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All Contents © 2017The Kiplinger Washington Editors
By Charles Sizemore
| August 2017
I have a well-deserved reputation as a cheapskate. I brown bag my lunches most days, keep my thermostat at 79 degrees, and— if my wife doesn’t intervene — I’ll generally wear my clothes until they’re moth-eaten and threadbare. I’m good with that. As Benjamin Franklin said, a penny saved is a penny earned.
Perhaps not shockingly, I take the same approach in my investing. I like cheap stocks and, specifically, cheap dividend stocks. I like getting paid in cold, hard cash, after all.
Now, as a general rule, price and value are two very different things. For example, Apple Inc. (AAPL) trades for well over $150 per share. But considering it trades for just 14 times estimated 2017 earnings, I’d argue it’s one of a handful of truly cheap dividend stocks to buy in an otherwise expensive market. At the same time, Snap Inc. (SNAP) trades for less than $13 per share, barely half its IPO price … yet I’d argue that the profitless piece of junk is still too expensive.
But sometimes a stock that has a cheap share price really is a cheap stock. And today, we’re going to take a look at seven cheap dividend stocks to buy, all of which are trading for less than $20 per share. With a hundred dollar bill, you could buy at least five shares of any of these and still have cash left over.
Prices and data are from the original InvestorPlace story published on August 3, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Stock Price: $11
I’ll start with American auto giant Ford Motor Company (F). Like poor old Rodney Dangerfield, Ford gets no respect these days. The stock trades at a pathetic $11 per share, which amounts to just seven times earnings and 0.29 times sales.
That’s not just cheap — that’s going-out-of-business cheap. Yet Ford today is, ironically, in its best financial health in decades. Yes, sales are down this year, and estimates have been consistently pushed lower. But you have to remember that last year was a record year and that some sort of pause was inevitable.
And for crying out loud, Ford’s sales are hardly in the dumpster. Sure, unit sales were down 7.5% last month. But this was driven mostly by a drop in lower-margin sedan sales. Higher-margin SUV sales were actually higher for the month. And analysts are still expecting total industry sales to top 17 million for full-year 2017. That’s slightly lower than last year’s number, but very much in line with the boom years the mid-2000s.
Ford yields and attractive 5.4% at current prices, making it one of the cheapest dividend stocks to buy today.
Stock Price: $17.10
Up next is pipeline giant Energy Transfer Equity (ETE). I’ll admit, I have a soft spot for this stock. It was my winning pick in last year’s Best Stocks contest, returning an eye-popping 53%.
It seems like a lifetime ago, but Energy Transfer was once a $30 stock. Alas, an oil-price bust, the botched acquisition of Williams Companies (WMB), and an unpopular merger of two of its affiliated MLPs conspired to give this stock a real beating.
I’m ok with that. Investors that fled the stock have left us a real bargain. ETE yields a whopping 6.7% at current prices, which is well above its average of the past several years.
Importantly, ETE, via its related MLPs, has excellent exposure to the Texas Permian Basin, which is the largest and most profitable site for onshore drilling. Newer oil wells in the region are profitable with crude oil as low as $20 per barrel. That means that you’ll likely to see a lot more drilling, even if prices slump from here.
And as ETE is in the business of moving oil and gas, that’s excellent news for the company’s patient unit holders.
Stock Price: $8.10
In a list of cheap dividend stocks, business development company (BDC) Prospect Capital Corporation (PSEC) is generally going to stand out. It yields over 12% at current prices. Prospect Capital trades for a little over $8 per share. But here’s where it gets fun. Its net asset value (NAV) — the value of its underlying portfolio investments less debt — was $9.43 as of its last earnings report.
Now, there is a little wiggle room when it comes to estimating NAV, and Prospect Capital’s management has been known to price its assets a little more aggressively than some of its BDC peers. But still, you’re talking about a 15% discount to NAV. That’s a margin of safety you’re not likely to find too many other places these days.
Whenever you see a dividend as high as 12%, it’s fair to ask: Is it safe?
I’ll admit that the margin here is a little smaller than what I’d generally like to see. For the past several quarters, Prospect has paid out substantially all of its net investment income as dividends. And for the past two quarters, net investment income actually fell modestly short of the dividend.
So, Prospect’s portfolio either needs to generate higher investment returns in a hurry, or a dividend cut might be necessary at some point down the road. But at the current discount to net asset value, I believe we’re being compensated for the possibility.
