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Opportunities For Patient Investors
By the end of last week, the overall market, at least as measured by S&P
500 Index, had lost 8% in May; more than wiping out the gains it had
recorded in the first four months of the year.
This happened while the U.S. economy was showing signs of perking up.
Many corporations reported good March quarter results
and forecast even better times ahead. Further, recent economic reports,
although somewhat mixed, have mostly looked encouraging.
So, we have a strengthening economy, but a falling stock
market. Why? Consider this. As of April 30, the S&P 500 had gained 49%
over the previous 12-months. Most of that time the overall economy was
still sputtering. So, it’s likely that the stock market simply got ahead
of itself and needs a rest.
Exactly when the market will recover is unknowable. But
opportunities abound for investors patient enough to wait out short-term
volatility. That’s especially true for many high-dividend stocks. They
already have plenty of cash in the bank and business is improving, so
their payouts are not at risk.
Your dividend yield is analogous to the percentage
interest that you receive on a savings account. It’s the next 12-months
dividends divided by the price that you paid for the shares. Thus, when
share prices drop, the expected dividend yields for new purchases move
up.
The market downdraft has pushed potential dividend
yields up for many stocks with strong fundamental prospects. Further, if
the economy does strengthen, many will likely increase their payouts
over the next year. Shareholders win two ways when that happens. First,
the higher payout means that your dividend yield goes up. Second, a
dividend hike usually drives the share price higher.
Here are some ideas.
DuPont (DD), expected yield 4.5%:
Officially E.I. DuPont de Nemours, DuPont is a diversified chemical
company operating in five different industries, the largest being
agriculture and nutrition. Its brands include Pioneer Hi-Bred, Tyvek,
Kevlar and Corian. DuPont is well-positioned to prosper in a recovering
economy.
Foot Locker (FL), 4.3%:
Operates more than 3,600 retail stores in 31 countries specializing in
athletic footwear and apparel. Hurt by the recession and a tired format,
Foot Locker’s new CEO, hired just last year, is reenergizing the
company.
Westar Energy (WR), 5.7%:
A natural gas and electric utility serving more than 600,000 customers
in Kansas. After years of underinvestment, in 2005, Westar initiated a
capital improvement program intended to spur revenue and earnings
growth. Analysts expect around nine percent earnings growth for the next
few years compared to five percent or so for most utilities.
Verizon Communications (VZ), 6.8%:
Verizon’s wireline business provides local telephone, long-distance and
Internet access to customers in 24 states and D.C. Also owns 55 percent
of Verizon Wireless, which, with 80 million customers, is the largest
U.S. wireless carrier. While the consumer cellular phone market is
experiencing slowing growth, the demand for wireless data transmission
services is exploding.
Windstream (WIN), 9.5%:
Offers wireline telephone service, high-speed Internet, and
digital TV services to consumers in mostly rural areas of 21 states.
Growing mostly by acquiring other small rural telephone companies,
Windstream generates lots of cash, and pays out about 60 percent of that
cash to shareholders.
Kayne Anderson Total Energy (KYE), 8.6%:
Kayne Anderson is a closed-end mutual fund. Unlike conventional mutual
funds, closed-end funds only issue new shares during the initial public
offering (IPO). After that, the shares trade on the open market, just
like stocks. Kayne Anderson holds energy-related partnerships and
trusts. One such category, Master-Limited-Partnerships (MLPs), typically
own and operate pipelines that carry natural gas, crude oil, or
gasoline. Although consistent high-dividend payers, many investors avoid
MLPs because the required income tax forms are more complicated than for
regular stocks. Also, in some cases, MLPs may not be suitable for
tax-sheltered accounts. However, buying a fund such as Kayne Anderson
instead of the individual MLPs eliminates those issues. For income tax
purposes, owning Kayne Anderson Total Energy is no different than owning
any other mutual fund.
Western Asset High Income Fund II (HIX), 13.1%
Also a closed-end fund, Western Asset holds below investment grade
(junk) corporate bonds. Western also holds a small amount of debt issued
by foreign countries including Brazil and Turkey.
The stocks and funds that I’ve described look interesting to me, but
they may not suit your investing needs. Keep in mind that high dividend
yields usually imply higher than usual risk. Consider these stocks as
candidates for further research, not a buy list.
published 5/23/10 |
