EPS has grown by above 40% a year over the past half-decade. In other words, Seaspan is the rare beast that offers all three ranges of the ideal spectrum: income, growth and value.
Equally as important, there are also a couple very simple trends that can loft Seaspan shares higher over the next couple years. Firstly, S&P notes that in China, iron ore demand has been a key driver behind higher commodity freight rates, and imports in greater Asia are generally improving. Seaspan is based out of Hong Kong and primarily caters to this region.
Additionally, the company’s 70-vessel fleet has an average age of about six years, which is 40% below industry norms. A young fleet ensures Seaspan will be able to benefit from secular tailwinds without having to worry about patch-up costs as much as its peers.
IAMGOLD Corp (USA) (NYSE:IAG), meanwhile, is another company on this list, and it faces a remarkably different macroeconomic scenario than Seaspan. With gold prices hitting a three-year low earlier this year before rebounding a bit, gold miners have had to consolidate their higher-cost mines to keep profitability up.
We covered how bigger miners like Barrick Gold Corporation (USA) (NYSE:ABX) were doing this last week via asset sales, but it’s worth mentioning that IAmGold has been cutting costs by suspending operations at a few locations. IAmGold’s method to reallocate operations toward lower-cost mines is a less permanent decision than an outright sale or breakup. Thus, any investor looking to bet on a rebound in gold over the next year or so might want to think about investing in this company instead of the larger players.
With that being said, if you are bullish on gold and want to invest in a nimble miner like IAmGold, the stock also offers a dividend yield of 5.2% at current prices, a P/E below 13, and stellar historical earnings growth. If you’re more bearish on gold, companies like Barrick Gold might be better bets because of their asset sales, but the choice is ultimately dependent on how you view the metal’s future. Either way, you have options.
The final two
With regard to the latter, Select Medical is a healthcare facility operator that manages rehabilitation and special hospital facilities. As is the case with many healthcare companies, investor confidence has been wavering on the heels of Obamacare, and inpatient facility operators like Select Medical face greater uncertainty than outpatient clinics.
If you’re bullish on long-term acute healthcare and have five to ten years to invest in a stock, though, Select Medical might be worth thinking about. It pays a dividend yield of 5%, has generated annual earnings growth above 40% over the past five years, and trades at depressed valuation metrics across the board. Shares currently trade near the $8 range and Wall Street’s average price target sits just above $9 a pop.
Fifth Street Finance, on the other hand, is a traditional credit services provider that pays an enormous dividend yield above 11%. A monthly payout schedule is attractive to many investors, and shares are valued at less than 10 times trailing earnings. Returns have been up-and-down as of late, but its latest 15 million-share stock sale a couple weeks ago should be taken as a long-term positive.
As Jordan Wathen writes, the move “expanded its balance sheet without diluting the holdings of current investors.” That’s generally regarded as a win-win for any company, and if you’re looking to add a business development company to your portfolio, Fifth Street Finance wouldn’t be a bad place to start thinking about it.