Stock Price: $19.50
Private equity firm KKR & Co. (KKR) made news recently when it agreed to take online medical information site WebMD Health Corp. (WBMD) private. While the deal itself wasn’t especially noteworthy, it points to a much larger trend these days: More and more companies are eschewing the public markets, choosing to stay privately held instead. Over the past 20 years, the number of publicly traded companies has declined by 37%, and the IPO market is dead on arrival.
That’s bad news for the average stock investor. But it’s excellent news for KKR and its peers in the private equity space, as they have a much larger pool of potential investments to choose from. And unlike stock investors — who are passive — private equity investors often take an active role in the business, unlocking value as they do.
Like most private equity companies, whose profits can be lumpy and uneven, KKR has a variable dividend policy that scares away a lot of investors. That’s ok. Their aversion is our opportunity.
At current prices, KKR yields a respectable 3.5%. But I believe that payout is likely to rise sharply over the next few years as some of the company’s older funds finally start to deliver incentive fees. Though it may be a little off the beaten path, I consider KKR one of the best dividend stocks to buy in this market.
Stock Price: $18.20
It’s easy to understand the appeal of a medical office REIT like Physicians Realty Trust (DOC). America’s Baby Boomers are aging and requiring a lot more medical attention these days. But at the same time, hospitals and skilled nursing facilities have an open-ended political risk in Medicare and Medicaid reimbursements. The U.S. government can — and does — change the rate it pays, and there is really nothing a provider can do about it.
Hence the appeal of medical office buildings. Private-practice doctors are less affected by changes in government policy. And even if they are affected, they’re not likely take a hit to their incomes that would be deep enough to cause them to miss an office rent payment. So, you can think of medical office REITS like Physicians Realty as a safe way to play the aging of the Baby Boomers.
At current prices, DOC pays an attractive dividend around 5%, and it’s already raised that dividend twice since going public in 2013.
DOC’s shares took a major tumble over the summer after the company announced a larger-than-expected secondary offering of shares. The proceeds will be used to invest in quality assets, but investors were put off by the size of the offering, which diluted existing shareholders by about 13%.
If you looking for a high-growth dividend stock, you might consider this recent setback a good buying opportunity.
Stock Price: $8.50
One of the biggest themes of 2017 has been the destruction of traditional brick-and-mortar retail by online retailers like Amazon.com, Inc. (AMZN). The rotten sentiment towards retail has been a big reason why triple-net retail REIT Vereit Inc. (VER) has seen its stock price languish in the single digits.
Of course, Vereit also has a few homegrown issues of its own. Investors have viewed the company with suspicion since a 2014 accounting scandal led to the ouster of most of its executives, and this has weighed on the shares for nearly three years now.
But investors who shun Vereit because of the sins of its former management team are missing out on what I consider to be one of the very best bargains in the REIT sector. Vereit trades for about 12 times its trailing funds from operations. That compares to 19.5 for Realty Income (O).
Now, I’ll be the first to point out that Realty Income should trade at a premium to its peers, as it is the best in class of this sector. But that premium should be nowhere near as big as it is today.
Buy Vereit, enjoy its fat yield and wait for the market to give this stock the valuation it deserves.
Stock Price: $8.05
And finally, I get to Spirit Realty Capital, Inc. (SRC), one of the cheapest REITs on the market. I was a little reluctant to include Spirit on this list, as the company has had some well-publicized problems of late. Spirit has heavy concentration to the troubled retail chain Shopko, and its portfolio is less “Amazon-resistant” than many of its peers.
So, while Spirit Realty is one of the cheapest REITs in the sector, trading for around $8 per share and at deep discounts to its peers based on funds from operations and yield, it also has to be considered one of the riskier ones.
That said, if willing to roll the dice, Spirits 9% dividend yield is hard to beat these days. You’re not likely to get much in the way of dividend growth from Spirit any time soon, as it would be downright irresponsible for the REIT to raise its dividend before it gets its Shopko portfolio stabilized.
But I don’t see a dividend cut as being likely either, and Spirit’s share price seems to have stabilized after taking its tumble in June.
This article is from Charles Sizemore of InvestorPlace. As of this writing, he was long AAPL, F, ETE, PSEC, KKR, O and VER.
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