By Eli Inkrot
When you’re first introduced to the stock market, the commotion of the opening bell and the draw to a quick buck might be overwhelming. Suddenly you’re buying numbers and a percentage change one way or the other could set your mood for the day. It takes time to realize the positive lure of cyclical markets. But finally you settle in and develop a strategy. If you’re in it for the long haul, and especially if you’re jonesing for substantiated income, you’re looking for strong companies that consistently provide strong returns. Your numbers game of the past loses muster and you scoff at the unwarranted day trades of the newest investors.
Somewhere in this process income investors develop the mindset that cheap stocks are speculative stocks, and speculation is taboo. But it’s important to remember that stock prices are forever temporary. Believing in a company’s future prospects and current value is much more important than a price tag of $10 or $100; as Warren Buffett is oft quoted: “price is what you pay, value is what you get”. There are strong companies paying strong dividends whose price is quite low. Just look:
Ticker | Company | Yield | Price @ 3/30 Close |
National Semiconductor Corp. | 2.75% | $14.54 | |
American Eagle Outfitters | 2.73% | $16.14 | |
Investors Real Estate Trust | 7.32% | $9.39 | |
Old Republic International Corp. | 5.54% | $12.49 | |
Hudson City Bancorp, Inc. | 6.17% | $9.72 | |
People’s United Financial Inc. | 4.93% | $12.57 | |
First Niagara Financial Group Inc. | 4.67% | $13.69 | |
H&R Block, Inc. | 3.58% | $16.76 | |
Valley National Bancorp | 5.19% | $13.88 | |
Windstream Corporation | 7.79% | $12.83 |
National Semiconductor Corporation (NSM) recently released a family of ‘clock jitter cleaners’ that have the industry’s ‘lowest phase noise’. Sounds impressive, but just wait for the financials. NSM is currently trading at $14.54 and sports a 2.75% yield. Not the juiciest yield, but this California based semiconductor company has been steadily increasing payouts since 2004. Further, its 28% payout ratio brushes away any concerns for a slashed dividend in the near future. Those looking to mirror the markets return need not look further as NSM steps up with a spot on 1.00 beta. The 62% return on equity and uncanny 8.34 current ratio cement NSM as a top dividend stock under $17.
In a cyclical industry such as retail, consistent payouts can be a great signal of strength. Apparently American Eagle Outfitters (AEO) got the memo, as they have paid a dividend for the last 27 quarters. Recently, it has grown moderately to provide a 2.73% yield on a price of $16.14. Keep reading yield hogs. AEO paid out a special dividend of $.50 just last December making for a tidy 6% yield last year. The 61% payout ratio seems reasonable and the clothing outfitter continues to gobble up shares through its repurchase plan; good signs for returning value to investors.
Those looking for high yield and consistent growth, all priced under $17 need not look much further than Investors Real Estate Trust (IRET). A quick rearrangement of the ticker and you find that this upper Midwest Company is a REIT, or Real Estate Investment Trust, who is required to pay out 90% of its taxable income. Recent REIT news might draw sustainability skepticism, but IRET is in a league of its own having paid a dividend for the last 160 quarters. IRET has long been deemed a dividend champion, increasing dividends for 40 straight years; the only concern here is the current 286% payout ratio.
If you read the write-up on IRET, it wouldn’t be much of a stretch to apply it to Old Republic International Corp. (ORI) as well; increasing dividends for 30 straight years, this insurance underwriter shares in the title of dividend champion. The 5.54% yield on a price of $12.49 is also attractive in this setting. Most striking is ORI’s exuberant payout ratio of 531%! But they have been paying uninterrupted cash dividends for 70 straight years and it appears that truly care about their investors well-being.
Although many associate low prices with speculative issues, a more fundamental problem arises from the lack of volume that these stocks generally carry. With Hudson City Bancorp, Inc.’s (HCBK) average volume of 8.4 million, the liquidity issue is certainly not a concern. Further, this bank holding company sports a strong 6.17% yield and has earned the title of “dividend contender” having increased dividends for at least 10 straight years. Additionally, HCBK’s payout ratio of 55% leaves investors without much worry.
Good things come in pairs, as People’s United Financial Inc. (PBCT)looks to replicate the strong financials of HCBK. Also a “dividend contender” PBCT has an even lengthier record of increasing dividend payouts: 17 years. The 4.93% current yield of this bank holding company is respectable, having grown by an average of nearly 9% a year for the last five. Investors averse to volatility will love the 0.17 beta, but the 257% payout ratio still yells caution.
First Niagara Financial Group Inc. (FNFG) is not on the “dividend contender” list, but it might as well be. A two and a half year dividend freeze during the recession kept it off the list, but its quarterly dividend has steadily increased from just over $.01 in 1998 to its $.16 mark. The streak of above average yields continues with FNFG as this holding company comes in with a 4.67% yield. The 81% payout ratio is a touch high but nothing when compared to IRET or ORI, and they’ve been increasing payouts for much longer.
H&R Block, Inc. (HRB) takes advantage of the $17 ceiling, coming in at $16.76. This personal service firm is probably best known for its tax preparation. The quarterly dividend has been frozen for about 2 ½ years now, but its history of consistently paying dividends since 1986 is impressive. The current yield of 3.58% is acceptable, although some might be looking for a dividend growth rate to bump up their yield on cost. Still, the 0.49 beta and 48% payout ratio suggest that income investors can have some confidence in both HRB’s stability and ability to sustain future dividend payouts.
If you like unusual stock splits then you’ll love Valley National Bancorp (VLY). The most recent 21 for 20 split was preceded by seven straight 105 for 100 splits; same math, different fun. Add in a 5.19% yield and now we’re really having a time. Paying dividends since 1991, VLY has established itself as a bank holding company that is worth a closer look. The 89% payout ratio warrants caution, but appears sustainable for the time being.
Given the choice of high yield, consistent payouts or a cool ticker, which do you choose? With Windstream Corporation (WIN) (a Charlie Sheen favorite) you don’t have to choose. The 7.79% current yield tops our list for top dividend stocks under $17. This rural telecommunications provider has paid the same quarterly $.25 dividend since December of 2006, giving it an accountant's dream, even-Steven, $1 dividend a year. The 152% payout ratio is worrisome, but those looking for high-yield telecom competitors outside of the AT&T (T), Verizon (VZ) and Sprint (S) race need not look much further.
The allure to a low price definitely has a place in the grocery store, but it often doesn’t carry much weight in valuing stocks. Sure, low prices can lead to exaggerated percentage gains, but these are often the workings of the speculative investor. The real problem with low priced stocks is often volume related, or more specifically a liquidity issue. There simply aren’t that many shares being traded and no one likes the threat of a reverse stock split if the stock is not trading. As we have seen above, given adequate trading volume, there are many low priced stocks that provide strong and consistent dividends. Remember, value is value no matter the price.
Disclosure: I am long T.
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